Book Highlight: The Sleuth Investor

By: Avner Mandelman (2007)

Lots of foolish money in the market and it is not efficient.
It fails to take physical evidence that is public or that can be sleuthed.
Sleuthing a company is a function of 3 Ps
People (customer, suppliers, internal employees) (Humans)
All will have lots to say if you know how to talk to them
Products (function, who uses, why, etc)
Plant and periphery (location, production, environment)

The ideal company serves a 3 in one where the user (vetter), buyer (decision maker) and check writter is the same person. Ask the question is the customer worth it?

Market Index = mediocraty. Public info can uncover an edge but back it up with sleuthing.

Invest with information that is TRUE, Important, and Exclusive.

Stock selection/analysis should be investigations based
Use star Map to uncover relationship and see the whole picture

Profitable Stocks can fall into Cheapies (Buffet), Goodies (Munger - lasting franchises), Rockets (Momentum, Growth), and Tradies (special situations, speculations).
The First 2 types are most profitable.

Canadian Info Sources
www.Sedar.com
www.sedi.ca

Steady nerves are needed when the bullets start to fly

AVNER MANDELMAN Saturday, July 29, 2006
Five years ago, in August, 2001, Giraffe's monthly letter to clients tried to explain that good stock values often appear in times of war. I claim no prescience, and can no longer remember why I chose that topic. (This was three weeks before Sept. 11.) Maybe it was because our databases were picking so many tech values that the market was disregarding and no one but us was buying and so I felt besieged.
At any rate, I tried to be cute and titled the piece "Valuations in times of bombardment," (you can read that piece on Giraffe's website), then added a true-life example -- which I shall now shamelessly plagiarize before segueing into its relevance today. Here is that example, summarized.
In 1982, a war broke out between Israel, the PLO, some Lebanese militias, and various local drug lords (there's some redundancy here). In the midst of the fiercest bombardment, a scion of an old Lebanese merchant family (related to an economist I knew) decided to buy an office building on Rue Verdun, Beirut's main drag, because the war dropped local real estate valuations to next to nothing. (Worldwide, too, the financial markets were plunging.)
Friends of the guy tried to dissuade him, but to no avail. He plunked down 50 grand in U.S. cash and bought the building. (Even in the midst of war the registry office functioned -- the mark of a fundamentally civilized country.) The seller took the cash and departed to Paris, where he bought a one-room apartment, which over the next 10 to 15 years became $200,000 (U.S.). What of the buyer? He had to suffer through some years of turmoil and rebuilding, but within 20 years his property became worth several millions.
Which brings us to today -- Lebanon is again at war and the stock market is swooning. Does today's war also signify a market bottom? You may recall that Lord Rothschild famously said one should buy when war's cannons boom, and sell when victory's trumpets sound. Is it the same now? I claim no prescience. Instead, let's look at the record of Mideast wars as predictors of market bottoms, or at least abundance of values.
That region has been warlike for the past 5,000 years (as evidenced by weapons found in all layers at archaeological digs), but I suggest we stick to the last generation's wars.
The first Mideast war of modern times, 1967 (one in which I participated), saw the market rise for about a year afterwards, into 1968, before it plunged toward the 1970 bottom. (Curiously, in 1968 Warren Buffett closed his investment partnership, saying he could find nothing to buy.) The next war, 1973 (the Yom Kippur war), preceded a year of market decline before a bottom of sorts was reached in 1974. Then came eight years of sideways movement until August, 1982, when a war similar to the current one broke out in Lebanon -- as per the above example. That time, however, the market made a historic bottom almost concurrently, and did not look back, except for corrections and brief crashes (such as 1987). Then nine years later, in 1991, the first Gulf war took place, when President George Bush senior came to Kuwait's rescue. And again, that was precisely predictive just as the 1982 war was: Gulf 1 broke out on Jan. 17, 1991, and the market bottomed that very same month, with both stocks and bonds (especially junk bonds) taking off, tech stocks zooming, and fresh bull market geniuses born every day.
The next Mideast-related war (or at least warlike event) was Sept. 11, 2001, which Giraffe's letter so eerily preceded. The market plunged for one more week, vacillated, bottomed in October, then rose for six months before plunging again and bottoming a year later, in a complicated year-long bottoming process. There were perhaps a few more unsettling months leading to March, 2003, when the second Gulf war started -- and this was of course yet another historical market bottom that saw the market rise for the next few years.
So what can we say about war's predictive power today? Even those who invest on fundamentals may occasionally find themselves holding on to terrific values, which no one else wants for a while, before they receive their just rewards -- just like that Beirut resident of long ago. Will the bottom now be quick, 1982- and 2001-like? Or an extended one, like 1973-1974?
For all those who invest on fundamentals, this is almost an irrelevant question. You buy when you find a compelling value, and can purchase a dollar for 50 cents, and if it falls to 40 cents, you buy more and wait. But I cannot help but point out that Warren Buffett himself -- the same one who quit the market (for a while) in 1968 -- very recently made a $4-billion acquisition, in Israel, of all places. Therefore, in this case, we do not need to have an opinion, as Mr. Buffett's will suffice: He thinks one of most bombarded regions in the world is now a good place to invest in.
Will he prove as prescient as that Beirut merchant of long ago, in 1982? Time will tell. But it should also tell you that if you find a deep value, do not let present war conditions deter you. Wars come and wars go, but markets always remain.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com

