Constantly Concentrating: Why I Sold George Risk (RSKIA) and Weight Watchers (WTW)

by Geoff Gannon

I’ve gotten a lot of questions regarding my sales of Weight Watchers (WTW) and George Risk (RSKIA).


Interestingly, literally no one emailed me about selling Babcock & Wilcox Enterprises (BW).  


I’ve picked out two questions as representatives of the larger group.



Question #1: George Risk


“Really interested in why you decided to suddenly sell RSKIA.


I mean it's still obviously undervalued. You could have sold it in the beginning of 2014 for a better price than $8.40. Stocks in general were obviously cheaper at that time than they are now.


So logically it means you've found a better opportunity now than you could find in 2014 relative to the current price of RSKIA. That just seems really surprising to me.


The only logical conclusions are that you either lost patience with RSKIA, now have a different view on the risk of the markets, or really did find something better than what you could in 2013/2014.


If it's the latter, I can't wait to hear what it is when you decide to post it...”




I sold George Risk, because I am planning to buy Howden Joinery.


I don’t like to take positions that are smaller than 20% of my portfolio. The total amount I had available in cash, Natoco, and Weight Watchers combined was less than 20% of my portfolio. So, I sold George Risk to make room for Howden Joinery.


I try to only sell one stock to make room for another. The reason I hadn’t sold George Risk before is that I hadn’t found a stock I liked better than George Risk. I’ve now decided I like Howden Joinery better than George Risk.


Yes, I could have and should have realized this a couple years ago. I’ve known about Howden for years. Howden shares were cheaper in the past than they are now. George Risk shares were more expensive in the past than they are now. I’d have been better off if I made the swap sooner. But, it took me a while to come to this decision. I don’t own Howden yet. But, I expect to buy it soon.



Question #2: Weight Watchers


“With regards to your long term stake in WTW, I am just curious about the WTW sale, since WTW has announced growing subscription numbers and has Oprah as a Board Member, so things look rosier than last year.”


Yes. Weight Watchers is doing better now than it was in the past. Oprah Winfrey is a great spokeswoman and a good board member for WTW.


I didn’t sell my shares in Weight Watchers because I like the stock less now than I did last year. I sold my shares of Weight Watchers because I looked at what percent of my portfolio the stock made up and then considered whether or not I’d like to buy more.


Here’s what I said in a previous post:


“Weight Watchers, B&W Enterprises, and Natoco combined were now only about 10% of my portfolio. I had no intention of buying more of these stocks. I like individual positions to be about 20% of my portfolio. So, both Weight Watchers and B&W Enterprises had become distractions I wanted to eliminate at some point.”


Honestly, once I come to the realization that I’m never going to buy enough of a stock to get it up to 20% of my portfolio – I start thinking about selling that stock. I still own Natoco. It’s only about 5% of my portfolio. And I plan to sell it at some point. When I do sell Natoco, it won’t be because I don’t like the stock. It’ll be because I don’t like the stock enough to bring it up to 20% of my portfolio.


That’s really just how I think. If I wouldn’t want a stock to be 20% of my portfolio – then why would I want it to be any percent of my portfolio?


From time to time, I do own stocks that are less than 20% of my portfolio. Natoco was bought as part of a roughly 25% to 50% of my portfolio basket of Japanese stocks. When I sold out of those Japanese net-nets, nobody was willing to take the price I was asking for some of my Natoco shares. So, I kept the leftover shares rather than compromise on price. Later on, I kept holding Natoco, because I didn’t have anything I wanted to buy more of at the moment. So, it was a choice between either doing nothing and staying in Natoco or doing something and adding 5% of my portfolio to my cash balance. My bias is usually toward: 1) Inaction and 2) Holding stocks instead of cash. So, I just stayed with Natoco.


Once I decided I was probably going to buy Howden Joinery, I started thinking about selling George Risk, Weight Watchers, Babcock & Wilcox Enterprises, and Natoco because these positions combined were about 30% of my portfolio. I knew I’d want to put at least 20% of my portfolio into a new stock idea like Howden.


And I knew I don’t like holding “distractions”. I consider any stock that makes up less than 10% of my portfolio to be a distraction. When I look at a distraction, I ask myself a simple question. Would I rather have 20% of my portfolio in this stock or 0% of my portfolio in this stock? And then, I either buy more to get the stock up to 20%. Or (much more likely) I eliminate the position entirely.


