Yet Another Value Podcast - Patrick Wolff shares his thoughts investing in 2024, battleground stocks, MicroCaps + $TACT thesis

Episode Date: January 12, 2024

Patrick Wolff, full-time private investor, joins to have a general discussion a wide range of topics: his background (former US Chess champion in 1992 and 1995), the right to buy stocks, domestic vs. international focus, indexing vs. single stock investing, battleground stocks, advantages investing in MicroCap stocks and closes with his thesis on Transact Technologies $TACT. Chapters: [0:00] Introduction + Episode sponsor: Fundamental Edge [2:01] Patrick Wolff's background [7:10] The right to buy stocks [12:37] Domestic vs. International focus; European markets [21:04] Indexing vs. single stock investing; tax efficiency; time efficiency [32:56] Diversification and circle of competence [37:53] Battleground stocks [40:19] MicroCap stocks [47:13] $TACT Transact Technologies thesis Today's episode is sponsored by: Fundamental Edge You’ve probably heard it’s an “apprenticeship” system, or that you’ll “learn by osmosis”? But what if there was a better way to learn the equity analyst job? Fundamental Edge is re-defining training on the buy-side. Website: https://www.fundamentedge.com/ Whether you’re already in the seat or looking to break in, the Analyst Academy from Fundamental Edge offers a thorough and flexible path to developing the tools and frameworks employed by leading hedge funds. Breaking in: https://www.fundamentedge.com/breaking-in Check out the Academy syllabus and sign up for future free content: https://fundamental-edge.ck.page/academyinfo

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Fundamental Edge alumni get access to exclusive webinars, case studies, and an invite to their first annual analyst spring training conference in Arizona. If you want to fast track your byside career, go to Fundamentedge.com for more info. That's Fundamentedge.com. All right. Hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker, also the author of Yet Another Value Blog.com. If you like this podcast, it'd mean a lot if you could rate, subscribe, review, wherever

you're watching or listening to it. With me today, I'm happy to have Patrick. Well, Patrick, I don't know if I argue formally of Grandmaster Capital, currently of Grandmaster Capital. What's the right terminology here? Formerly, I mean, Grandmaster Capital as an entity doesn't exist anymore and has not existed for some time. I've kept the email address. It's just my personal email address, but no, the entity went away some time ago. Perfect. Perfect. Well, anyway, Patrick, happy to have you on. Super excited to get into today's conversation before we get there. Just a quick disclaimer to remind everyone,

nothing on this podcast is investing device. Always true. But Patrick and I have kind of a list of stock and a few different questions we want to go through before we get there. So just remember, that carries extra risk. We'll be talking about a few different things. financial advisor, do your own work, all that result. Patrick, one of my goals for this year was to have interesting conversations with maybe not like pure single stock focus podcast, but you know, single stock adjacent and a couple other podcasts that might interest people who are interested in stocks, but interest in their things around. So you reached out and I thought this would be a great conversation to kind of kick this off. You know, as we said, formerly a grandmaster capital. And we wanted to have a conversation of, hey, what about somebody who is interested in

investing, but, you know, maybe isn't doing it 100% full time in kind of a fund structure anymore, still does that, does some other stuff. How do they think about structuring investments? How do they, you know, what gives them the right to continue to buy stocks, to continue to do research, all that type of stuff. And maybe some of the other stuff you're looking at. So I'll just toss it over to you if you want to give some background and elucid on that a little bit more. Yeah, absolutely. So maybe some quick background on me. You know, you and I were chatting a bit before the podcast, and as the name would indicate, many years ago, I used to be a professional chess player. I am a chess grandmaster because that's a lifetime title. So in the

1990s, I played chess professional. I was U.S. chess champion in 1992 and 1995, all the way back in my 20s. Lord helped me. What happened in 93 and 94? I competed but did not win. But actually, I'm trying to remember. I think I played in 93, but not in 94. At any rate, I, I wrote some books on chess. I was the chess second for the, at the time, Challenger, and then subsequently World Chess Champion, Fiswell-N-Anon. So I worked with him for several matches, including his first World Chess Championship match against Gary Kasparov in 1995, and then wrote a book about that match, and then played the U.S. chess championship in won, so that was a good year for me. He lost Sunboy Shui. not as good a year for him. So I retired from chess professionally in 1997 when I graduated from college. And then I went into business and eventually I earned my CFA charter. I really wanted to get into investing. It was a very non-traditional path for me. I did not, you know, like work at an investment bank or, you know, go straight to work at a private equity shop or something like that. but I had met Peter Thiel when I was in Silicon Valley in 1999 at two different dot-coms that

you've never heard of and he was at PayPal, which you very much heard of, and eventually he was CEO of PayPal and had a very successful exit and launched himself from there. And so he had a hedge fund that I was networking and got back in touch with him and eventually got hired as an analyst and eventually became managing director there. So I started in 2005 at Clarium Capital Management, which was a global macro hedge fund and worked there for five and a half years and became one of the managing directors, eventually left to run a long short equity hedge fund, which I named Grand Master Capital. Peter Thiel was the seed investor with 50 and then eventually $100 million of his capital and then outside capital for the next several years,

ran that for four and a half years, had pretty good, but to be perfectly honest, not great results. So I would say, like, we generated some alpha, and we generated just enough alpha to pay our fees, which is everybody made money. But in the end, you know, it made more sense just to close it down. I went back to work for Peter, did that for another two years, and then left in 2017. Since then, I've sort of been knocking around, doing a bunch of stuff, not least of which getting very involved politically in San Francisco, but also over the last year, I have worked with a friend of mine to develop a real estate investment strategy where we actually

