My Investing Philosophy

My name is Paul. I am a private investor in Minneapolis, MN. I am a value investor and resident of Graham-Doddsville. That means I believe that value is not based on price. Volatility does not equal risk. I believe in buying businesses for less than they are worth, with a significant margin of safety. I tend to look at microcaps. I always keep an eye out for promising special situations.

I have a few guidelines that may answer your commonly asked questions.

1. Don’t lose money. This excludes speculation and positions with a significant likelihood of permanent capital loss. This also means I only invest in businesses I understand.

2. I only invest in equities that are based in a country with the rule of law, where foreigners are allowed to buy securities outright (so not China), and where they are allowed to withdraw their money at any time (no currency controls).

3. I value securities based on the intrinsic value of the business. If it is undergoing a strategic review or a different special situation, then calculating a liquidation value and timeline is central to the thesis. If it is a going concern, I am looking at earnings power (using Greenwald's methods) and when applicable growth (for franchise businesses).

4. I tend to avoid debt, unless it is a durable franchise business that is well positioned for a credit crunch.

5. I prefer to invest in places where I am more likely to have an advantage with a small amount of capital. Where there is less competition, there are more mispricing opportunities. This means that I tend to invest in public equities with a market cap below $500mn USD.

6. When it comes to general issues, I am often attracted to securities that are unattractive to Mr. Market. These might be companies in ugly industries, equities overselling on bad news or facing uncertainty. Michael Burry calls these “ick” stocks:
   “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick’. I tend to become interested in stocks that by their very names or circumstances inspire an unwillingness - and an “ick” accompanied by a wrinkle of the nose - on the part of most investors to delve any further. In all probability, such stocks will prove fertile ground for the rare neglected deep value situations that could provide significant returns with minimal risk, and minimal correlation with the broad market.” - Scion Capital Letter to Investors October 2001

7. Management should be at least an excellent management team in an average industry or an average (but non malicious) management team in an excellent industry.

8. In terms of position sizing, I think in terms of opportunity cost. For each investment opportunity I calculate the earnings power yield (earnings yield + growth (if applicable + share reduction). Each investment is compared to the others by this metric. That also means that generally, if my top opportunity has a yield that far exceeds the rest, I will be concentrated there. If not, and my top opportunities have an equal yield, I am diversified.

9. Money and earning yields are fungible. The cash that a business pours out doesn't care what sector it was generated in, so why should you?