This is something I really do. With both Weight Watchers and Babcock & Wilcox Enterprises – which are two stocks that dropped 50% or more at one point to become small positions for me – I really did ask myself whether I wanted to more than “double down” on these positions. In both case, I decided I’d rather buy a completely new stock than take positions like these from less than 10% of my portfolio up to more like 20% of my portfolio.


So, I sold George Risk because I decided I liked Howden Joinery more than George Risk. And I sold Weight Watchers and Babcock & Wilcox Enterprises because – in both cases – I decided I’d rather have 0% of my portfolio in each of those stocks than 20% of my portfolio in each of those stocks.


I could have kept them at 10% or less. But, that always feels to me like a half measure that doesn’t make much sense. I never want to “water down” a future good idea I’ll have – like Howden – because I’m still holding some ideas I maybe half-like and half-don’t like so much anymore. I’d rather ask myself: do you really want to buy more of this stock to bring it up to 20% of your portfolio? No. Then why own it at all?


I know that’s an unorthodox approach. I’ll also admit that on a strictly rational single case basis, it’s an incorrect approach. It’s not rational to sell something just because you aren’t willing to make it 20% of your portfolio. However, I’m always trying to find the strategy that works best for me over the long-term. And I think a habit of focusing all my efforts on holding no more than 5 ideas is one that makes sense. If I’m going to implement that policy long-term, I need to constantly eliminate positions of less than 20% in the short-term.

Talk to Geoff About Why He Sold George Risk and Weight Watchers

Sold George Risk (RSKIA)

by Geoff Gannon

Last week, I eliminated my entire position in George Risk (RSKIA).

This position was about 20% of my portfolio. It is now 0%.

My average sale price was $8.40 a share.

My average purchase price had been $4.66 a share (back in 2010).

I held the stock for about 6.5 years. So, the stock price compounded at about 9.5% a year while I held it.

George Risk also paid a dividend. The yield was rarely less than 4% a year. So, my total return in the stock was about 13% a year over my entire holding period.

My return in George Risk was not better than the return I could have gotten by simply holding the S&P 500 for the same 6.5 years.

However, the stock was cheaper than the S&P 500 when I bought it. I believe it remains cheaper than the S&P 500 today.

Right now, George Risk’s dividend yield is about 4.2%. And the stock has $6.36 a share in cash and investments versus a share price of $8.40 a share.

I didn’t sell George Risk because I no longer like the stock. Rather, I sold George Risk to make room in my portfolio for a totally new position.

I try to only buy one new stock a year. So, when I do finally buy this new position – it’ll be a big moment for me.

I’ll let you know once I’ve added the new position.

Talk to Geoff about George Risk (RSKIA)

Some Books and Websites That Have Been Taking Up My Time

by Geoff Gannon

I get a lot of questions from readers about what investing sites I use, what books I’m reading, etc.

So, here are two sites and four books I’ve been spending time with lately.




GuruFocus: Buffett/Munger Screener

I write articles for GuruFocus (click the “Articles” link at the top of the page to see all of them). So, it’s a conflict of interest to recommend premium membership to the site. What I will say is that if you are a premium member – I think the most useful part of the premium membership is the various predictable companies screens. There’s a Buffett/Munger screen, an undervalued predictable companies screen, and you can also just filter companies by predictability score (GuruFocus assigns companies 1-5 stars of predictability in 0.5 star increments). I think the best thing GuruFocus ever developed is the predictability score. And it’s a good use of your time to type in some ticker symbols and see which of those companies are high predictability, which are low, etc. Do I personally invest based on predictability? No. GuruFocus doesn’t rate BWX Technologies (BWXT) and it assigns predictability scores of 1 (the minimum) to both Frost (CFR) and George Risk (RSKIA). I have about 85% of my portfolio in those 3 companies. So, I have almost all my money in non-predictable companies according to GuruFocus. The predictability score isn’t perfect. But, for non-cyclical and non-financial stocks that have been public for 10 years or more – I think it’s a pretty good indicator. Use it like you would the Z-Score, F-Score, etc. It’s just a vital sign to check. Don’t just buy a stock because it’s predictable or eliminate it because it’s unpredictable according to GuruFocus’s automated formula.