invest in a very interesting, inefficient, that's the key, inefficient niche of federal government leased real estate. And so we've done one small deal last year. We're working on another couple deals this year. Last year actually was in some ways a terrible time and in some ways a great time to launch a real estate investment fund. It's a terrible time because nobody had been doing any deals. Everybody's like super far apart on the bid and the ask. On the other hand, it's a great time because we didn't do a lot of deals the two previous years, which obviously would not have been good. And we had a lot of free looks at things and we're able to build our network and and and our knowledge base. And I feel the next couple of years are going to be a great time to be doing

some of these deals against. We found one small one. We were able to close working on some more. So we'll see where that goes. And then at the same time, over the last several years, I have continued to invest actively my PA in stocks, which I think we'll be talking about. forward to it. Yeah, yeah, exactly. So let me just start. You and I were talking a little bit before. First, you were educating me on the chess rating system, and I was trying to see just how many worlds ahead of me you are. But the second thing we were talking about is talking about a few things, but you mentioned, hey, what gives someone the right to buy a stock, right? And a lot of times I'll talk to someone and they'll be like, hey, you know, I'm interested in this idea.

I read a write up on Vic or I listened to your podcast on it and I want to buy it. And I like that you said the right to buy stocks. It's like, look, anybody's got the legal right to buy stocks, right? You can do whatever you want. It's a free country for now. Like, go do whatever you want. But the right to buy stock, like, to me, implies I've done serious work on this, right? I have a convicted edge on that. So I want to ask you, like, to you, what is the right to buy stocks? And then B, look, you mentioned multiple things you're involved in, right? A real estate effort, which anybody's ever bought anything in real estate knows, like that's not easy. It takes a lot of time. Forget sourcing just to close a deal takes it. And then to go source,

like off the market inefficient deals is really difficult. So like, What to you, as somebody who's not fully focused running this full time, what to you do you need to do to get the right to buy a stock? Excellent question. So let's break this down a couple of ways. So first of all, when I think about my entire personal portfolio, right, which I, you know, basically I have one client who's my wife and she's a great client. And so that's good because you could also imagine your wife being a really bad client. Constable, always asking where the alpha is. No, no. Happily, I have a wonderful wife, a wonderful marriage, and she's a great client. But in all seriousness, right, you have to really think about your entire personal portfolio. So the way I think about it, I have money invested with one outside manager, someone I've known for a number of years, someone who's doing great and who I really trust.

And I felt like I had a reason to invest with this manager because I knew him and knew his background and was there when he launched and the whole thing, right? Like, it's very hard, I think, really, to know someone well enough to know if you want to trust them with your money to buy and sell stocks. So that's sort of one piece of the portfolio. Some of the portfolio is just in index funds, right? Because you want to have, and by the way, cash, which these days is not bad. You know, so, you know, five and a quarter percent with no duration of risk is, you know, not a bad place to park some of your money. You know, we might come back to cash in a second, but it's funny because, you know, I graduated from college in 2010. I probably start getting involved in investing in 2006, 2007.

You like, what's that? Yeah. And but for the whole time, I was like, look, you know, I don't really want to hold cash. The opportunity cost of holding cash, particularly if you think you can generate alpha is really, really high because you're getting paid zero. And today, I'm like almost having a rethink because, hey, you know, the bar for an investment is a little higher because if you don't find, if, you know, you're doing an average, if stocks on average return 8% and cash is yielding 5%, you're not getting a lot for that. Like, and even if you think you can generate a couple percent alpha on a deal, like it's actually not that big. And you know, the opportunity cost of not swinging is a lot lower at 5%. I think I think that's exactly right. And I think that's exactly the rational way to think about it. And by the way, I'm old enough. to remember the late 1990s when Warren Buffett at that time was shifting a fair amount of his Berkshire Hathaway portfolio into bonds because that was one of the rare times when, you know, bonds actually just offered a better like overall risk, risk-return adjusted, risk-adjusted return.

And, you know, it took a couple of years for that to become clear, but it did become clear. I don't think that's the case today, but I completely agree. with you, the particularly short duration, I think there's a pretty powerful argument for having more of your portfolio in, you know, five and a quarter percent yielding zero risk, a lot of optionality. And then, you know, a certain amount in stocks, because I think stocks will yield, will return more. And so thinking about that overall portfolio, the indexes I tend to invest in of much more international because developed market international. Because when I look at the markets today, I think that, you know, the last 15 years or so have just been an unbelievably amazing

time to be invested in the U.S. and particularly U.S. large cap. I mean, of course, ultimately U.S. large cap tech has been like the super duper grand slam. Last I checked, it was up like 20% annualized over the past, I think like 12 years, which again, 20% annualized over a decade is an outstanding result. Like, you're starting to talk about, not quite, but you're starting to talk about like Warren Buffett in his prime. Oh, yeah, absolutely. And we're talking an index, not a single stock in index.

Like, it's wild. Which, by the way, should obviously tell people that is not going to happen over the next 12th. So I agree with it. Like, if you're underwriting, I see lots of people who are in the magnificent seven or fame or whatever. Like, look, A, if you're a serious investor, maybe, but like, I think it's kind of crazy if you're a serious investor and you say, I can't find something better than like 30% of my stock in Facebook, 30% of my stock in Apple, 30% of my stock in my record. But let me ask you a question. You mentioned, I do not run a PA. All my money is kind of in my day job. People can figure that out. But there is some money I have that for one reason, another, I can't bring to my day job. So what I do is I do index funds as you do. And I generally focus international index funds because most of my focus in my day job and my pot are domestic stocks. I'm like, I kind of get a little bit of diversification.