Don't worry about risk if you know the business's value

AVNER MANDELMAN Saturday, July 1, 2006
On Wednesday night my 15-year-old son won first prize in entrepreneurship in the Greater Toronto Area for a detailed business plan to minimize raccoons' nuisance to a home. Several of his friends won prizes too. It brought to mind how more than a year ago his teacher invited me to speak about "value investing."
The kids were a bright lot, but when I asked how they defined "risk," they used theoretical concepts such as beta, correlation and volatility. Now, I use some math myself, but to a value investor risk is more than math -- it is the difference between price and value. How to explain it? Imagine, I said, that a company's sole asset is a condo building with 10 units, each with a market value of $100,000. The company is publicly traded and there are one million shares outstanding. What's the intrinsic value of the shares? Right: $1 a share, because if you bought all shares you could sell the condos and get this value.
Now assume there's a rumour that deceased raccoons were found inside the building's walls and an expensive renovation is needed. The stock swoons to 75 cents. You hop on the subway to check the building and find only two baby raccoons strolling in the basement, none resident in the walls. The city inspector confirms the building is fine.
So, based on your research, you buy shares, and make money when they climb back to 95 cents. This, I concluded, is what value buyers do. But where's the risk here? It is certainly not in the price volatility.
Finally, one kid piped up: The risk is asbestos in the walls, not raccoons. Exactly, I said. The risk is in ignorance of the facts. But if you check things out, why should you care about the upsy-downsy movement of the stock price?
Which brings me back to the topic of risk, a concept most investors think they know, but may not have thought through. You may be surprised to learn that for certified financial analysts, academics, financial advisers and others who assimilated modern portfolio theory, risk is basically the "squiggliness" of the price line. But is it really? Or is this just the risk of losing sleep?
Take for example Berkshire Hathaway -- Warren Buffett's flagship company. During 1998-2000, the stock fluctuated wildly between $80,000 (U.S.) and $40,000 a share, up and down. At roughly the same time, the stock of a certain mining scam, where local warlords had salted the lab rock samples, was going straight up (because no one had found out about the scam yet). Based on modern portfolio theory, at that period Mr. Buffett's stock would be seen as riskier than the mining scam, because its price wiggled more.
What of the fundamentals? Or underlying assets? About this the theory is silent. Now, this is not an idle point -- most investment portfolios are constructed using the price squiggliness as a surrogate for risk, because economists who won Nobel Prizes define "risk" this way, mathematically. (Indeed, how can you express "dead raccoons in walls" in a mathematical formula?)
But then, if you don't use math, how can you measure risk? Ah. Depends who is doing the measuring. You see, the market is composed of two types of people: agents and principals, and the two see it differently. For the first, it is the risk of losing money; for the second, of losing their job. That's why the first (like Mr. Buffett) usually define risk (and investment) in terms of underlying value, while the second (brokers, advisers) define it in terms of clients' sleeplessness. When you invest your own money based on your own due diligence, if shares you bought at 70 cents drop to 60 cents, you're likely to see a bigger bargain, and perhaps buy more. But if a money manager did it, his clients might yank the account and so force the manager to sell the shares (most likely to a principal investor).
This is something that savvy market pros know and that neophytes take years to learn: Principals make money when agents panic and hand them value bargains. That's why the best money managers (which is what this column is concerned with) often behave like principals -- they buy value and accept price squiggliness (also known as drawdowns) as a fact of life.
Mr. Buffett did not flinch when BH's stock fell significantly in 1999. (Of course, it helped that he controlled the company.) An excellent value manager who appeared in this column noted that 30-per-cent drawdowns are something he'd accept -- and had. (Giraffe, another value investor, had levels of about half that in the past.)
Another excellent money manager who appeared here had taken drawdowns but keeps investing according to value, with a focus on physical due diligence.
What should it mean to you? That if your investments are down after the past few weeks, the best solution to your angst is to measure the value you own, and if it is still ample, ride it out. Just like that condo building -- if you know the value of each unit, some raccoon rumours won't faze you.
But what if you find you don't know the true value of what you own? Then you should either find it out, or invest in something else whose value you do know. Because only deep knowledge of value can both make you money and safeguard your sleep.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com