I can’t vouch for the accuracy of the data on this site. But, that’s true for summary financial statements at all websites. Once I’m actually researching a stock, I do my own calculations using the company’s financial statements as shown in their past 10-Ks on EDGAR (the SEC website). What I like about is that it’s simple and clean. Most websites that show you historical financial data give you way too much to look at. When you’re just typing in a ticker you heard of for the first time – which is what I use these sites for mainly – what you need is a “Value Line” type summary of the last 10 years. It shouldn’t be something you need to scroll down to see. As sites age, they get more and more complicated showing more and more financial info. You don’t need more than what shows you. If you like what you see of a company at then you should go to EDGAR yourself and do the work. is for the first 5 minutes of research. The next hours should be done manually by you – not relying on secondary sources like, GuruFocus, Morningstar, etc. None of them are a substitute for EDGAR.




Deep Work: Rules for Success in a Distracted World

This is a great concept. It’s not a great book though. I recommend reading the book only because focus is probably the most important concept in all of investing. If you can focus the way the author of this book talks about – you can become an above average investor. If you can’t focus the way this author talks about – I’m not sure you can ever become an above average investor. In fact, I actually think you can’t. Focus is the foundational skill for an investor. You can teach most everything else. I’m not sure you can teach focus. But, this book tries to teach focus. So, I do recommend it. Value and Opportunity reviewed this book last year.

By the way, Value and Opportunity is a great blog. You should read it.


Tao of Charlie Munger

I just said “Deep Work” wasn’t a great book. That’s true. But, it’s not a bad book. This book is really, really not a good book. However, it has some great quotes from Charlie Munger in it. And, although I was disappointed by the book as I read it – I did find myself quoting the book quoting Munger in the weeks after I read it. So, the author did actually imprint some of Munger’s quotes on my psyche. I guess it’s worth $12 on Kindle for that. Don’t expect much out of this book though. Just think of it as a collection of quotes from Charlie Munger.


The Founder’s Mentality

This is a Chris Zook book. You might know that I’ve read all of Zook’s books. They’re basically about profitable growth. How can a business grow for a long time in a way that compounds wealth for the business’s owners at an above average rate? I’m sure that’s not how Zook would phrase it exactly. But, that’s how I approach his books. This is a good book. It’s probably my least favorite Zook book so far. But, I do recommend it to all value investors. This kind of book is very useful for buy and hold investors. For example, I was just talking to someone about Howden Joinery and I mentioned that in about 6 years the company will have fully saturated the U.K. with its namesake concept (the concept is a chain of depots for local, small builders who are renovating kitchens). The founder/CEO is also about 61 now. So, I told this person I was talking to that while I thought Howden would likely return something like 12% a year as a stock – I was only interested in viewing the stock as a 6-year commitment. In 6 years, the founder would be about retirement age and the company would be producing a lot of free cash flow it could no longer put back into its core concept (Howden depots) in its core country (the U.K.). So, I just felt that it’s possible the company’s phase of value creating growth would be over at that point. I think it’ll continue to be a durable business. But, most companies start to stray once their original concept is mature and once they move on to the second generation, third generation, etc. of management. When I invest in a growth company, I want it to be run by the founder and to still have room to roll out its core concept in its core country. I think Howden has about 6 more years of that period left in it. I’m not sure I would be able to so clearly explain my thinking on Howden if I hadn’t read this book and Zook’s other books. So, I recommend them all.


Global Shocks: An Investment Guide for Turbulent Markets

Now, this is actually a great book. Though I’m not sure it’s a great topic. And it’s a topic I’d recommend most value investors avoid. Full disclosure, a member of my extended family knows the author of this book. So, I actually heard about the book before it came out. It’s not a topic I would have found searching through Amazon. The topic is basically financial crises. However, it’s really focused on financial crises through the lens of monetary policy meaning especially foreign exchange and asset bubbles. It’s very useful for value investors to hunt in countries that have been devastated by these sorts of crises. It’s also useful to avoid countries that may be in bubbles. I would recommend this book with a caveat. Most value investors I talk to are already way too worried about things like the overall price of the stock market, whether a country is in an asset bubble, foreign exchange rate levels, etc. I started investing as a teenager in the late 1990s. So, I went through years like 1999-2001 and 2007-2009. Even when the stock market is overvalued, you can find stuff to do. The market is clearly overvalued now. And yet I hope to add a new stock to my portfolio later this year. I think it’s good to understand these things. But, I also think it’s good to be practical about it. If you’re a value investor and a stock picker – you should be capable of both believing that a market is overvalued and also believing that it isn’t pointless to keep reading 10-Ks, looking through spin-offs, etc. day after day. Hope is having something to do. And there’s always something for a stock picker to do. So, I recommend the book. But, I also recommend staying focused on individual stocks rather than macro-concerns. If you know you’re the kind of person who tends to get overwhelmed – don’t read this book. For everyone else, it’s an interesting read. Some people think it’s dry. I don’t. It helps if you’re interested in financial history. There’s a lot of (recent) financial history in this book.