him, right? Say again? Developed market? Developed and a little bit Europe too, but most of myself is domestic, and I suppose developed market. Oh, but I mean like not EM, right, but like Western Europe, Japan, like that. Yeah, yeah, yeah. And so a little bit of emerging markets too, but it's ETFs and stuff. My question is like, one of the reason the developed markets, like Europe looks so cheap to America, but one reason is because the fangs and stuff are just taking all the profits. So, like, their, their stock markets don't have the things. And I keep wondering, like, hey, is this actually, like, maybe we are just in a tailwind world for these global guys

who, like, their returns on capital are crazy. They can incrementally scale. And it's all just America. Maybe people should be domestic focus. I read what's on there, but I'll talk. Yeah. No, so Goldman Sachs published a little while ago, uh, actually have it on my desk. I'm looking here in middle of November, November 14th, I think. They published a really good report, where they basically looked at Europe and the United States stock market returns and how much of it was driven by earnings growth and how much it was driven by multiple expansion. Of course, in the U.S., there has been healthy multiple expansion, but also the U.S. had pre-pandemic, and that's the important caveat here, pre-pandemic, the U.S.

had much more robust earnings per share growth. Like Europe was sort of in an earnings recession for a decade, basically, whereas the U.S. had very, very strong earnings per share growth. And of course, a lot of it driven by these unbelievable mega-cap tech monsters. But post-pendemic over the last couple of years, in fact, Europe's EPS has been growing faster. Now, you know, past doesn't necessarily, you know, predict the future obviously. But I think there are reasons to believe that Europe's earnings per share growth should look better both on an absolute and on a relative basis over the next coming years than it has over the previous decade. One is simple reversion to the mean. Like, it would just be a very strange world if forever and ever the U.S. has much

faster earnings per share growth versus Western Europe, which, you know, is a set of well-developed, you know, wealthy countries, you know, plenty of dynamic industries and so on and so forth. So I think just pure reversion to the mean, I think also a number of the sectors that were really sort of responsible for dragging down the earnings growth in Europe, particularly energy and financials. They've gotten smaller as a share of the index. And also, if we are out of the weird 0% and, of course, in Europe, negative interest rate world that we were in, there's good reason to think that the financials ought to do better. Plus, the balance sheets have had a long time to repair. And then, of course, those Japan, which is sort of a separate story, and lots of people

have talked about like there's all these reasons to kind of like Japan. It looks cheap. It seems like it's becoming more dynamic and so forth. For governance reform, absolutely. Exactly. Exactly. Sort of an all, a very common story, but you know, a common story that's common because, you know, it's probably a lot of truth to it. Brett Coffron, founder and Lee trainer of Fund Edge, barely remembers his first year as a hedge fund analyst. Most of the year was spending a blind panic. Was his research any good? Was he learning fast enough? What did his PM really went from him? Training on the by side was non-existent 15 years ago when Brett was a new analyst at Maverick Capital, and he actually got demoted. Then he worked harder,

found mentors, and asked for uncomfortable feedback. Eventually, he turned it around, learning by osmosis from the talent of people around him, and rose to managing director. But is this the best way to develop talent? Brett doesn't think so, and that's why he founded Fundamental Edge. The Fundamental Edge Analyst Academy provides students with the tools, frameworks, and confidence to excel in any fundamental equity analyst seat in the industry. Lose the panic and fast track your career on the by side. Find out more about their next cohort at Fundamentedge.com. It's just going to, yes, and what you said on Europe, though, just to go back to here for a second. I think the two things I would yes and, because I agree with just about everything said is number one, like, look, the fact that European markets have underperformed for so long means, like, if you look at, is it the Danish market that Novo Nordisk is in?

If you, like, weird things can happen, right? One company can become a shooting star and the European, the valuation of market caps are so low, like one of their companies hits it out of the park and it's the next Facebook. It's the next Amazon. It's the next Novo Nordis. Like, that's going to drive a lot more. returns. And then the other thing, if I was a European regulator, I mean, obviously they're cracking down on the fangs and stuff in terms of antitrusts. But I would really be looking closely at tax policy and being like, hey, do I love that, you know, Amazon Apple? Yes, they've

got employees everywhere. But do I love that most of their highly paid employees are in the U.S. All of their profits are getting back, refraged you back to the U.S. They're boosting the U.S. stock market. But, you know, a lot of the profits are coming from us domestically. And yes, we get sales tax and everything. I would say I don't love it. I do think like a global style tax reform and kind of cracking down on that is a longer term issue that you have to think about if you're along these stocks and maybe is a headwind to U.S. returns over time. I'm dreaming, but that is a long-term concern, I think. No, I agree. And I would, I agree with that. And I would put that in the overall bucket of over a long period of time, lots of stuff happens. And

generally speaking, there ought to be reversion to the mean and sort of long cyclical way. waves, generally speaking. And in fact, if you look historically over many decades, and Golan Sachs was published a report of others, and there's a wonderful book that was written some years ago called Triumph of the Optimus that looks at equity market returns worldwide over like the entire 20th century. And the United States has not always outperformed other developed market indices. In fact, it tends to go in long cycles. You know, we could sort of sit here and try to come up with explanations for why it tends to go in long cycles, but, you know, empirically, it just tends to go in long cycles. And the length of cycle that the U.S. has outperformed, basically from 2009 to, let's call it, 2023, that is a fairly common cyclical length of outperformance.

