After generating an annual return of approximately 17 percent in the 10 years ended in December 2009, Seth Klarman of The Baupost Group, chose to return some money to investors. The reason? Not enough investment opportunities for the $22 billion he has under management. However, individual investors or money managers with fewer dollars under management don’t have this issue. Our problem is having too little money and too many ideas.
How is it possible that Seth Klarman, one of the best value investors, cannot find many deals while you and I can within hours? Klarman answered it himself: “Today, Baupost’s opportunity set is smaller than it has been in some years.” In other words, he can only invest in big companies because of the size of his portfolio. If he wanted to find enough $50 million companies so he could put the entire $22 billion to work by purchasing 10 percent of each of them, he would have to find 4,400 $50 million companies. Good luck!
It usually takes me about three weeks to study one company. With 4,400 of them, it would take me 254 years to complete the analysis. However, if you only have $2.2 million or $22 million instead of $22 billion, all you need to do is find just a handful of companies of this size, and you will do well beating the return of Seth Klarman or other money managers who are disadvantaged by the size of their portfolios.
Small companies are mispriced more often than bigger companies because few investors and analysts are even aware of them. Joe Ponzio, the author of F Wall Street, wrote that businesses are like boats and the stock market is like an active seaport. Small boats, which represent small businesses, come to the port more often than big boats or big businesses. When you are alone or with just a few friends, you can just board the small boat and reap the rewards. Someone like Klarman with his army of investors has to wait for the biggest boats to arrive while watching us make money.
Unfortunately, many investors would rather invest in big cap companies, thus limiting themselves to fewer ideas just because the investment industry has convinced them that small cap companies are more risky. One of the reasons given is that small companies are illiquid. I have heard this nonsense many times from private business owners who have the majority of their net worth tied up in their own businesses, which may be worth as little as $2 million and have virtually no liquidity if they needed to be sold quickly. So how is a $2 million private company less risky than a $50 million public company? If you want to make some money and are not a $22 billion gorilla, then maybe you should look at companies such as KSW Inc (KSW), Mastech Holdings (MHH), and Premier Exhibitions (PRXI).
KSW, Inc (KSW)
KSW, Inc,. furnishes and installs high-end (>$3 million) heating, ventilating and air conditioning (“HVAC”) systems and process piping systems for institutional, industrial, commercial, high-rise residential and public works projects primarily in the New York City metropolitan area. This company is dirt cheap. You can read my two articles about them here and here for greater detail.
Mastech Holdings (MHH)
Mastech Holdings provides information technology staffing and consulting services to large and medium-sized organizations in the United States. This company also has lots of potential. You can read my two articles about it here and here.
Premier Exhibitions, Inc. (PRXI)
Premier Exhibitions, Inc. develops and tours museum quality exhibitions worldwide. It is an interesting investment opportunity because it trades below the value of Titanic artifacts. To read more, click here.
Disclosure: The author owns KSW, MHH, and PRXI as of the date of this article