Ask Geoff a question.







When Picking Stocks: Can Snap Decisions Ever Be Good Decisions?

by Geoff Gannon

"...if you’re an experienced investor, you’re going to be instantly attracted to the best ideas you have within the first hour of hearing about them. That’s just how it happens. Good ideas are simple. They’re obvious. You know them when you see them. It happens really fast. That doesn’t sound prudent and full of the kind of due diligence we’re told we’re supposed to practice, but it’s the truth. A great investment is usually something you fall in love with the day you first find it."

The Difference Between “Moat” and “Durability”

by Geoff Gannon

Someone emailed me this question:

"Am I correct in assuming that when you discuss durability, you are referring to the ongoing need or want for an industry’s products or services, whereas when you discuss moat, you are referring to the competitive positioning of an individual company within its industry?"

Yes. Exactly. Durability is about the product and the product economics of the industry. Moat is the ability of the specific company to sell more of the product and have better product economics than competitors.

In Michael Porter's approach: moat limits rivalry between firms.

And durability is about the relationship between the customers and the firm we are looking at.

So, Corticeira Amorim (Amorim Cork) in Portugal may have low durability and a wide moat at the same time, because it has advantages in the production and especially the distribution of cork compared to other firms. However, there are substitutes for cork including synthetic products and screw tops. Societal shifts in the acceptance of these ways of enclosing a wine bottle would mean that Amorim might not have very good durability.

On the other hand, a company like McCormick (MKC) has perfect durability. McCormick sells a variety of spices. Spices have been part of the food that even households that aren't very rich have used for well over 2,000 years and they have been used all over the world. It isn't anything cultural that determines the desire for spices. The spices used may change a little but people all over the world will always want to add spices to their meals. Whether McCormick will always be a leader in spices is a different question. But, 2,000 years from today people will be spicing the food they eat. I'm not a hundred percent sure people will be corking wine even just 20 years from now.

Sanderson Farms (SAFM) is another good example of the distinction between durability and moat. The durability of chicken is excellent. There are only a handful of domesticated animals that have been as selectively bred and extensively used as meat - mainly cattle and pigs - throughout human history. The product economics of processing chicken are also fine, you can earn a decent ROE doing it. I also think chicken should continue to be a cheaper protein than other alternatives. So, while I can't guarantee humans will be eating chicken in 2,000 years - I'm sure they'll be eating about as much or more chicken in 20 years. And I wouldn't be surprised if people are still eating more chicken than almost any other meat even 50, 100, or 200 years from now. So, I think the durability of SAFM's product and the business model - the things the firm actually does day-to-day - are both durable in terms of providing value for customers. The question is rivalry between firms. Fifteen years from today, someone will be doing what Sanderson is doing. But, how much profit will the firms that process chicken actually make? That's why I compare it to airlines. Airlines will be around in 20 years. It's not hard to guess how many passengers will be flying in 2037 within the United States. It may, however, be hard to know how much the major carriers will make in profit per passenger.

From a discounted cash flow perspective, it isn't very important what earnings will be far into the future. If you are buying a tradeable, liquid asset like a stock and you are expecting a fairly high return on your money (I try to stay in cash till I find something I expect to compound at 10% a year) you don't really need to worry about 50 or 100 years. I'd say that the clarity with which you can see the next 5-15 years is what matters. A lot of investors and analysts are looking out at years 1-4. But, if you can find situations where the durability 5-15 years out and the moat 5-15 years out looks good - you'll do fine. So, from an intrinsic value perspective - I'd say that both McCormick and Sanderson have high enough durability (in spices and chicken) that risks to durability don't need to factor into your investment analysis at all. I would say that Amorim Cork has enough risks to durability that you should factor those risks to the durability of cork as a product and the cork industry in general into your calculation of the price you’d be willing to pay for Amorim stock.