And given where we are starting from in terms of valuation, and given that the last couple of years, we've now started to observe earnings per share growth, in fact, more than catching up to U.S. earnings per share growth, it seems reasonable to think that a larger allocation to Europe, Western Europe, and Japan makes sense. And critically, looping back to the topic that we were on a few minutes ago, about sort of like the right to invest, that kind of analysis and thought process, I think is very readily available to anybody, and you have every right to reach those kinds of conclusions on a long time horizon. No point of view over the next six months, 12 months, 24 months. But on a multi-year time horizon, it would be surprising if developed rest of

world did not do a lot better, certainly than it did over the last dozen years, and probably even in the U.S. just given the relative valuations. And so that argues for an asset allocation strategy that takes that into account. I don't know if it's developed or emerging these days, but one thing, a lot of my friends when I talk to them, a thing we frequently say is, if you look at the English market, the London Stock Exchange and stuff, the values out there, you comp anything there to anything similar listed in the U.S. It is just absolutely crazy. And again, I don't know if that's developing market at this point, but it's true. So let me ask you another question. Yeah. I'm specifically thinking of what?

a few years ago, he's like, hey, I've really got to get into investing, right? I've got to start researching stocks and everything. And he's a very successful small business center. And my Bushback was like, hey, if you want to, that's great. If you really enjoy it, like that's great. But you don't need to, right? Like, you're running a small business. Like, you can get the, you can just go and buy the SMP 500 index, right?

And get the average return. Like, there's nothing else you do where you can get that. I can't go and buy like the small business index and get the average return to the small business like you're doing, but you can do that and get that average turn. So I guess my question to you, just going back to the rights. Actually, this isn't quite the rights investment. You've got a lot of different stuff. You mentioned politics. You mentioned the real estate fund. Like to you, what do you need just to, you know, get off your butt and stop doing the average, like when you're looking at you know, what do you need to get off your butt and say, hey, I'd rather

not just take the average returns from indexing buying developed market ETFs. If I think that's better than buying domestic ETFs, whatever is. I think this stock is worth. like the effort I'm putting into researching it, the effort to sell, maybe the tax consequence of selling, buying it, the tax consequences of, like, what do you need to see that? No, it's excellent question. So, you know, one perfectly just sort of honest answer is I love investing and I love looking at stocks and I've done it for such a long time professionally that I really can't not do it. So I kind of have to, or, I kind of have to, or, you know, organize my life and organize my investing around doing it intelligently, right? And honestly, I mean,

I would say, like, I just really like it. And I think that's one of the best reasons to do it. And then you should think about how to do it intelligently. I was just, I'm laughing at saying, I really like it. Because whenever somebody says that, I know people roll their eyes, but like, I remember in college sitting in the back of the college classroom and like reading 10Ks in the back the college class. When I was at McKinsey, we'd work like, I don't know, like eight to 10 and I'd come home and I'd unwind by like reading a 10K or something, right? Like some people actually just like, and I will say like now that it's my full-time job, some days I like it a little less than other just because, you know, you have something that reports of bad earnings

and it drops a lot on you. There's a little added stress versus when it's kind of like just the side hustle or whatever. But I do it. You know, I really enjoy it and people, it sounds cheesy, but you do it. You mainly do it just because you like it. No, I think that's absolutely right. So that's like really sort of the honest answer as to like why I really continue to do single stock investing. Now, then there's a question of how to sort of do that intelligently, which I'll get into in a minute. But I would also add, I was sort of like a little bit of a detour to come back to the main path. I think one of the most important, if not maybe the most important things about investing successfully is you want to. find a niche. You want to find something where you can have some sort of edge in terms of information, in terms of process, in terms of access, like whatever it is, right? So again, without going to, we're going to talk about stocks, without going too far into real estate. Like, the reason my friend and I have, like, really been developing this particular real estate investing strategy niche

is my friend has done it before and he knows someone who's developed a fund who's been mentoring us to some degree. And as I've really dived into it over the last year, I've really come to learn a ton. We've developed, I mean, my friend already had some of the network and we've developed that network much more. We know people. We know how to think about this. We have access to capital. That is a field where we have a right to invest. And quite frankly, again, I'm not trying to tout this, but like that's a product that I think has that should exist. Like outside investors can't readily get access to that and we can provide that. Now, that's just one thing. There are many, many ways to do that in the investing world. But figuring

that out is critical. Like, where is your right to. invest and why and what really makes it some sort of sustainable process, some kind of advantage and access information, all that kind of stuff. Now, let's bring that to stocks. I think that let's say you've decided, I really love stock investing, whether or not it's the best, you know, risk-adjusted use of my time, I'm going to do it. So I've tried to think about, like, what is the, what is the right way to build a portfolio and to look for opportunity? The first thing for me is my portfolio needs to be tax efficient and it needs to be time efficient. So I have an IRA and I have sort of non-tax advantaged assets.

The non-tax advantage assets are larger, but I have a meaningful IRA as well. That IRA is basically evenly split, not quite, but I've split the IRA. Some of that money is with this outside manager whom I told you about because real estate investing, that's very tax advantage. Hedge fund investing, not very tax advantage. But if you can put IRA assets with someone who's got real skill, even if they're generating a lot of short-term capital gains, that's okay. So that's a very important component to me. I'm laughing because if I ever run for office, one of my three or four key party platforms is going to be these real estate guys. We're coming for every single tax break you real estate guys

get. Well, you know, let's move on. So I would say that in the tax advantage in the IRA, that's where I'm willing to make investments that will have a shorter time horizon, where the shorter for me, because I want to be time efficient, still means a couple years, hopefully, no, not always, obviously, but I'm, you know, I'm willing to put those sort of six-month trades in, nine-month trades in, or even like something that I think is going to run for a couple years, but it's not a long long time. That's tax efficiency, and I certainly do hear that, but what do you think, like, as an individual investor with your background, like, you know, spending not full, full time on this,

what do you think, like, where is your process or where do you think the inefficiency you can take advantage? Right. So I promise I'm getting to that. So in terms of the time efficiency, like, I want most of my investments to have longer time horizons and I want to be able to have a portfolio that's not that big. So I want to have enough diversification. I'm not trying to get four or five stocks, but I don't want to have 30 or 40 stocks. So I want to have kind of 15-ish, 15 to 20 is kind of the sweet spot where some of those I don't think I really need to put too much time into math. managing them. And I feel like that's enough, I've got enough to diversification. It's concentrated enough to matter, but also it's time efficient. And I know I'm not going to be looking, I'm not doing it full time. So I'm not going to be finding the very best stocks or trying to find the very best stocks. But I want to, you know, my research to matter. And then when I put something in, like, I don't have to like constantly be recycling. So that's, that's one.

