Today we are interviewing Nano-cap, micro-cap, deep value and contrarian investor Nicholas Bodnar. We talk about how he got started investing, his investment strategy, his love of microcap stocks as well as the books and people that influenced him
1. How did you get into investing?
Thanks for doing this interview with me, PJ. I got into investing my sophomore year in college. Ever since I can remember I was an entrepreneur and enjoyed the aspect of business. For an example, when I was in high school I was an avid skateboarder. Skateboarding doesn’t sound like an expensive hobby, but when you are breaking skateboards every week – it can become an expensive hobby for a kid without a job.
In order to make money to fund my hobby, I would buy skateboards and skateboarding apparel in bulk and sell them at local skate parks – I also occasionally hosted skateboarding contests. When I grew older I had a business selling junk on eBay (EBAY) and a small gumball/candy machine route in college. Needless to say, I have always enjoyed the challenges of making money myself and the stock market naturally seemed like another way I could make a few bucks.
I thought investing was going to be easy and didn’t think I would have delved this deep in this profession. Put a few bucks here and there, collect dividends and boom, make some money. However, I quickly realized it takes more than selling in May and going away to make the hobby worthwhile. Likewise, I think Malcolm Gladwell sums up the mastering of a skill in his fascinating book "Outliers":
“Ten thousand hours to master your craft. That’s eight hours a day, five days a week, 44 weeks a year for 5½ years. Better get started.”
2. What is your background and education?
I was born and raised in a small rural town in the state of Michigan. Both of my parents were teachers and advocated to my younger brother and I that reading was important. Ever since I can remember, I have been a voracious reader. Furthermore, I adopted early that teaching myself something was more effective – for my personal learning style – than sitting in a classroom.
The institutional school setting wasn’t easy for me. It’s not that school was hard, but rather there was an opportunity cost. In middle school I would get in trouble for reading books during teaching lessons. In high school there was more of an incentive to hang out with my friends and learn about myself than dot the I’s and cross the T’s. Finally, in college I spent my time thinking of entrepreneurial ventures and reading annual reports – instead of paying attention in class. Likewise, the following Mark Twain quote sums up my thoughts on the institutionalization of school:
“Don’t let schooling interfere with your education.”
As for my educational background, I went to a community college right out of high school and ended up transferring to the University of Michigan – graduating with a Bachelor of Arts in Economics. In college I worked at a local supermarket and had a few other side businesses. After college I quit my job at the supermarket and started writing full time on Seeking Alpha. Today I continue to write on Seeking Alpha – passively searching for a job on the buy side.
3. Investing strategy.
My investing strategy is focused on deep value investing – specifically within micro-caps. Moreover, I try to invest in severely undervalued securities – with a type of asset back protection – and implied upside of at least 25%. I search for a margin of safety and focus more on protecting my downside than worrying about if a specific company is going to double, triple or whatever. I don’t like companies with a lot of debt, technology is confusing, and biotech would make my head hurt. Finally, I like tiny companies that no one else is looking at.
My strategy continues to evolve to this day and will most likely continue as I grow. However, I hope to stay a contrarian and go on the road less traveled.
4. What attracted you to a micro-cap deep value strategy?
I didn’t start off investing in micro-cap companies – my first investment was in Apple (AAPL) and Waste Management (WM). However, I have always been attracted to a value investing methodology, given the statistical backtesting results achieved from utilizing value investing practices.
When I started to write on Seeking Alpha, I realized that everyone was writing about the same companies. Given that my personality doesn’t enjoy doing what others do, I started to focus on micro-caps – which hardly anyone writes about on Seeking Alpha. I then realized that there were a lot of value disconnects within microcap stocks due to the lack of information, liquidity or sheer size.
In my opinion, anyone who likes the research aspect of investing and wants to invest in companies that no one else is looking at should adopt a micro-cap strategy. The strategy is more research intensive due to the lack of prior research on a lot of these tiny companies – but is well worth the time and effort given the value a small-time investor can discover.
5. What books or people influenced you?
There have been a lot of books that influenced me – inside and outside of the investment landscape. Within investing, books like "The Intelligent Investor," "The Sleuth Investor," "The Margin of Safety," "Titan" and "The Snowball" had an influential impact on me. Books outside of the investing practice that were highly influential on me have been "The Adventures of Huckleberry Finn," "His Dark Material Series" and "Love and Capital."
People who have directly influenced me have been my immediate family and my wife – both having supported my decisions. Indirect influences have been Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), in regards to investing. Jay Adams and Pat the Bunny for their contrarian nature and opposition towards conventional living. And Carl Sagan and Neil Degrasse Tyson for their creativity and thought.
5. How has your investing style changed over the years?
When I started investing I really had no idea what I was doing and would blindly put money into random companies. This changed quickly, and I realized a deep research-oriented approach was needed. As I started to read and learn more, a fundamental value strategy attracted me.
At first, I would invest in companies that have a historically back-test methodology of beating the market – Magic Formula Stocks, net-nets and companies in the Acquirers Multiple. I still invest in these types of companies, but I don’t really use already created lists or screeners for idea generation – well sometimes I do, but not often.
After realizing that micro-caps fit my personality style, I would go through lists of OTC stocks – seeing if I could find a hidden company that no one else knew of. This methodology works well and I still do it from time to time.
Once I adopted a deep value strategy with a focus on micro-caps, my strategy and style hasn’t changed much. There have been a few minor alterations – but overall, I am looking for cheap companies.