Here are some examples of how I'd classify durability.


ZERO RISK TO DURABILITY (nothing about the product is going to change in the next 15 years)

* Sanderson Farms (SAFM) - Chicken

* McCormick (MKC) - Spices

* Omnicom (OMC) – Advertising


SOME RISK TO DURABILITY (something about the product may change in the next 5-15 years)

* Progressive (PGR) - Car insurance

* Corticeira Amorim - Wine corks

* Village Supermarket (VLGEA) - Offline groceries


BIG RISK TO DURABILITY (something about the product may change in the next 5 years)

* Fossil (FOSL) - Watches

* Teradata (TDC) - Data warehouses

* Wal-Mart (WMT) - Offline general retail


What I said above doesn't deal with moat. For example, I would put Costco (COST) in the "low durability" category and yet also in the "wide moat" category. Costco has a strong competitive position. However, offline retail has serious risks to durability within even just the next 5 years. On the other hand, there are plenty of commodity type products (like steel) that have high durability as a product and yet no moat at all for many of the individual firms.

I think you can keep this fairly simple.

Durability: Will customers still value this product as much in 5 years, 15 years?

Moat: Will the company’s competitive position versus its rivals be as strong in 5 years, 15 years?

If you aren’t sure about either of these statements over the next 5 years, don’t buy the stock.

If you aren’t sure about either of these statements over the next 5-15 years, you need to seriously consider whether this is the kind of business you want to own and how cheaply you need the stock to be selling for.

If are sure about both of these statements over the next 15 years, you’re fine. To buy Apple (AAPL), you need to be sure of the durability of smartphones generally and the Apple iPhone specifically through 2032. Beyond that, it’s okay if you don’t know what the future will be. But, if you have any uncertainty about the durability of smartphones or the moat around the iPhone between now and 2022 – you really can’t buy the stock. Risks to moat or durability that could manifest themselves within the next 5 years are what cause losses in a stock.

Ask Geoff a question.

Sold Weight Watchers (WTW) and B&W Enterprises (BW)

by Geoff Gannon

Today, I sold my entire positions in Weight Watchers (WTW) and B&W Enterprises (BW).

My Weight Watchers position was eliminated at an average sale price of $19.40 a share.

My B&W Enterprises position was eliminated at an average sale price of $10.22 a share.

My Weight Watchers position had an average cost of $37.68 a share. So, I realized a loss of 49% on Weight Watchers.

My B&W Enterprises position had an average cost of $15.48 a share. So, I realized a loss of 34% on B&W Enterprises.

Note: I got my shares of B&W Enterprises as part of the Babcock & Wilcox spin-off. I bought that stock ahead of the spin-off. I still retain my shares in BWX Technologies (BWXT). My BWXT position is about 10 times the size (in market value) of the BW position I just eliminated.

My portfolio is now:

Frost (CFR)

BWX Technologies (BWXT)

George Risk (RSKIA)

Natoco (a Japanese stock)



In rough terms, Frost is about 40% of my portfolio, BWX Technologies is about 25%, and George Risk is about 20%. Natoco is less than 5%. The rest is cash.

So, about two-thirds of the portfolio is just Frost and BWX Technologies and more than six out of every seven dollars is in just three stocks.

Why did I sell WTW and BW?

Weight Watchers, B&W Enterprises, and Natoco combined were now only about 10% of my portfolio. I had no intention of buying more of these stocks. I like individual positions to be about 20% of my portfolio. So, both Weight Watchers and B&W Enterprises had become distractions I wanted to eliminate at some point.

Also, this portfolio is taxable. Three stocks account for 85% of the value of my portfolio and those three stocks are anywhere from 80% to 150% higher than where I bought them. I hope to buy a new stock sometime this year. To make room for that stock, I'll have to trim some positions with large capital gains.

Today's sales provide me with capital losses.

As a side note, you may have noticed WTW stock was up over 30% today and B&W Enterprises was down over 30% today. My Weight Watchers position was several times the size of my B&W Enterprises position, so today's rise in WTW's stock price may have had some influence on my decision to sell right now. However, I could have opted to eliminate just WTW and keep BW - and I didn't. So, I'd still say the sale is mostly not due to short-term price movements.