In terms of the kinds of investments, and that gets more to your question, sort of like the right to invest, there are sort of two big buckets, I think, where an individual investor has sort of a right to pick stocks. One is large companies that are very understandable that you think are mispriced for an understandable reason. you don't think you're getting some, like, massive mispricing, but, you know, many people have made this observation that if you just look at how stocks trade over a couple of years, very stable companies will move up and down much more than they normally, than their fundamentals would dictate. And it is perfectly possible to understand a company, and because it's an understandable company, It's a large company. You don't really getting like an edge.

You're just doing your work and understanding it and then picking a good entry point. And that all by itself is enough to generate a little bit of outperformance. You're not swinging for the fences, but if you do this well, you should, it's something you ought to be able to do and generate pretty good returns. I hear this. That's the old. I think it was the, I can't remember it was Peter Lynch or Greenblatt who put it in the book. And they were like, look, if you look at the stock price of the top 50 companies in

the U.S., like most of them, the low and the high over 52 weeks are like 50% off, right? Like Apple's low will be 130 and Apple's high will be 190. They'd be like Apple's business, especially a net cash business like Apple, their value didn't change by 50% over that year. So if you kind of wait for the market, and I do hear that, but like, that's getting very close to technical analysis at that point, right? And I just like, I do want to think it's technical, right? Because you're looking at valuation.

But you're waiting for, I guess it's starting. starting to say, hey, wait for something to be down 20% and buy it and then sell it when it's up 25% for there. Like, it's kind of getting close to that. And I also just start wondering, like, can the market really be that and efficient where it does like one thing we can, again, this comes back to cash and like not swinging. It sounds like you're saying, hey, wait for the markets to be a little pessimistic and then buy, which sounds great.

But like, you know, what if it's a raging bold market and nothing's going down 20%? So you're sitting on cash for like two years while everything keeps drifting up. I don't know. It just sounds nice in theory, but I feel like. practice like the opportunity cost problem is a real one and that gets back to the question it's like maybe the best thing to do is just take all your money put it in a low cost index and do something else with your life and I don't think that you're like that's a high hurdle to clear as we've talked about right but I do think that empirically companies

trade within a very wide range of valuation where the underlying fundamentals on a longer-term horizon are not really changing that much. And so that is understandable. You can come to a company, and it's not saying, like, I'm just picking stocks and the Dow and waiting for one of them to be down 20%. That's not what I'm talking about. What I'm talking about is if you come to a business that you can understand and you can form a general idea of a range of fair value and you see that like it's going to get to the low end of that range from time to time and there will be moments where it intersects like you understand the company it comes to the low end of that range of fair value and you see that like look what's

driving this is something that I can understand like yeah I don't know what the next quarter or two are going to bring but I have pretty high confidence what the next several years is going to bring and this is a good and treat point. Again, I think you have to temper your expectations. I don't think you're going to like massively outperform that way. But I think outperform a little and pick stocks intelligently for the long term that way. The other worry I do have with that is like you kind of run into the turkey before Thanksgiving problem where that works until it doesn't. And like the ones I think about and this is just because I worry about them, right?

But like, you know, First Republic, how many people would tell you that First Republic was the best banking franchise in the world? best managers, all this sort of stuff, like literally until the day before they went bus, right? And I worry, like, there was people outperformed buying First Republic, buying Silicon Valley Bank, all these banks. People outperformed for like literally 12 years, right? And I think smart people, maybe they got out in 2022 when they looked at the balance sheet and said, oh my God, you know, like hopefully they did. But I do worry, like some did not for a hundred different possible reasons. And I worry, like, with a First Republic or go back to Lehman in 2008, there's that famous chart of Lehman's return on equity, you know, every year until they go to

zero. And I worry, like, maybe you outperform using the strategy over 10 years, over 15 years, but eventually that strategy leads you to buy the one stock that is First Republic in March 2023. And it's, you know, it went from 100 to 70 and you wake up the next morning and it's a zero or something. I think that is absolutely the right thing to worry about. And there are two responses to that. But, you know, there are two responses to a very real concern that one always needs to have front of mind. The first response is that's why you want to have a reasonable amount of diversification. If you own five stocks and one of them is First Republic, that's a lot worse than if you own 20 stocks and one of them is First Republic. And by the way, if you also have assets

invested in a couple other ways as well. So now you're actually, you're getting a reasonable amount of diversification. And look, you know, Warren Buffett or Charlie Munger, rest in peace, would say, if you really know what you're doing, you don't want to diversify. And so the no-nothing investor buys the index, and there's nothing wrong with that. The investor with super, super, super, super-duper conviction buys like four or five stocks. And then there are places in the middle. And you have to decide for yourself where you're placed in the middle is. And that is part of knowing your circle of competence. And that gets to the second thing, which is the circle of competence, right?

Where, yeah, it's hard to really know. And it's hard to always understand and look around corners and monitor. You know, as again, Charlie Munger used to say, this business, this thing about picking stocks, it's simple, but it's not easy. Right? And that's right. It's not easy. Now, you know, there were people who understood that. And certainly, I never owned First Republic.

