Q3 2017 Newsletter

October 5, 2017

I’ve been to several conferences recently on both coasts. I always go with an inquiring mind.  I tend to ask a lot of questions because I find that better than knowing all the answers.  My major takeaway from these conferences is that the small-cap investing industry has shrunk tremendously.  It’s mostly due to many mutual fund, hedge fund, and independent advisors throwing in the towel.  Many of these professionals focused on one or two industries that got crushed over the past eight years – the amount of time that that small-cap companies have been in investing hell. The other takeaway is that the smaller companies is where the values are in the stock picking universe today.

We’ve been fortunate by having one or two winners every year or so. Just recently, Silverstream (SSNI) was bought out for a nice profit.  Earlier in the year, we shed Qorvo for a huge gain.  Going forward, I am optimistic that we will continue to find our spots.  We are currently broadly invested in cyber security, products that drive the internet, computers and cellphones, recycling, drugs, energy, raw materials, banking, chemicals, household goods and last but least – smoothies!  We are, if nothing else, broadly diversified!

The Good, the Bad, and the…. what the heck?

Back in February of this year, I told you to trust me.  I sold our investment in Qorvo (QRVO) and retained our investment in Tower Jazz (TSEM).  Both companies are in the semi-conductor space & I strongly felt that we had too much money in this sector by owning both companies.  I justified the selling in my February letter to you and suggested that TSEM had the greater ability to rise 50-100% then QRVO did.  When I decided on this tactic in early January, TSEM was approximately $19.30/share and QRVO was approximately $53.50/share.  As of the writing of this newsletter, TSEM = $30.15/share (+5%) & QRVO=$71.39 /share (+33%).  I’ll report back at the end of the first quarter of 2018 to determine if this tactic proved correct & hopefully…..you can trust me for another year 😊  I also wrote in my last newsletter that we were retaining Chicago Bridge and Iron (CBI) but that it was on a short leash.  Well, the leash became a choker and I cut CBI loose.  One of the more conservative investments GCM has made over the years turned out to be a big dud.  CBI’s substantial volatility and lack of support was its final undoing.

The last thing we want to own is a stock that continuously whipsaws us without any hint toward a predictable future.  On a brighter note, the detailed outlook I provided on Barfresh in July still holds and Tower Jazz continues to meet and exceed all goals.  Our diversified holdings should yield those one or two surprises every year or so, hopefully for the foreseeable future.

The market is up to its old tricks.  A small percentage of companies are driving the indexes, FAANG specifically.  FAANG = Facebook, Amazon, Apple, Netflix, Google.  It appears that these companies are dominating the universe as in their own GAME of THRONES.  Facebook has nearly as many users as Catholics and Chinese combined.  Apple draws on the second most powerful instinct behind survival – procreation. Apple is the new symbol of wealth and creativity, and by owning Apple products, it’s obvious you must possess superior genes and intellect.   Amazon controls commerce, supplanting profit with vision and growth.  Nothing you can’t buy through Amazon!  Netflix has changed the way we’re entertained at home and you cannot walk the mall or golf course without discussing a Netflix original. If you don’t have Netflix, simply, you cannot be trusted. Finally google has replaced everything we’ve trusted in the past such as doctors, lawyers (maybe), rabbis, priests, teachers, coaches.  Just look it up – the answer is out there for a fraction of the price. Who needs an expert when you can Google?

My friends, it’s a brave new world out there.  My job has become passé.  All those managers and small research companies I mentioned that have folded their tents, have chosen not to fight the electronics that are dominating the industry in which I reside.  It’s a rarity to find a stock picker today and it’s a million to one on top of that, that you’ll find someone doing research on small companies.  Why? Because it takes a lot of time and your reputation is always on the line.  ETFs and mutual funds provide much a safer harbor from criticism.   HOWEVER……I’ve implied on more than one occasion that when something is given up for dead, it’s often a good time to pay a visit to the morgue.  We have diversified over the years to mid and large-size companies but we have forsaken the smaller companies.

Thinking long-term – Berkshire Hathaway’s CEO Warren Buffett’s recently predicted Dow 1,000,000 in 100 years.  That seemingly outlandish target represents a relatively modest annual price appreciation of just under 4% (not including dividends). It’s safe to say that none of us will be around in 2117 to find out who was right. However, we will stay focused on the long horizon and as my coaches always told me – keep taking your shots on goal.

Here’s to the old ways – research leading to good fortune,

Len