How to tell good buys from bad: Talk to people, trust your gut

AVNER MANDELMAN Saturday, June 3, 2006
Two months ago Giraffe put an ad in Report on Business, looking for a research analyst. We asked for a one-page résumé, a half-page letter, and a one-page tech stock pick (or pan). Why the last part? Not because we lack ideas (though you never know where another good one may come from), but because I've found in my past Bay Street incarnations that good analysts, like good magicians, actors, or secret agents, are best picked via a test-audition.
So we published the ad and waited. Over the following few weeks we received many responses, which we culled down to a handful, to be called in for an interview. That's the part I like. (I know it sounds odd coming from a techie, but although I like gizmos, I actually like people more.)
The candidates were a brainy, well educated lot -- professional engineers, possessors of MBAs, CFAs, and other degrees given to those who were taught to deal with the real world via its symbolic echoes. All presented themselves well, and some even gave interesting stock picks (or pans).
But two things were missing: First, nearly all had based their analysis on public, second-hand data -- the kind that everyone else sees also. Very few did primary field research and none thought it important to highlight exclusive information. Instead, the recommendations were rife with data copied from the Web, corporate filings or famous analysts' reports.
It was clear the interviewees saw their role as financial scientists massaging data gathered by others, rather than gatherers of exclusive info themselves. Second, very few spoke of the company's people. The engineers spoke of the gizmos' features; the MBAs spoke of strategies; the CFAs spoke of alphas, betas and financial ratios. All necessary and useful. But what of the people behind them?
Very few candidates spoke of the character of their pick's chief executive officer, the trustworthiness of the chief financial officer, or the high integrity of the company's team when compared to the competition. This lack of people-mention was glaring.
It was as if the possession of degrees made one see the world through concepts only. Or was this because the candidates were trying to sell themselves to Giraffe as investment scientists?
Without saying it explicitly, they seemed to be selling their reasoning power and learned ability to manipulate symbols. This was not a bad proposition, actually, since all were smart and well educated.
But at Giraffe we have a certain reservation about relying on mere smarts and degrees as our main competitive advantages. Other fund managers have smart people also, and if we pitted only our smarts against theirs, our advantage would be small.
What is the best advantage, then? As you probably know by now, in my opinion it is the relentless seeking of primary, important, exclusive information, the kind obtained by talking to people both high and low. Now, I don't want to denigrate our interviewees' academic degrees. After all, I myself have a few.
But in my opinion, relying on formulas can blind a person to the raw commercial world behind them, where real people steal each other's clients, patents and girlfriends, where some act honourably and so may deserve investment dollars, while others don't. How to find out who is who?
I hoped you'd ask. Why, just last week two Enron executives were found guilty after a dozen regular citizens listened to their story in court and said they didn't believe them. No CFAs, no Nobel-prize winning math theories, just normal people using the inbuilt lie detector that every human is born with -- you, me and everyone else.
If the poor fund managers who "invested" in Enron had done the same before and listened to their gut, perhaps some would have stayed away. But then, how many fund managers consider the gut-check proper research? I suspect very few do.
Indeed, several of our interviewees tilted their heads in perplexity like the RCA Victor puppy when I asked whether they had sought primary people data. "Like what kind?" one asked. Like asking ex-employees what they really thought about the company and the CEO; or asking previous colleagues of the CEO whether he was trustworthy. (Enron's chief had issues before.)
Or seeking the CEO's ex-secretary to ask her what she really thought of him. (These are especially valuable sources.)
Only two candidates had done some people checking. One also asked us questions, and listened to the answers. He knew tech, yes, but he spoke of people too. We hired him. Now we'll have to develop his sleuthing ability further. But it isn't hard. He'll only have to talk to people or look them in the eye, then let his inbuilt polygraph tell him whether he trusts them or not. You, too, have such an inbuilt natural device. If you use it more you'll prosper.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.

