I was recently on a podcast with MicroCapClub. You can find the interview here. I ramble a lot - watching yourself on a recording is always a bit painful. I had a very good time doing it, and hopefully, I can get better at this kind of thing over time. There is one thing that I wanted to expand on a little in this post. I talked about my investing style and how it has evolved. From purely quantitative in the beginning, to more qualitative, to a “personal” style I have adopted to my personality and circumstances. I shared a story about my nine-year-old daughter. Whenever we travel, she finds little “treasures” that she likes to keep as remembrances of her trip. She usually squirrels them away in a little box or container. They are very special to her, which we discovered when I <cough, cough> accidentally threw some away without her permission. I identify with this in my investing strategy: I am on a Treasure Hunt.
My journey as an investor went something like this: quantitative value → qualitative value → business value → treasure hunter. I’ve read similar stories from other investors. The trail from a quantitative investor to a quality investor seems well-traveled. My investing style has continued to evolve as I have learned more; I expect it will continue to evolve. But this idea of being a treasure hunter is relatively new, so I thought I would explore it a bit more.
The treasures I have found will be different than yours. The things I am comfortable holding for long periods reflect my areas of expertise, past experiences, and personal curiosities. Yours will be different, maybe dramatically different, than mine. Currently, I hold around 25 positions in my portfolio. The top 8 comprise 50% of the value. Of those, four fit in my mental category of treasures. Although these weren’t necessarily the criteria for selection for my treasures, here are some qualities that they possess:
They have high levels of insider ownership. I like to invest in micro- and nano-cap companies. Companies with a high level of insider ownership make me feel comfortable that management is aligned with outside shareholders.
I have a long history of ownership. I have mentioned that I am a slow learner. Many of the “treasures” are companies that I have owned several times. I bought them, sold when they were not “cheap” anymore, and then re-bought them after I continued to follow them and appreciate their unique business characteristics.
They are “build and buy” companies. This was a bit of a surprise to me. I’ve only recently begun to appreciate this. Most of these companies grow significantly organically. They also buy strategic “tuck-in” acquisitions. Generally, they use debt funding (as opposed to equity) and then pay off the debt over time. Lather, rinse, repeat, and you have a much bigger company in a few years. This is a bit different from a “roll-up.” A roll-up is a company whose specific mission is to consolidate smaller companies in a fragmented industry. Build and buy companies target specific areas they want to expand in or services they wish to add.
They operate in favorable, large, and growing industries. This is probably self-evident, but most treasures are in growing industries. All of these companies have significant white space to continue growing for a long time.
You might be thinking that if these companies all have these great characteristics, why not just own those types of companies and don’t look at anything else? The short answer is I do look for these characteristics, among others. Since the primary purpose of my investing is to make money, I will invest in other situations that don’t meet all these criteria - if I have cash and a good chance of making a decent profit (I’ve written about this previously here). An interesting aspect of this treasure hunt: the longer you do it, and the more long-term treasures you find, the more your longer-term holdings “crowd out” your ability to make shorter-term bets. Since I intend to hold them for a long time, they just become a larger and larger part of the portfolio. It takes many years for me to add a company to this bucket - but I think other people can recognize it faster.
I think this type of treasure hunt mentality has led me to build a portfolio that is very specific to me and my personality. It reflects my quirks and interests. Hopefully, this will enable me to remain a committed shareholder over the long term. As a reminder, what works for me may not work for you. You will need to find your way and your style. I hope sharing some of my experiences may help you in your journey. Good luck to all the treasure hunters out there!