I've always had a healthy appreciation for the risks of owning a bank. If I had owned First Republic, I would have suffered some significant losses, but I would have gotten out before the worst, just in terms of the timing of when I was aware of what was happening. But this is always a risk. And it's part of what makes it, you know, tricky. But anyway, that's the first. That's the first sort of strategy.

But your commentary on especially, hey, first or like the two examples I could list with that, you know, 100 to zero overnight were First Republic and Lehman and those were financials, right? And financials are a different piece. I mean, you could list, you could probably start listing frauds. Like you do have some fraud risk. But I think moot, I don't know, fraud risk is an interesting one to talk about because generally, like you get fraud by you're really aggressively, not always, but kind of you're aggressively hunting for alpha by buying a company. company whose numbers, they're putting up great numbers, numbers that are almost too good to be true. And they turn out to be too good to be true. Like, if you're kind of, you don't

find a lot of frauds that are like, hey, guys, like, we trade for 12 times price to earnings. We buy back 4% of our shares per year. We pay out a 3% dividend. We have no need to tap the capital markets. Like, there's not, you know, if you're not seeking, you generally find frauds we're like, we're issuing tons of equity, 100 times P.E. We got to like keep people interested, keep it like. So I never know. It's tough. Like, I, I, I, I, Knock on what, I haven't really fallen for frauds before, but I could see that. But that's the other thing that would like turkey. That's 100%. I totally agree. And here it's helpful for me that I've run a long short equity hedge fund and I did shorting as well as going long.

I mean, you know, oftentimes you get these battleground stocks. And the battleground stocks can either be great shorts or great longs, but you can avoid the battleground stocks. You know, and the battleground stocks have a signature to them. And, you know, certain stocks, like, something could go wrong, but, you know, and you can always get hit by a meteor out of left field, right? That can always happen. But that's not the same thing as something where, like, you could smell that there's a risk here. Do you have two or three examples of battleground stocks right now? Let's see.

You know, the funny thing is, like, don't because I avoid them. But I don't want to mention who, but one person in this dinner group that I've been a member of for many years. And we just had dinner last night. And he actually brought as a long this stock griffles, which is in the news literally today. I saw it. Yeah, for a short report, right? And dropped 40%. And last time I looked, it was down 25% or something like.

that. And this is a very smart person who might respect a lot. And his strategy is to go much more into the battleground stocks. And he brought it as a long and suddenly boom. Like now it's either a great long or you want to flip it and be short. I have no idea, which I'll never know. Because it's not what I'm going to do. No, I definitely hear you. Though I don't think Ripples, I mean, I could be completely unaware. It's a Spanish stock. I do think it was funny. Like, you know, who is the short firm that put out that they were? I can't. I can't remember who but they did a tease they're like hey we're going to be announcing a 10 billion dollar Spanish short yeah yeah I wish I didn't see it in time because I wish I had

because there were only like three to five if you look to the description there were like three to maybe five Spanish companies that would fit the description and you could have nothing on this podcast invest you might everybody should remember like shorts risky and it's too late for this but I you definitely could have just gone short all three to five that fit the description wait for the short reports come out covered all of them the day and made a pretty nice profit. And by the way, there's something about plasma that seems to be like a dodgy industry. Not sure really why, but it definitely seems to be the case. But yeah, so I think you can avoid these. You can recognize and avoid these battleground stock. Also, by the way,

I don't do shorts. In my PA, like, I think shorting is a great product professionally. It's done well, but I have absolutely no desire would need to do it. I can just fold cash. You mentioned, I mean, I look, shorting, just because of the heightened risk and the heightened sensitivity and, like, the timing is a lot more active matters in and oversight. The upside down, it just requires

all the time. Now, the reason I ask about Battlegrounds is because I agree, like, I know some people who have created fantastic track records, and if you look at where most of their, they generally run concentrated, and this is not their strategy, but this is generally what they've they find stocks that are battleground stocks and they go long them. And what they do is, you know, if there's 50 battleground stocks out there, they find four of them and they find the best four where the battle is wrong, right?

The longs are right and they go long them and you will generate incredible alpha if you can do that correctly. Now I also know people who look at that track record and say, hey, you know, cool, they did four stocks every three years. They've done 12 stocks over the past 10 years. Their track record's great, but they're going to blow up with that because, you know, the moment you're wrong on one of those, boom, boom, boom. And, you know, you think about Herbalife, right?

Like Bill Ackman, this is a great example on both the short side, the long side in terms of battleground and the timing. Bill Ackman, if you went long herbal life on the Bill Ackman report, you made a fortune, right? Carl Icon made a fortune trading the other side of that. And today, the business, I'm not saying it is, but the business, a lot of Bill Ackman's concerns seem to be playing out now. He was just 10 years too early. But guess what?

If you were long, you did great, but maybe you took on a lot of risk you didn't realize you were taking on. No, I agree with everything you just said. But that leads to the second strategy, which I think the individual investor can do, right, which is microcaps. Like, there is clearly a major information asymmetry in the world of microcaps, and hopefully we'll have a chance to talk about one that is my most recent microcap investment. I only do a handful of those.