I have also started to search globally for cheap securities – for I believe there is a significant amount of value in other markets that no one else is looking at. Furthermore, this past year I started researching mutual conversions and started to invest in the community banking space. As Peter Cundill would say:
“There’s always something to do.”
5. Things that you do that other investors don’t do?
Well I think that a lot of investors don’t invest or research micro-cap stocks. Most investors focus on bigger more popular names – while I focus on pretty illiquid unheard of names. Other than my focus on micro-caps, I think there is a lot of overlap with how I research, my value methodology and thoughts on implied valuation, within the investment community. Investors know what works – so there is going to be a lot of overlap – whether you like it or not.
6. Where do you get your investing ideas?
When I first started writing on Seeking Alpha I use to get all of my investing ideas from screeners. As I continued to build my following, I started to have people reach out to me with ideas – I usually get at least one to two people messaging me with their investing pitches a week. This has been a good way to generate ideas and build a network. I have also been able to generate ideas from going to conferences. Overall, my favorite ways to generate ideas are from: talking to people, OTC lists, a few investing websites and conferences.
7. Traits a company must have to invest in?
A company needs to be undervalued. An undervaluation can be determined through variety of methods such as sum of the parts, NCAV, P/B or other multiples or on DCF basis. I like companies that have simple business models, some sort of asset, a net cash position and a type of downside protection. I also like statistically back-tested methodologies of outperforming such as mutual conversions. Overall, if I can understand the business model, the stock is cheap and I don’t think there is much downside – I will begin my research process.
8. What kind of checklist do you use?
I don’t really have any specific checklist written out or follow a type of rubric. What I do is read the most recent annual and quarterly report word for word – while taking detailed notes. After getting through that arduous process I can usually determine if further research is needed or if I put the company in a "pass" pile.
9. Before making an investment what kind of research do you do?
The first thing I do is read the most recent annual and quarterly reports. After that I typically will read a few more years’ worth of filings. While I am doing this I put a lot of data in Word and Excel notes – this not only helps me understand the business model but I have a library of information on companies that continues to grow. After understanding the business, I typically reach out to management and introduce myself. I think talking to management teams is important and helps to solidify their incentives with the business as a whole.
My research process is pretty intensive and continues to evolve with every new company I look at. I try to get better as an analyst every day, and I am sure my process will continue to evolve. As I grow I would like to start making more company visits before I invest in order to better understand the business and have a more complete understanding of what I am about to invest in.
10. What kind of bargains are you finding in this market?
It has been hard for me to find value in this market – but with enough searching, value can be found. The most value I have found has been in the community banking sector. No one pays attention to community banks, and this lets investors watching these companies buy undervalued banks that are growing at a decent rate and with an M&A option. I have written multiple times in the past year why community banks are attractive.
I am also finding value overseas – specifically in the Japanese market. Net-nets are hard to find in the U.S. However, they are very prevalent in Japan and the surrounding areas. It’s not unusual to find a basket of Japanese companies trading below their cash value. I have also created a theoretical portfolio tracking basket of Japanese, Hong Kong and Singapore net-nets.
There is also a lot of value in pink sheet companies in the U.S. – and that will probably never change. It’s not hard to find a cheap pink sheet company with a significant margin of safety on the OTC boards. An example is Aztec Land & Cattle (AZLCZ) or Tower Properties (TPRP). The trick is finding the liquidity to invest in these companies.
Finally, I created a theoretical portfolio of my favorite investing ideas called: Nick’s Micro-Cap Fund. Right now the fund has seventeen of my top ideas. Companies in the fund include Ottawa Savings Bancorp (OTTW), PICO Holdings (PICO), J.W. Mays (MAYS), AMREP Corporation (AXR), Keweenaw Land Association (KEWL), Otelco (OTEL), Westbury Bancorp (WBB, Financial), Consolidated-Tomoka Land (CTO, Financial), Conrad Industries (CNRD, Financial), Plumas Bank (PLBC, Financial), Mission Valley Bank (MVLY, Financial), Precision Auto Care (PACI, Financial), CKX Land (CKX, Financial), Tix Corporation (TIXC, Financial), Surge Components (SPRS, Financial), Forestar Group (FOR, Financial) and Alamogordo Financial (ALMG, Financial). I believe each company in the fund is undervalued and has potential to outperform in the next few years.
11. How do you feel about the market today?
I feel we are nearing a peak in the economic cycle and there could be a correction. Do I know when a correction will happen? Not at all. What I do know is that value is hard to find, the market continues to edge upwards, and it’s probably not bad to have a cash position. On the flip side, I am not a macro guy and a correction could be years away.
12. What books are you reading now?
Right now I am reading "A People’s History of the United States." The book is a controversial read and talks about all of the history that is left out of conventional school books. I have also been reading into the history in Japan – so I can better understand the country as a whole due to my interests in Japanese net-nets. Finally, I plan to read "Fountainhead" before the winter comes. I am always down to discuss books with anyone and feel free to shoot me books to read.
13. Advice for a new investor?
Strive to learn something new each day. Knowledge is power and will help you tremendously in the investing world. Also, once you understand the tools of investing, start reading as many annual reports you can get your hands on. Reading books on investing doesn’t really make you a better investor – reading annual reports and understanding businesses does. Finally, think for yourself and don’t do what everyone else does. If you do what everyone else does you will get the same results as everyone else. Forge your own path.
14. Where can readers reach out to you?
Disclosure: No position in the stock mentioned.
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