I really just wanted to:

1. Eliminate positions that were less than 10% of my account

2. Realize capital losses

3. Raise cash for a future stock purchase

Talk to Geoff about his Sales of Weight Watchers (WTW) and B&W Enterprises (BW)

How I Research Stocks

by Geoff Gannon

"I guess you could say I have a checklist that reads: durability, moat, quality, capital allocation, value, growth, misjudgment, and future. I also always compare the company I'm interested in to publicly traded peers. And, most importantly, I look at historical financials going as many years into the past as possible. I'd say I'm usually working from about 20 to 25 years of past financial data. That data is the bedrock of my process. It's the only quantitative part. Everything else I do is qualitative."

How to Tell Which Company Will Survive an Industry Downturn

by Geoff Gannon

"Variation in the operating margin is really a measure of profit wobble. In a capitalist economy, some firms tend to act as shock absorbers – they take a hit – and other firms tend to pass the shock on to customers, suppliers and employees without themselves showing much sign of the shock rippling through their industry, the economy, etc."

How to Steal Another Investor's Style

by Geoff Gannon

"...know your own style. Be honest about it. Then find those investors you admire most. The true investing masters out there, not just the guys with good records, but the guys you personally have admiration for. The guys you want to learn from. Then study up on all the ways they are different from you. Look for those places where their beliefs challenge your beliefs. Then start trying to ape their style."

Read the text version of this episode.

Get your question answered on the podcast.

Analyzing Stocks With a Partner

by Geoff Gannon

(To have your question answered on the blog, email Geoff.)

Someone who reads the blog emailed me this question:

“Buffett has Munger, and you have Quan. It seems like in this industry, a collaboration of minds can be a potent formula for long-term success if approached correctly. That said, how would you recommend investors/ aspiring portfolio managers to find a suitable partner who not only is able to shine light on your blind spots, but who can also be of one mind and culture?”


It's a huge help to have someone to talk stocks with. But, I’m not sure it’s a help in quite the way people think it is. I think people believe that Buffett is less likely to make a big mistake if he has Munger to talk to, that I’m less likely to make a big mistake if I have Quan to talk to, and so on. I’m not sure that’s true. I know from my experience working with Quan that our thinking was more similar than subscribers thought. For example, one question I got a lot was who picked which stock. And that’s a hard question for me to answer. Some of that might be the exact process we used. I can describe that process a bit here.


When I was writing the newsletter with Quan, we had a stock discussion via instant messaging on Skype. We did this every week. The session lasted anywhere from maybe 2 hours at the very shortest to maybe 8 hours at the very longest. A normal session was 4-5 hours. So, we were talking for let’s say 4 hours a week about stocks. We weren’t talking about stocks we had already decided on. Instead we were just throwing out ideas for stocks we could put on a “watch list” of sorts. We called it our candidates pipeline. It was really a top ten list. So, instead of saying “yes” or “no” to a stock – what we did is rank that stock. We always had the stock Quan was currently writing notes on, the stock I was currently writing an issue on, and then 10 other stocks. In almost every case, once I started writing an issue – that issue did end up going to print. In most (but not all) cases, whenever Quan started writing notes on a stock – that stock eventually became an issue. But, there were probably 3 to 5 times that he started writing notes on a stock and yet we didn’t publish an issue on that stock. This was rare. Most stocks we thought about but eliminated were eliminated in the “top ten” stage.


So, we’d have a list of ten stocks that we weren’t yet doing but that we planned – if nothing better came along – to work on next. Let’s make up a list here. Let’s pretend #1 is Howden Joinery, #2 is UMB Financial, #3 is Cheesecake Factory (CAKE), #4 is Kroger (KR), #5 is Transcat (TRNS), and #6 is ATN International (ATNI). It would go on like this for 10 stocks. A lot of times there were stocks on there that we didn’t really love – but we had this rule that we had to always keep 10 stocks on the board. This kept us from ever saying an idea just wasn’t good enough. We were trying to do an issue a month – so the answer was that if it’s better than every other idea we have right now, it should be the next issue. This way of working – by making our next best idea the hurdle – was very helpful. Each week, as we’d talk, we’d move stocks up or down. So, maybe I would say that I had been reading about Cheesecake (since it’s number 3 on our hypothetical list) and I decided that its future growth prospects in terms of the number of sites it could open is just not high enough to justify its P/E. It might be fairly valued. But, it’s unlikely to be undervalued. So, I wanted to move it down the list. Well, instead of just moving it down the list – I had to say where I wanted to move it and what I wanted to move up in its place. In other words, I’d have to explain to Quan why I thought Cheesecake was a less attractive stock than Kroger, Transcat, and ATN International. Otherwise, the stock would stay where it was.


