Top 50 Microcap Investor List: Keith Smith
For this week’s Top 50 Investor we present Keith Smith, Portfolio Manager of Bonhoeffer Capital Management in Webster, New York. While the Bonhoeffer Fund does not invest exclusively in micro-caps, Keith recently presented investment theses on MOI Global’s website under “Best Ideas 2022.”
Read our feature on Keith here
Welcome Back, Volatility
Volatility has returned to the markets. The S&P 500 is down 8.7% from its high on January 4th, and the Nasdaq is down 15.5% from its high. Many stocks—especially those related to technology and the “work from home” trade—have fallen much further. But even though markets have come down a bit, they remain at historically high valuations, as the chart below shows:
And the stock market isn’t the only highly valued asset important to people. The housing market remains hot and elevated as well:
So stocks are cheaper than they were, but are still richly valued. Housing has now about matched or surpassed—depending on which local market you are in—the price-to-income ratios of the last housing bubble, which caused plenty of problems and losses when it popped. What’s an investor to do?
There is no easy answer. What will happen in the weeks and months and years ahead will seem completely obvious in hindsight, but is uncertain and probabilistic in the present. Investors need to assess the risks, assess their own situation, and position themselves to live with whatever future unfolds—all while remaining flexible to alter course along the way.
As the prices of some stocks have gotten cheaper, and in case they continue to do so, one thing we suggest is that you look for investments with the potential to be antifragile, to use the term coined by Nassim Taleb in his book Antifragile. Investments and businesses that are antifragile improve from volatility. Readers may think of others, but here are a few ways in which businesses can be antifragile:
Execute on stock buybacks when a company’s shares are undervalued. Buybacks can subtract value if done above intrinsic value, and add value if done below intrinsic value. Finding management teams that know the difference can make a big difference for a long-term shareholder.
Raise prices in response to high inflation. If the higher inflation we are currently seeing persists or increases, finding good businesses that can pass along the higher costs over time will greatly reduce business and investment risk.
Keep a conservative balance sheet. If the worries causing volatility lead to economic volatility, opportunities will be presented for those companies with the capital and the gumption to capitalize on them.
And as a final reminder to investors out there, we’ll repeat what we wrote back in November, which is especially relevant if the current volatility continues on for a while:
There’s the saying that fortune favors the bold. But the bold—through leverage, overconfidence, or bad timing—often get squashed. There is a major difference between betting big when the odds are on your side and betting big when there is little margin for error. It’s always good to remember the first rule of auto racing and think about how to apply it to your investing process: To finish first, you must first finish
Tweet of the Week
Q4 Investor Letters
We’ve heard from our Premium Members that one good investment idea a year will pay for their subscription many times over. In an attempt to provide that worthwhile return on investment, we’ve started compiling a summary of our favorite potential investment ideas from the investor letters that we have been reading, and continue to read as new Q4 and year-end letters are published. We’ll send the final compilation out to Premium Members over the next couple of weeks. If you’re not already a Premium Member and want to join so that you will receive the final version, you can become a Premium Member HERE.
In Case You Missed It…
Gritty Conversations - Episode 24
Will Thomson - A Real Asset Discussion
Let The Wild Rumpus Begin - by Jeremy Grantham
Tell Me a Story - by Scott Galloway
Ballantyne Strong: The Good, The Bad and The Inflection Point
Planet MicroCap Podcast: Ep. 210 - Simplify with William Green, Author of ”Richer, Wiser, Happier”
The Investor’s Podcast: Classic 03: Seth Klarman's Book - Margin of Safety
Capital Employed Podcast: 4 High Quality Aussie Microcaps (w./ Mark Tobin)
If you have not already upgraded your membership…
Avenel Financial Group, a merchant banking and advisory firm located in Charlotte, NC, launched a new business venture called the Co/Investor Club. The Co/Investor Club is a community of value-oriented investors that collaborate on investment opportunities and ideas. You are receiving this newsletter because you are a Free or Premium Member of the Co/Investor Club!
Chat with Mike
Whether you’re an executive with investment opportunities or a college student looking to network, we would love to chat with you!
Email our Founder, Mike Pruitt, at mp@coinvestorclub.com with questions and ideas or schedule a meeting.
Don’t forget to follow us on social media too!
Twitter:
LinkedIn:
For our disclaimer, please visit our website
Have friends that want to join? The Co/Report is public, so feel free to share!
Thank you for reading. Co/Report grows through word of mouth. Please consider sharing this post with someone who might appreciate it.