they're more time intensive, you know, this sort of hit or miss, excuse me, when you find them, but, and there's more risk. There's no question, there's more risk. Even if you're right, they're likely to slosh around a lot. They're generally much more fragile businesses. But the advantage is you can, you can really generate the part-time investor, single-stock investor, willing to really zero in, focus in on a couple, and really generate an information advantage. And on top of that, small caps are a lot cheaper relative to the market than they have been in other points in history. So I think you're fishing in a pool that's working for you in a couple ways, one from a pure

valuation perspective. Second, just structurally, it's the place where the lack of, the lack of, you know, a better term amateur stock picker can really generate an edge. And then third, because there's been that the large caps have outperformed, there's been so much move into passive, I think there has been sort of an increasing dearth of fundamental stock picking sort of work that's being done. Obviously, there are plenty of smart people who work in this area. It's just that I think there's more inefficiency and so it's two questions microcaps how are you defining microcap because i do find the definitions vary a little bit i mean i would say functionally below certainly below a billion

but i would say below 500 million okay i don't disagree but you know some people it's under 100 some people's under 5 oh and i was going to say like you can go lower to you know like the the line between small cap and microcap is uh you know sort of a judgment call that you And low, and low, um, and low analyst coverage is an important element too. So microcaps, I like, I go back and forth because I do agree with you. If you, you can find some very high quality businesses that are under a billion, under 500 million that trade for silly multiples. And actually, even under 10 billion, if they're not in indices these days, it will, can trade

really cheaply versus peers. And, you know, I think my pushback and I like go and waves on this, I would say, but I can't tell you how many times I get into a microcap or small cap. I'm like, this is a really good company. I'm buying it at eight times free cash flow, right? Eight times after tax free cash flow. That's a 12.5% year yield in terms of if there's just sending it all back to the equity, sometimes there, sometimes they're. And I think it's growing. I think it's got optionality. You know, this is a great thing. And then I just can't tell you how many times I've done this and just sat there for two years. I'm like, okay, cool, the stock has gone up five percent the past

two years. And maybe it's out of one, but nobody cares. Maybe management's not, like, fully, fully optimized, because if they were, they'd be buying back shares like crazy. But, you know, like, it's just like a sleepy small cap company that's a good business. You just not going anywhere. And after two or three years, I'm like, cool, the NASDAQ that we talked about, it's up 22% over the past three years. And this little sleepy microcap is up four percent annualized. I'm like, did I take less risk? Probably. But like, you know, they're not doing anything or heaven forbid the management decides, oh, we're a $250 million company. You know, nobody's going to go activist on us because to go activists would require.

just way too much money versus the rewards on us. So why don't we just start paying ourselves crazy amounts of money or doing bad? I mean, I kind of like, what would you say to all that? Well, I think the response to that is, is it a melting ice cube or is it something that's growing its intrinsic value over time? Because if it's a melting ice cube, if it's cheap at this moment in time, but it's not growing its intrinsic value, but growing its generally means growing its earnings per share, right? In quality earnings per share. then you are relying upon a catalyst or an event or just things to go your way. But if something is growing its intrinsic value over time, you know, the market will catch up.

And you just have to just have to accept that, you know, bare markets can last. And that's okay. You make money in bare markets by buying smart and letting it work for you over time. Like all the best investors, Fundamental Edge believes that the learning process never truly ends. That's why the Analyst Academy is just the beginning of their journey with you. Fundamental Edge alumni gain access to exclusive content, such as their guest speaker series. It recently featured TEDCDs of capital allocators. Alumni can also look forward to frequent webinars, case studies, and content from industry partner. For job seekers, there's the talent hub,

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We have been talking almost an hour at this point. There were four companies you wanted to talk about. I think we're probably only going to have time to get to one. know the four, so I'll let you choose. Which one would you like to focus on? Sure. Well, you know what? Why don't I focus on this? I actually was bringing this, discuss this with this dinner group last night, and this is a microcap. This is a real microcap. It's transact technologies. So, you know, most of the companies that I don't, most of the stocks I own are larger, more established, compound, you know, long-term compounders or their really solid

businesses that are cheap that I think are still durable, et cetera, et cetera. This is a different animal entirely. This is a company that most people will never have heard out. Transact Technologies is in two businesses primarily. Its legacy business, which is the cash cow business, is the manufacturing of thermal ticket, thermal printers. Thermal printers for casinos, operators and video lottery companies, basically for these machines, like a slot machine, that it doesn't give you coins, it prints out a ticket. It's a very niche business. It's essentially a duopoly, and it's a low to no growth, generates cash, not a great business, deserves a little multiple, but, you know, is Steady Eddie and they actually gain share during the pandemic.

There's a second business which leverages the thermal ticket printing technology they have where they call the Boha Terminal, B-O-H-A-exclamation point. Don't forget the inflammation point. And their customers are restaurants, convenience stores, grocery stores, and this product is a, it's a terminal, a hardware terminal, and you can use it to print labels. That's how they leverage their technology, but also it comes with software modules, right, apps that you purchase on a subscription basis, that allow you to monitor the temperature of food and print out task lists and labeling and keep track of the labeling. And the pitch is that for convenience stores and restaurants and so forth, You are saving money in terms of food spoilage, and you are improving food safety.

So you're buying this. It's paying for itself. It's a growth business. It should have very favorable economics, right, because you're basically selling the razor and capturing the blades in terms of the software. Now, the same critically, right? Critically, we'll get to the valuation a minute, but critically, there's been a CEO change over the last six months.

And I believe that CEO change is a very positive catalyst for the company. So the same guy who basically founded the company all the way back in 1996, I've been running it all the way into the early middle of last year. And to his credit, built a small business and pre-pandemic, this was a no growth, but steadily buying back some shares. And, you know, like a little microcap doing all right, ran into the pandemic and ran into headwinds that you can understand, given its business, but then sort of captured some shares. and so on, so forth. But they had this other growth business that they'd started in 2019.