How savvy investors use charts to zero in on fundamentals

AVNER MANDELMAN Saturday, January 27, 2007
Since this column began, I have been recommending that you do more personal due diligence of the companies whose stock you consider. Go out there and sleuth, I said, and you can outperform those who stay at home and rely on the Internet and charts.
That long-ago mention of charts brought a small flurry of e-mails from those who swear by them. One or two even claimed that price charts tell them everything they need to know. "Don't you ever look at charts?" one e-mailer asked.
Well, I do. But not for reasons you might think. Let me give you a few cases, then why it's relevant now.
Years ago, I had travelled to New York to listen to superinvestor Jim Rogers speaking to a class of budding graduate student investors at Columbia University. In that class, Mr. Rogers spoke about sugar. Even though I didn't invest in commodities, the points he made were good for stocks as well, and so they bear repeating.
When he started to invest, Mr. Rogers said, he looked for commodity charts going back 100 years and more, perused them, and marked the bull and bear markets. Then he dug out the history books to see what events that took place at those periods could have influenced supply and demand. That, Mr. Rogers said, is the legitimate way to use charts. Not as a magic trigger that tells you to buy flying-saucer bottoms or sell head-and-shoulder-blades tops, but as a pointer to past fundamentals that may recur today.
For example, in the case of sugar, Mr. Rogers found that nearly every time there was a sizable war, sugar went up. Was it because the population indulged in comfort food to forget the misery? Or did the army buy sugar in bulk for the fighting men's tea (then) or Coke (now)? Hard to say, but the historical fact is clear: In most times of national conflict, sugar's price rose.
So, if you are a commodity trader, this is a powerful fact to keep at the back of your mind, because if you think a current war may last, you would be favourably inclined toward sugar. If you think peace is at hand, you may want to sell it.
Mr. Rogers' use of charts as a pointer to fundamentals was no an aberration on the part of an honest value investor. None other than Warren Buffett did something similar. In a Fortune magazine article from November, 1999, he gently mocked those who forecast the economy in order to forecast the stock market.
The assumption that a good economy brings a rising stock market was bogus, the Sage of Omaha said. Just look at the evidence. Mr. Buffett pointed to two 10-year periods, one with low economic growth, and yet enjoying a wonderful rising market, the other with high economic growth but a stagnant market. The charts were clear. (So what did help markets rise? Why, the Sage said, you must start with cheap valuations and high interest rates, and see rates come down. Then you buy stock by stock-- fundamentally.)
Whereas Mr. Rogers used very long-term charts and data to learn about a commodity's supply-demand fundamentals, and Mr. Buffett used them to make conclusions about the market-economy connection, such tools can also be used for individual stocks. Here are two examples: One from the past, one from the present.
When I was a research director, a mining analyst once forecast that Inco (which was still independent then) would lose a ton of money. Such a loss, he said, only happened three times before in the company's history -- here are the dates. It's such a historic disaster, the analyst said, we must slap a "sell" on the stock.
However, taking a page from Mr. Rogers' book, I asked the analyst to bring me a 40-year stock chart of Inco, then mark the points where those historical losses occurred. As you probably guessed, these proved to have been the best buy points. Please note, the chart was not used to show a "buy" because of moving averages or what have you. It simply showed that a company that survived more than 40 years, and had a reasonable chance to go on surviving, was one you bought when things looked grimmest, because that's when everyone else ran away from the stock the fastest.
Indeed, as every long-term chart would show you, the best times to buy in cyclical industries are when things look most awful. For example, oil and gas, when the Economist had a cover declaring: "The world is awash with oil"; mines, when metal prices sank below production costs; or microchip machinery makers, when such companies lost money in fistfuls and couldn't fill their plants.
That last one in particular is an exercise we have done in Giraffe long ago. We can show that "sell" points for microchip machinery makers coincide accurately with fabrication lines having 100-per-cent capacity utilized. At such times you better sell the stocks, because it can't get much better. Conversely, the best buy points on the charts occur when plants are only 60-per-cent full, all companies are losing sacks of money, and analysts are forecasting further losses.
For instance, a year or so ago, many tech plants were half empty, yet I noted here that the Nasdaq's prospects were rosy. It has since risen nicely. Where is it headed now?
Short term, I have no idea. But over the next year or two, it should be good, because plants of chip machinery producers are not yet 100-per-cent full. When they are, everyone would be euphoric, the Nasdaq's chart would be buoyant -- and I hope I would be smart enough to sell.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com

