This post is excerpted from a letter by MOI Global instructor Jim Roumell, partner and portfolio manager of Roumell Asset Management, based in Chevy Chase, Maryland.
The end of 2018 marked a milestone for RAM—our 20th anniversary. From the beginning, there have been myriad market conditions and always lots of things to worry about: economic slowdowns, the dot-com bubble, 9/11, wars, rising corporate and government debt levels, overleveraged consumers, the financial crisis and possibility of a depression, worldwide quantitative easing combined with potential runaway inflation and currency depreciation, and more recently, Brexit. As Gilda Radnor said, “It’s always something.”
Since our inception, we have remained consistent in the investment principles that animate us, regardless of macro-economic factors. To wit, in a 1998 quarterly letter that was written just prior to the official formation of RAM, we used the phrase “specific securities at specific prices,” and highlighted a key temperamental element of our process — averaging down. In our recent 3rd Quarter 2018 letter, we used the phrase “company-specific investment narratives, while eschewing overall stock market exposure.”
There has been little style drift. While most investors pursue “great companies,” we look for deeply mispriced securities. We speak and think in only one language—opportunistic, deep value. We find value in out of favor, overlooked, or misunderstood securities. Our philosophy typically leads us to focus on small companies with super-strong balance sheets, where we carry out dogged detective work. That’s been our song since day one.
The following are excerpts from twenty years of letter writing. We hope you enjoy our trip down memory lane.
3rd Q 1998 — Business risk is about winning or losing customers and creating overall shareholder wealth. Market risk is about what a shareholder is willing to do when he wakes up in the morning in a panic. Market risk is impossible to control. It appears to be managed most efficiently by 1) the security selection process itself and 2) averaging down.
2nd Q 2002 — In this year’s first quarter letter we noted that we looked to see what the market was making cheap…Pursuing this thesis, we purchased a basket of well-capitalized, fallen technology companies we considered to have good futures notwithstanding their current struggles…the market’s current “judgement” will not detract us from our own analysis of a company’s intrinsic value.
4th Q 2002 — Our current holdings possess meaningful discounts to tangible book values, under re- ported real estate values, strong balance sheets, competent and honest management teams (best we can tell) and business models that are straightforward. As we’ve stated many times, our job is not to predict the direction of the overall market or to discern how the market will value our holdings in the short term. Our job is to discover value through a conservative analysis of a company’s business and its assets, justify the analysis on a quantitative basis, and demand a meaningful discount to our estimate of the business’s worth.
2nd Q 2003 — Our sell discipline has shortcomings. For instance, because we are often seeking to simply arbitrage the difference between a security’s current public price and its current intrinsic value, we will often not participate in the growth of the company’s intrinsic value itself. We are always looking to up- date (hopefully increase) our corporate value estimate with new information, but our targets are based primarily on taking advantage of current discrepancies rather than making long-term judgments about the growth of a particular business.
2nd Q 2004 — I liken our opportunistic deep value investing strategy to a tiger patiently waiting in the weeds; off to the side, quiet and calm, waiting for a mistake to happen. Why risk coming out of the weeds when the odds are not (wholly) in your favor? And like the tiger, we demand differing levels of safety to come out of hiding depending on the type of prey…Nevertheless, regardless of the type of opportunity, we need to have the odds strongly in our favor.
1st Q 2005 — Roumell Asset Management strives to align itself with quality people in all of its activities. In selecting investments, we ask ourselves: Do we want to partner with this management team? Are they honest? Are they smart operators? If you can imagine making a private equity investment, you would probably do a tremendous amount of due diligence on the management team. However, for some reason, once a company trades on the public markets, investors often feel management isn’t worth trying to assess. Some investment managers (even some we respect), choose to “let the numbers speak for themselves” and avoid any real management inquiry. We are not looking for perfection, but we seek to go into business with people we believe we can trust. Often, we have to wrestle with what appears to be cheap assets controlled by less than stellar operators.
3rd Q 2006 — Our aversion to an over reliance on debt financing directly affects how we invest your money. In fact, if a novice were to ask us for one simple rule to adhere to as he/she embarked on a strategy to invest in individual companies, we would say stay away from companies who rely heavily on debt financing and pursue those with strong balance sheets. In other words, focus first and foremost on a business’s staying power and ability to survive regardless of the general economic or industry specific climate by referencing its balance sheet (including off-balance sheet items, such as unrealized real estate appreciation).
4th Q 2008 — We are mindful of the current environment characterized as it is by a dramatically slowing economy, real asset price declines, and the difficulty in assigning value to companies and their assets. However, in this environment, security prices appear in many instances to be priced at ridiculously low levels. If historically the investment criterion was “cheap,” it is now “ridiculously cheap” because (1) such prices are available and (2) it is necessary given current economic conditions. Demanding a greater mar- gin of safety seems quite appropriate. Perhaps our view is best described as being tempered, judicious, and flexible, but clearly one of opportunism as well. The economic outlook is truly muddled.
We do not hold securities on margin, have ample cash reserves, and are confident in our abilities as we enter a period that should allow a flexible, research-intensive firm such as ours opportunities to make money for our clients.
4th Q 2009 — We finished 2009 on a solid note. Our sizable investments in high yield corporate debt and select well-capitalized small companies paid off. We were cautious (and continue to be), holding roughly one-third of our assets in cash throughout the period.
4th Q 2011 — Our emphasis is on taking advantage of investment situations where we can reasonably expect to gain an informational and analytic edge through dogged, disciplined detective work to uncover well-capitalized promising securities underfollowed by Wall Street.
For us, while remaining conscious of both stresses and opportunities in the greater economy, investing is about price versus value, plus patience, as it pertains to very specific securities purchased at very specific prices.
4th Q 2012 — As much as information has become easier to access, we still believe firmly that this information is uneven in quality and does not replace old-fashioned shoe leather work. In our minds, the investment culture has been taken in by the notion that everything can be learned while sitting at one’s desk searching the internet. Deeper understanding often demands direct experience. Our research process is relentless and includes regular travel to see management teams, assets, customers, and competitors firsthand in order to obtain more and better information.
The “higher things” in life (thinking, feeling, temperament, and patience) will never become commodities. The investment operation flows from a clear, well-defined philosophy with the discipline to forge ahead independent of the market’s current vote of confidence — and that’s finally about a firm’s character. Proverbs perhaps says it best, “Where there is no vision, the people will perish.” In turn, if there is no investment vision, the strategy will, at some point, fail. The investor must internalize his or her process and beliefs such that they become part of his or her being. The mind’s eye ultimately becomes the tool to distinguish between risk and reward.
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Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.