FAQ

Santa Monica Partners, LP was founded on February 2, 1982 by Lawrence J. Goldstein.

No. Our investment partnerships are available only to accredited investor/qualified purchaser. To determine if you are eligible, you must be able to answer "Yes" to both of these questions:

1. Is your current net worth (or joint net worth with that of your spouse, if applicable) as of the date of this subscription in excess of $2.100,000 excluding homes, furnishings, personal automobiles.

2. Did your individual income without regard to that of your spouse exceed $200,000 in each of the last two full calendar years and do you reasonably expect such individual income to exceed $200,000 in the current year? For the purpose of this question, income includes earned income, as well as other items of ordinary income, such as dividends, interest and royalties, but excludes capital gains. If you are married, did your joint income exceed $300,000 in each of the last two full calendar years and do you reasonable expect such income to exceed $300,000 in the current year?

3. Are you a trust with total assets in excess of US$5,000,000 which was not formed for the specific purpose of acquiring an Interest and whose purchase of an Interest was directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment.

Anne Arnold at (914) 833-0958 or aarnold@smplp.com.

Most mutual funds have substantial unrealized gain and often use these gains to "window dress" their quality and public reports. This widely used technique can make the fund results appear to be better than they are. Unfortunately, newer investors can be liable for their prorated share of the taxes on these gains even though they often do not participate in the profits because they were not investors in the fund at the time a specific stock was purchased. The average turnover as of 2019 was 63% (according to Michael Laske, research manager at Morningstar) for typical equity fund investors. Because the annual turnover of Santa Monica Partners has typically been less than 20% per year, similar taxable events are very unlikely to happen to our clients.

Stocks of well-known companies are costlier than their smaller counterparts by most measures: price/earnings, price-to-cash flow, price-to-book, etc. Many investors place a premium on companies in the limelight because of the perceived lower risk associated with owning companies recommended by Wall Street analysts. According to the efficient market theory, the potential profit is usually already reflected in the stock price of large companies. Therefore, smaller companies that trade in neglected markets and are overlooked or ignored typically trade at lower valuations, thus offering greater profit potential. Additionally, many brokerage firms choose not to research less liquid securities because of their inability to profit by moving sizable amounts of stock. It is important to note that if we choose well and exercise patience, ultimately, we believe liquidity will be present.

Unlike mutual funds, when a Limited Partner joins our partnership, the capital contributed buys into the partnership at the current market prices of our portfolio positions. This is known as layering. The new partner is never responsible for historical gain (or loss) prior to becoming a partner. This contrasts with investment in a mutual fund, whereby the new investor buys into the fund at the original cost of the portfolio position and acquires an interest in all of the unrealized gains in the portfolio, often resulting in taxable gain at year-end. For example, if Santa Monica Partners disposes of a security shortly after a new partner joins, there would be no tax consequence for him. On the other hand, if a mutual fund were to dispose of a security shortly after a new investor entered, this would result in a taxable event for the new shareholder; even though the shareholder was not part of the mutual fund when the original security was purchased. Thus, in a mutual fund, the new shareholder would have to pay a capital gains tax following an event in which the shareholder had neither participation nor any benefit.

Another reason for Santa Monica Partner's high tax efficiency is its extremely low turnover rate. Turnover is defined by the frequency that a security is purchased and sold, resulting in a taxable event. Therefore, a 20% average turnover per year means that, on average, 20% of Santa Monica Partner's assets have been sold. This results in infrequent taxable events for our partners. Historically, our turnover rate has been forced upon us and was not a result of our own intention. This was because, many of our companies were purchased through corporate takeovers or private tender offers, thus forcing us to sell our holdings.

By contrast, according to Morningstar, equity mutual funds in the United States average 115% turnover each year, resulting in extremely high taxable consequences for investors. Clearly, mutual funds claiming to be "long-term" investors are anything but, as they continue to pass along annual tax liabilities to their shareholders.

By dictionary definition, asymmetrical primarily means out of proportion. What we mean in this case is that the potential for gain is not symmetrical or is "asymmetrical" to the risk of loss, therefore having a greater potential for gain than the potential for loss. By investing in companies with our desired characteristics, we offset risk by buying stock with a greater intrinsic value. For example, we may buy a stock for $1.00 when the company has $2.00 of cash per share and no debt.