GuruFocus had the pleasure of hosting a presentation with Steven Kiel, the founder and chief investment officer of Arquitos Capital Management.
He is also the portfolio manager of Arquitos Capital, a value-oriented private investment fund. Arquitos Capital takes a long-term approach with its portfolio and investor relationships. The time horizon is decades. The firm looks for alignment of interests: with the leadership in companies it owns and with its investment partners. It aims to limit the risk of permanent capital loss.
Kiel is also the executive chairman of Enterprise Diversified Inc. (SYTE, Financial), an alternative asset manager. Enterprise Diversified partners with unique emerging managers through its Willow Oak Asset Management subsidiary, providing operational services to support the goals of its affiliated managers.
Prior to launching Arquitos Capital in 2012, Kiel was an attorney in private practice. He was also a member of the Army Reserves, a veteran of Operation Iraqi Freedom and retired with the rank of major. He brings an unconventional perspective to the management of the portfolio, combining traditional analysis with the mindset of an entrepreneur.
Watch the full presentation here:
Key takeaways
Kiel kicked off his presentation by diving into his investment philosophy that he explained should look relatively familiar to all investors who subscribe to a value-based approach. In short, he looks at things with a fundamental, bottom-up approach to valuing companies.
He continued to explain that while many value investors utilize a similar approach, everyone will have their own unique background and experiences that will govern how they choose to make decisions. His biggest piece of advice was that investors find their own way to apply a value philosophy that fits in their strengths and tolerances for risk.
Comparatively, Kiel runs a fairly concentrated portfolio that is made up of approximately 12 positions at any given time. The top five of those positions will make up around 75% of the portfolio. He did add in that running a fund comes at a very different comfort level for concentration compared to investing your own money.
In Kiel’s eyes, the largest risk comes from not knowing what you are doing and not being humble about your knowledge base. If you decide to go in on a specific holding that you do not know enough about, you can get into trouble. If you can be honest with yourself and accept that you may not have the knowledge base to lean into certain holdings, then you may find yourself with a more diversified portfolio to cover your bases.
He then explained that he likes to dive deep into companies, doing years of research before actually making an investment. This has allowed him to establish large positions in companies that he is interested in regardless of the industry that they may be a part of.
At the same time, he recognizes there are certain industries that do not agree with his strategy that he will avoid due to a lack in his confidence. Kiel used the oil and gas industry as an example, explaining that there are many factors that exist outside of the control of management that he feels make for dangerous investments.
Before jumping into an explanation of the public company that Arquitos took over, Kiel explained some of his background and its influence. He competed as an athlete throughout college and explained that this allowed him to develop a competitive mindset. For investors, having a competitive mindset can help them to find a target or goal to achieve. While they may not be competing directly against others, the drive to beat past returns or even the S&P 500 can be key to success for many managers.
Stocks
While Kiel did not dive into any specific holdings during his presentation, he did take a moment while answering a question about the overall state of the market to briefly explain a position in Nam Tai Property Inc. (NTP, Financial). This special situation offered a unique opportunity with an activist investor involved alongside an ongoing court battle. In this opportunity, Kiel saw a catalyst that could easily drive value.
He continued to explain they are following multiple companies that have the potential to receive buyouts, or have received offers for their business. He believes that at this point in time, investors should really be using all tools available to them. There are many unique opportunities, whether it be meme stocks, spinoffs, SPACs or even bitcoin that can offer investors an opportunity to try something new with relatively low risk.
Questions
The first question that came in from the audience asked Kiel to dive into his philosophy on selling stocks. He started off by explaining that it is much easier to determine when to buy stocks because you can do a great deal of analysis and factor in your own commitment level.
The first situation for selling a stock that Kiel spoke on was when the analysis simply was wrong at the end of the day. If he has realized that a mistake has been made, it is time to get out of that position regardless of making money. Kiel continued that an investor can make money with the wrong analysis and also lose money when they have made the right analysis.
His second reason came down to an investor’s commitment level on a position. If they lose the motivation or commitment level for a holding, then it is time to sell. This can come from changes in the company like new management coming in that an investor is no longer confident in.
At the same time, Kiel believes value investors have often been guilty of pulling out of positions that have gone up in price too early. He believes that at this point in time, if you see a holding going up in price past your fair value estimation, you should give it some time before selling. Patience is a good thing for the current market.
Another audience member asked Kiel how he goes about processing the vast amount of information that is available on the market. He explained that he has set a series of RSS feeds that allow him to have headlines and new SEC filings all in one place. From there, his background in law and deciphering complex legal documents comes in handy.
With the information in one place, Kiel explained that he starts off by looking for any information that might be out of the ordinary and stands out. This could be big changes across a company between quarters or things like the special situations that he referenced when speaking on the current state of the market.
Overall, his strategy starts at the balance sheets and looking into a company’s financials. If he finds anything out of place, he does his best to find out what may have caused that discrepancy. From there, he recommends comparing as much data as possible. The changes that can be found could lead to the next great investment opportunity.