I’m sure that if each of us had done separate newsletters, we would have ended up with a different set of stocks than Singular Diligence covered. But, it’s not like Quan and I disagreed much on which stocks to do. I think we tended to be furthest apart in the earliest stages of considering stocks. Early on, we weren’t going to do any financial stocks. But, independently, Quan and I had kept looking at Progressive (PGR). This was an obvious choice for the newsletter. GEICO and Progressive are similar. Over the years, they’ve become even more similar. Progressive has a very long history of excellent stock returns (something we always looked at). Some value investors own it. I think it had been consistently buying back stock and it may even have been within spitting distance of a 5-year low when Quan and I first talked about the stock. Things like a continuously declining share count (“cannibals” as Munger calls them) and a 5-year low (we don’t look at 52-week lows – but we are interested in when a company seems to have gotten better while its share price has gone nowhere) would have attracted us to the stock. So, either I brought Progressive up to Quan or Quan brought Progressive up to me. And the other one said he’d already looked at the stock. And neither of us was sure at first whether we’d do it. It’s not that we didn’t like Progressive. We just weren’t sure we ever wanted to do an insurer. We had done HomeServe (a U.K. stock). But, the actual insurance aspect of HomeServe – the risks it takes – is extremely minor when compared to something like Progressive. Progressive is a true financial stock. It is taking tremendous underwriting risk. In fact, you won’t find many insurers that write more in premiums (and expect to cover more in losses) relative to their shareholder’s equity than Progressive. If Progressive suddenly had a combined ratio of 110 for 2-3 years in a row – the company would be insolvent. On the other hand, if Progressive had low equity levels and then had 2-3 years of its usual – very good – underwriting profit, it could quickly re-build an insufficient capital level to an overcapitalized position. Progressive takes very little investment risk. But, it takes huge underwriting risk. Premiums are very high relative to equity. It can – if it misprices its policies – wipe out a good chunk of its shareholder’s equity in a single year.


So, Quan and I thought about Progressive a lot. Did we really want to break the seal on financial stocks? Once we did Progressive, other financial ideas might start appearing on our top 10 list. I mean, if we can do Progressive – why not Wells Fargo?


And that’s exactly what happened. We saw how much Progressive was hurting because of low interest rates. I described it as “flying on one engine” because Progressive usually made profits on both investments and underwriting. But, the stock’s current P/E only reflected the underwriting profit. It had way more float than it had ten years ago – yet it wasn’t earning more investment profit than it had 10 years ago. If that was true of Progressive – it was probably true of some banks too. There had to be banks that had twice as much in deposits today as they did before the financial crisis – and yet they weren’t earning a penny more in income than they had before the crisis. The stock I’m describing here is Frost (CFR). I had mentioned it to Quan several times. But, we weren’t doing financial stocks. It’s just not something we ever planned to do. And so, whenever I mentioned Frost – Quan wouldn’t say there was anything wrong with Frost. He just said we weren’t doing financials. But then we had done Progressive. So, now we were doing financials. So, it was time to look at banks.


Warren Buffett has said something like – I’m paraphrasing here: the best investments are the ones where the numbers almost tell you not to invest, because then you are so sure of the underlying business.


I don’t think he is talking about numbers specifically when he says that. I don’t think that statement is an argument against value investing. It’s an argument against prejudice. So, Warren Buffett is – at heart – a value investor. He is going to make the mistake of passing on a great business because it trades at too high a P/E ratio more often than he’s going to make the mistake of buying a great business at too high a price. Well, we each have our own biases. I certainly have that same value bias that Buffett has. I have missed out on some stocks I should have bought because they were trading at an above average P/E ratio, EV/EBITDA ratio, etc. They looked expensive by all the usual metrics. I also have a bias against financials stocks. So does Quan. So, it took a lot for us to move in that direction. We didn’t do it for just any insurance company – we did it for Progressive. And then when we moved into banks, we didn’t just pick any bank – we picked Frost (CFR). Progressive is a much better business than almost any other insurer. Frost is a much better business than almost any other bank.