Okay, restaurants, convenience stores were ran into some headwinds during the pandemic, but then they ought to have been able to grow much more quickly. And they were not growing nearly as fast as the board felt they should be able to. So the chairman of the board has now taken over as CEO. The board fired the CEO. The chairman's taken over. The chairman's this guy named John Dylan. He's 73. And incredibly, this is a guy who is CEO of several SaaS software companies, including Salesforce from 1999 to 2001. And worth a ton of money, obviously, has huge experience doing this, spoke with him at length, very impressed with him, impressed with him on the calls. And there's been a lot of positive things happening at the company. They've been reorganizing

sales boards. They initiated cost savings program and they think they get $3 million annually run rate savings starting 2024. And this is a $75 million market cap company. So $3 a year means something. They announced a big win in Q3 in terms of both international and domestic quick serve restaurant. They got licensed to sell into the international franchisees in Q3, and then just last week they announced that they closed the right to sell into the domestic franchisees. And they say more than 10,000 doors that they get to sell into just from this one client. So a lot of good stuff. And then the final good thing is they have announced, they hired a strategic advisor to look at all of their options. And we don't know what that is. They

for obvious reasons said, we're not telling even who we've, for whom we've hired. but we're looking at everything. We want to maximize shareholder value. And one thing that could make a lot of sense is some sort of sale or spin of the legacy business, some sort of monetization, because they already have net cash on the balance sheet. And yes, it would be great to get some investment, outside investment, you know, for the growth SaaS business. The legacy business, they don't really need to own it at this point. And so they may want to figure out what to do with it. Wait, they're unspeculating. What we do know is they hired a strategic advisor. When you add all of this up, there's just a tremendous amount of positive change happening in a business where they have a long growth runway. There are competitors, of course, but none of their competitors are super strong. It's a bunch of other startups. And I did some expert interviews using the Alpha Sense platform and read some expert interviews on the Alpha Sense platform. And again, a microcalf like this, four or five expert interviews, you're actually getting some real insight that other people are not necessarily going to get. It's not like you're trying to figure out, you know, Google or something like that. Now, so I think there's a lot of positive things happening. The valuation's tricky because the cash cow business, they are clearly over-earning and they've

said as much and their customers have access inventory and they're going to need to wait for their customers to work off the excess inventory. So there's a little bit of choppiness coming over the next couple of quarters. But pre-pandemic, the base business earned $4 to $7 million a year pre-tax. So if you think that they ought to be able to earn $5 to $6 million a year pre-tax, post-pandemic, normalized basis, they've gained share, they're taking out costs. It certainly, that doesn't seem very heroic. You put, say, an eight multiple on that, but, you know, everybody can choose their own multiple, but I think eight is a reasonably conservative multiple. You're getting call it $40, $45 million valuation for that legacy-based business. You've got excess

cash and receivables on the balance sheet that add up to another $20 million or so, which means you're probably getting $60, $65 million just for the base business and excess cash. And you've got this growth business that's being valued at this very, very low multiple. Wide range of possible outcomes here, a lot of risk. Like, definitely not a steady, eddy business. And I don't know what the next couple quarters will bring. There's a lot of positive catalyst, but there are potential headwinds, as I described. But I think this is a, I mean, it's, there's a little bit of analyst coverage, but no one really covers this. There's a lot of change happening. You do your own research. You can really just talking to the senior management and doing some expert interviews gives you some real

insight in this business where you might have a long-term grower on your hands. But a lot of risk and needs to be sized appropriately. Let me just one question here and then we'll have to go because I have one friend who's involved here, so I'd kind of looked at it previously and I did a little bit of research on all of the four or five stocks that we had done. So the one thing that jumped out to me. I mean, I think these guys have had, even before they launched Boha, my understanding is they had AccuDate and they had a relationship with McDonald's dating back like over 10 years at this point. My question was just like, McDonald's, I think is still a customer, right? If you go to there, they haven't done an investment presentation a while, but I saved one from like early

2023 down. They list Sonic, McDonald's, AFC, A&W. They have the point of sale terminal. That's right, which has no intelligence to it. It's just pure printing. But just like with that many, with that many big people, like, if they had this product, which seems really smart and really good, if they just had it at every McDonald's, like the business would be, I think, off the top of my head, 27 times bigger than it is currently is. And I guess my question is just like, if this product is so great and so differentiated and they've already got the relationship with McDonald's, like, I understand McDonald's a franchise system.

You can't get to everyone. But if it's so great, like, why isn't he just more fully rolled out through? McDonald's alone, right? I think it's a very good question. And I would say that the point of sale terminal that you're talking about with it's kind of like a dumb printer. It's not this Bohat terminal, which actually has intelligence to it, which is the Mac office, right?

So they're different products. This is a company that developed several different products and to serve different end markets with the thermal ticket printing technology. they were doing something in the energy space for a while that got discontinued, and something else that I forget as well. And this thing that you're mentioning is another sort of tag-in. It's different from this Baja terminal, which they developed in 2019. Now, I think the interesting question is not why do they not have more McDonald's customers for this one product, which I describe zero value to, but rather, why is McDonald's not a client for their Boha terminal?

And that's a good question. We know that they've signed up a very large QSR. They have not said who it is. Maybe it's McDonald's, maybe it's not. We don't know. I think that's an interesting question, but it just goes to the fact that they've had this Boha terminal. They should have been selling much more successfully over the last couple of years. They did not. They've taken very decisive action to change that. They've already seen pretty substantial progress in a short amount of time. And so one would hope that McDonald's, among others, would be excellent future clients for them. Well, hey, look, we are over an hour at this point. Patrick, this has been great. Thanks so much for coming on. I'm tempted to challenge you on. I'm tempted to challenge

you on chess.com and make you play a game where, you know, you start without a queen or something and see who would come out on top. But my ego can't handle it because I'm pretty sure you would still come out atop, even queenless. But hey, this has been great. You mentioned, do you want to give people your email if they want to reach out or you want to stay private? Because you mentioned your email at the front. I'll, I'll stay private. If people want to reach out to Patrick, send me an email and I'll try and make a connection. Patrick, this has been fantastic. I appreciate coming on and looking forward to chatting in the future. Thank you so much, Andrew. Take care. Bye-bye.

A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.