To get an investment edge, learn to recognize business stars

AVNER MANDELMAN Saturday, February 10, 2007
Last week I took my son to New York to see the L.A. Lakers play against the Knicks -- it was Dan's 16th birthday, and I had to be in New York anyway on business. So I got two good seats right behind the Knicks' bench through a friend of my buddy Bertie the gold trader, who recently began to trade uranium and enjoyed a good few months, and so was feeling charitable.
What's all that got to do with investments?
The game was the usual American three-ring circus. Madison Square Garden full to the rafters, Wall Streeters wearing baseball hats and chewing gum to show they are down-to-earth, people sporting the jerseys of their favourite players, teenage dancers flipping in the air, and celebs, celebs galore.
Donald Trump walked by, with his son, and his latest wife; Jon Stewart flashed a V sign on the large monitor; Spike Lee sat brooding over some stat sheets, and, of course, the entire teams of the Lakers and the Knicks, gods among men said my son (who knew the names of all, and their stats, and personal and game histories).
Only one player was missing: Kobe Bryant of the Lakers, who had been suspended. With him, the Lakers were bound to win. Without him, they were probably toast. Not crisp. But toast just the same.
And what does all this have to do with sleuthing investment research, you are asking? It just so happens that I have a good memory for faces, and so, as the game was progressing and the camera was flashing more celeb faces on the monitor (Kareem Abdul-Jabbar, and Cyndi Lauper, and a few more godlike folks), I suddenly noted a trio of young men sitting in the middle distance, talking chummily.
They were camouflaged in frayed jeans, non-descript T-shirts, and backward-pointing baseball caps, looking almost like hockey fans, but I recognized two of them as the president and chief financial officer of a Silicon Valley tech company which I'll call here SuperChip.
The company's stock was inexpensive, but its fortunes were in doubt because its marketing team was deficient in what is commonly called animal spirits -- of which, of course, there were lots around us, both on the court and off it. (But not as much as on the next night, when the New York Rangers lost to the Toronto Maple Leafs, a game to which I took my son also. But I digress.)
At any rate, when I noticed the third man in that trio, I sat up and paid attention: He was the vice-president of marketing of SuperChip's main competitor. His face might not have been known to you, nor to most of those who own SuperChip stock, but I had seen him twice before -- first in a conference, the second time when I looked up his company executives' photos on their website.
The fact he was here talking to the top two honchos of his main competitor could mean many things, but the most probable was that SuperChip was trying to recruit him. And if this business star jumped ship, his own company's stock would suffer, and SuperChip's would benefit.
Luckily I recognized the trio's faces, so when I came back to Toronto on Friday I placed some phone calls to Silicon Valley contacts, who soon called back with info I would never have bothered to seek, had I not recognized the business stars' faces. And so, finally, I get to the conclusion: There is more exclusive information in public than you may think -- and it is often related to people.
You see, most investors have been taught in academia (as I have) to analyze companies and stocks via numbers, thus taking people out of the equation. It's as if you tried to forecast whether the Lakers or the Knicks would win by looking only at the teams' and players' stats. (Not that this approach cannot contribute: This is what the Oakland Athletics baseball team did, and what J.P. Ricciardi, who had first helped manage the A's, later did with the Blue Jays.)
Yet often one or two star players, or star executives, can make a big difference: Not only Bill Gates, Steve Jobs, or Kobe Bryant, but also a long list of rising stars one rung below.
Now how can you be expected to recognize all these, you ask? Well. You could probably identify 50 movie and TV celebrities by sight -- just like the crowd in that basketball game could -- yet no celeb has ever made you a dime, and most have probably even cost you, via endorsements. My son surely can recognize most of the NBA players -- he's a sports fan.
Therefore, if you invest, see yourself as a business fan, and pay attention to individual business stars: Follow their careers, learn what they do and how they do it, what they succeed in and where they fail -- and try to remember what they look like. If you do that, you'll often have an edge over those who don't. Sure, you must know the numbers, too, and the industry. But if you can identify a young business-Kobe-Bryant joining -- or quitting -- a company, you may take the money of those who only see a press release. Star talent matters greatly, both in sports, and in business.
And by the way, the Lakers did indeed lose to the Knicks. By five points.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com