It's interesting to talk about how we moved into doing banks at all. It took a lot of time. What happened was Quan had to do some research into the industry. He needed to gather information on a lot of banks and create some Excel sheets we couldn’t find ready made elsewhere. There were two reasons for this. One, we needed long-term data on the industry to prove that something like the 2008 financial crisis wasn’t more common than we thought. And, two, we needed many banks to draw from for potential picks. It was especially hard to come up with good banks. We thought we’d find a ton of them. If we’d been looking for banks that were cheap enough – value stocks – we might have found plenty. There are thousands of banks in the U.S. But, they aren’t equally attractive. Small banks don’t have the economies of scale of big banks. They tend to have higher expenses as a percent of their total earning assets. They also don’t have equally attractive deposit bases. I know the three banks I was most interested in from the start were: Frost (CFR), Bank of Hawaii (BOH), and Wells Fargo (WFC) because I was most comfortable with their deposit bases. We never did an issue on Wells. Quan looked at it for a very long time. I can’t think of another time where we talked so much about a stock we didn’t do. But, we did do issues on Frost and Bank of Hawaii.


We also did issues on Prosperity, BOK Financial, and Commerce (CBSH). We found those stocks as peers. Frost’s most natural peer in Texas is Prosperity. It’s the second largest bank in Texas. And then Frost’s closest peer in energy lending is BOK Financial. Commerce would have shown up as a peer of BOK Financial. And we were going to do an issue on UMB Financial. UMB is controlled by different descendants (I guess they’re cousins) of the founder of Commerce. So, members of the “Kemper” family control both Commerce and UMB. However, the lines of succession split off almost a century ago, so these people are not closely related even though the banks share the same founder and are both controlled by Kempers.


So, what can this tell you about working with an investing partner? Quan and I both had a bias against financial stocks. It may have taken us even longer than it would have if we were investing on our own to branch out into these stocks. Would I have written about Frost sooner if Quan hadn’t been so reluctant to do banks? Maybe. But, I certainly wouldn’t have done issues on Prosperity, BOK Financial, and Commerce without Quan. Those were much more his picks than mine. Without Quan, I might have eventually done issues on both Frost and Bank of Hawaii. I don’t know about Wells Fargo. Wells is a tricky idea to discuss. Quan and I both like the stock a lot. We thought – even at the time we were looking at the stock – that it was one of the cheapest banks we’d looked at on a normalized basis. And yet we didn’t do it. Quan was more insistent than me that we not do it. But, I’m not sure I’d do Wells if I’d been writing the newsletter on my own. I know I would have written about Frost first, Bank of Hawaii second, and Wells – if I ever decided to write about Wells – third. I was more comfortable with both Frost and BOH than Wells. Quan was more comfortable with all the banks we did than with Wells.


There are sometimes slight differences between Quan’s preferences and mine. For example, I told some subscribers who asked about it that Quan probably likes Prosperity (PB) a bit more than I do and I probably like Bank of Hawaii (BOH) a bit more than Quan does. But I like Prosperity fine. And Quan likes BOH fine. Maybe this reflects a difference that Quan is a little more comfortable with a long-term strategy of serial acquisitions and I’m a little more comfortable with a long-term strategy of continual stock buybacks. Prosperity is unusual in how many acquisitions it does. BOH is unusual in how much stock it buys back.


There’s a chance I would’ve done Wells if Quan wasn’t co-writing the newsletter. There’s a chance I would’ve done ATN International (ATNI) if Quan wasn’t co-writing the newsletter. I think ATNI is more likely than Wells. But, in most cases where we eliminated a stock – it was unanimous.


I’ll give just two examples. Two stocks we liked a lot – and thought were “good” bets in some sense – but eliminated from consideration were Western Union (WU) and Wells Fargo (WFC). However, we were pretty much in agreement that Wells was too difficult to understand and that we didn’t like the management at Western Union. If one person had each of these “hunches” alone – would they have ignored it? Maybe. So, maybe analyzing stocks in pairs helps build your confidence more than it helps you avoid your blind spots.



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