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We recently exited our position in Sport-Haley (SPOR), a microcap golf apparel company in which nearly everything went wrong over the more than five years we owned the stock, yet we still made more than a 50% return – not much to celebrate, but better than a sharp stick in the eye.

We first became aware of the company when it was posted as an investment idea on a private, members-only website called (an excellent source for interesting, often- obscure ideas). Our research confirmed the investment thesis presented on the site, which was quite simple: the stock, at $3.11, was priced at roughly a 60% discount to liquidation value (current assets minus all liabilities), so if everything went wrong, there was ample balance sheet protection and if anything went right, the stock could easily double or triple, so we purchased more than 8% of the company at the end of 2001. Going in, we knew that this was a classic Ben Graham/Walter Schloss net-net, also known as a “cigar butt”.

To make a long story short, initially things went from bad to worse at Sport-Haley, but then new management improved things a bit and the company even signed a deal with Wal-Mart to sell Top-Flite branded apparel. But the company failed to deliver on the Wal-Mart contract and lost it, and was unable to return to profitability, so the margin of safety continued to erode. This was beginning to look more and more like a value trap of the worst kind: a “roach motel”, in which, to quote the Eagles in Hotel California, “you can check out anytime you like, but you can never leave.” Thus, when the company announced a Dutch Auction tender offer to repurchase up to 472,000 shares, we successfully tendered our entire stake at $4.80 (the stock closed yesterday at $4.34).

This wholly unsatisfying investment reinforces two lessons for us:

  1. Only buy low-quality businesses, especially those with illiquid stocks, with an enormous margin of safety – that’s the only thing that saved us in this investment;
  2. We are not well suited, psychologically, to this style of value investing.

We much prefer – and believe it is much more profitable – to wait patiently for the opportunity to buy better businesses when they fall out of favor.