Value play or value trap? Start by looking at the customers

AVNER MANDELMAN - Saturday, February 24, 2007
Value investors can be compared to managers of a shelter for beaten-up stocks. For example, every four or five years cyclical stocks get thwacked by the economy and are then discarded by the roadside. Even a fine tech company may see its main product die while the new one is only beginning to flower, and it, too, is then flung out by respectable investors, who may beat it up within an inch of book value, or even cash per share.
But these are also the times when value investors, perhaps wearing informal jeans and a loose T-shirt saying "Patience & Prudence," can pick up the bruised orphan, feed it, and shelter it in their portfolio where it can heal in peace. Then, two or three years later, its face glowing with financial health, the mended orphan can step out into the Street, where investors in pinstripe will now bid its price skyward. That's when the orphanage manager (value investor) is paid for his patience and troubles.
That, at least, is the theory. Yet there's a problem: Every now and then a bruised orphaned stock does not recover, and either stays in the sick-bed forever, or even succumbs. For a value manager it is thus of critical importance to know what makes one bruised stock an opportunity, while another would stay forever a value trap.
What is the answer? In my experience, eight times out of 10 it is "the quality of the business." Some businesses are good, some businesses are not good, and some are downright lousy.
What of management, you ask? Well, as Warren Buffett put it, when a business with a bad reputation meets a manager with good reputation, the business's reputation stays intact. In other words, even a first-class jockey can't win the derby if he's riding a nag,
What is a good business, then? In the large majority of the cases, a good business is simply one serving good customers. What are such paragons made of? Good customers quickly decide to buy, don't mind paying more, keep coming back, have the money or the authority to buy, pay promptly, and stay loyal. Bad customers are just the opposite.
Now a trade secret: If there's one thing we do really differently at Giraffe, it is analyzing the customer first, before we analyze the company, the product, the technology or the finances.
First of all we ask: Are this company's customers really worth serving? The company, as we see it, is only a mechanism to transfer its customers' money into our clients' pockets. Thus if we deem its customers good, we proceed to analyze the rest. If not, we stop, because you can't make a silk purse out of a porker's rear.
To make it clear how different this mindset really is, here's an example: Years ago, Geac Computer invented one of the first virtual memory processors in the world. The doodad could process vast amounts of data, fast.
And what did Geac's executives do with this? They automated the registered retirement savings plan query process in a trust company's branches. In effect, they aimed to make 6,500 tellers more productive. Was this a worthwhile endeavour? Hah. A teller then made $15,000 a year. (This was a long time ago.)
If the doodad made each teller 10 per cent more productive, it would make the trust company about $1-million. The doodad cost $1-million. Payback was therefore one year.
Sounds good? Hah again. To tinker with the computer systems of a large financial institution, you must get the ear of the chief executive officer. But to make sure it's executed well, the wise CEO (and that one was very wise) must ensure everyone is onside, so the decision goes through seven committees, none of whose members has a bonus incentive.
So why should they decide fast? Indeed, they didn't. Geac sold very few machines, and their cash fast dwindled. They also sold a few others to libraries -- where other committees of bureaucrats took their sweet time making up their minds.
As a result, Geac went bankrupt, and had to be rescued by Ben Webster (at the time Canada's premier venture capitalist), who put in Steve Sadler, who fixed Geac by firing the bad clients and jacking up the prices for the good ones until only those who really appreciated the service remained. Geac's stock zoomed. Why? Because the new jockeys fired the nag customers, and got themselves decent fast horses instead.
As you can see, same product + better customers = richer stockholders. So, if like many beginning investors you try to find value only via the numbers, know that cheap stock price, good balance sheet, even good management, are of course necessary, but are definitely not sufficient.
What you should also check is that the company's customers are indeed worth serving. If they aren't, avoid the stock, no matter how cheap it is.
But if the customers are worthy, and you give the poor beaten stock shelter when it is black and blue because of a temporary problem, when it eventually mends -- probably with the help of its customers -- it would likely repay you for all your kind hospitality.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com