The Fund

Philosophy and Approach

Companies often suffer from neglect for many reasons. Some have few shares outstanding or are closely held. Others lack liquidity, trade in inefficient markets or in very low volume. Many have market capitalizations so small they fail to appear on professional investor radar screens.

Professional investors generally look for companies of much larger size and require a high degree of liquidity. They are willing to accept symmetrical risk. We, on the other hand, seek out neglected, asymmetrical investments and are able to find undiscovered value. By investing for the long-term, we seek to avoid conventional market volatility and high risk.

Because we have spent more than six decades researching companies that trade in neglected markets, we have more experience than most in identifying financially strong companies whose value has yet to be recognized.

It is important to understand why it is that many stocks trade in misunderstood or neglected markets (Over The Counter, NASDAQ Bulletin Board, "Pink Sheets", and even, at times, the NYSE) and often trade at significant discounts to comparable, more liquid stocks listed on the major stock exchanges. The answer lies in the fact that there is very little analyst coverage, little notoriety, and less readily available information available to the average investor. This translates into larger discounts from real or intrinsic value, thus presenting a simple, yet genuine investment opportunity.



Our Research

Before making any investment, we strive to perform an exhaustive fundamental analysis and appraise the value of each company component. We methodically educate ourselves on a company’s industry, financial position, competition, suppliers, customers, management, and opportunities. We seek to explore all facts available to an outsider. We develop a close and enduring rapport with corporate leaders and maintain direct access to them. We expect to regularly visit with management and directors and speak frequently with customers, suppliers, distributors, competitors and employees. We try to understand the wants, needs, aims, goals, desires and ethical standards of the company’s leader, in whose image the company is usually created. This understanding enables us to be comfortable holding investments during turbulent times and setbacks without questioning our beliefs.



Investment Characteristics

Common threads running through many of our investments at time of initial purchase include:

• Cash rich and debt-free
• Substantial free cash flow
• High return on equity
• Above average profit margins
• Earnings growth
• Share buybacks
• Low P/E ratio; occasionally as low as 2, 3 or 4
• Discount to tangible net worth
• Market price below current assets less all liabilities
• Sometimes trading at less than cash per share

Many companies have a high intrinsic value hidden behind a low share price. People often tend to judge a company by its market price, similar to the way one judges a book by its cover. Often, investors will assume that because a stock is trading at $5 or $10 dollars per share, it is a speculative investment with significant risk. Moreover, should a company's stock sell below $1 per share, most will assume it to be highly speculative, insignificant and not worth their time. While this may be true at times, our performance record and analytics shows this to be an incorrect generalization, often far from the truth.



Why These Characteristics

Since 1982, Santa Monica Partners has focused on companies with the following fundamental characteristics. Most have proven their value over time. The conventional wisdom is to avoid companies with these characteristics, but the fact is, and our experience shows, that patience will be rewarded and eventually value will out.



Thinly Traded with Few Shares Outstanding

Because of their inability to take large positions quickly enough to justify their costly research, professional investors often overlook companies with few shares outstanding. Many are unwilling to devote long periods of time to accumulate positions and generally want the option of liquidating at a moment's notice. We, however, are very willing to take our time to accumulate shares and will even go directly to the holders when appropriate. Moreover, it is our goal to seek out such wonderful companies and most importantly, it is our intention to hold them for a long period of time.



Closely Held

Closely held companies are often led by management teams interested in building and maximizing long-term shareholder value because they own the company. Murray Stahl, Chairman and founder of both Horizon Kinetics LLC and FRMO Corp., dubbed such companies "Owner-Operated" companies. Such companies without using that descriptive "monica" have always been our preference for investment. In contrast, companies with minimal inside control, where the senior level management receive high salaries, bonuses and lots of stock options, have a greater concern and are often more preoccupied with job security and feathering their own nest at shareholders' expense.

Inefficient Markets

Companies trading in inefficient markets will typically trade at a lower valuation than their peers. This is due in part, to the lack of public information readily available and the absence of analyst coverage; vastly different than the availability and coverage of companies trading in larger, more structured markets.



Low Trading Volume

Investors often shy away from companies with low trading volume because of their perceived lack of liquidity. These are the very opportunities that Santa Monica Partners relishes. By investing in companies that are kept out of the spotlight, we are able to purchase stock for a fraction of its real worth. We prefer building a position when it is neither quick, nor easy.



Liquidity

Our investments typically experience an event that creates greater liquidity. Whether discovered by analysts, the media or even through our own voice, established, valuable companies are eventually noticed, rise in price and gain liquidity. Many are the subject of significant stock splits that multiply outstanding shares sometimes five, ten or even twenty-fold. Some receive notoriety and offer liquidity through additional offerings or listings on established markets. Still others may be sold or taken over, merge or go private. In each case, the result is a liquidity creating event. Events such as these are not uncommon. In fact, we believe they occur quite frequently -- sometimes with a "push" from us.