Interview With Samir Patel, Founder Of Askeladden Capital

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Includes: PII
by: Nicholas Bodnar

Summary

Samir is a very unique, up and coming, young investor.

He is a focused individual with a driven passion for investing.

Askeladden Capital was formed late 2015 with an underlying foundation of value investing, behavioral economics and positive psychology.

Who is Samir Patel?

I'm a 22-year-old value investor in Texas running a long-only hedge fund that makes concentrated (but unlevered) investments in small-caps aiming to generate a teens-to-twenties compounded return over a ~3-year investment horizon.

I try hard to be uninvestable - I show up to meetings in skinny jeans and Chuck Taylors and don't give two hoots about vol and am radically transparent about who I am and why I do what I do - because behind the charade of "proprietary processes" and "risk mitigation frameworks," investing is really about making good decisions with imperfect information. You can look at my resume and figure out whether or not I'm smart and motivated enough to read filings and interview management teams - I don't feel the need to prove that. On the other hand, what happens after analysis is what really differentiates good investors from great ones. So I want people to understand, with no filter or dog-and-pony show, why I make the decisions I do. I want them to invest with the real me: someone who cares about doing the right things the right way for the right reasons. And I think the right kind of people respond to that. There are plenty of other investors who sell hubris and that's not me.

I'm big on behavioral economics, epistemology and self-improvement. I write novels for fun and routinely quote pop-punk lyrics and Aristotelian philosophy in the same sentence. Basically, I'm not like anyone you've ever met.

How did you get into investing?

In high school, I'd saved up a couple thousand bucks from odd jobs, and was complaining to a friend (an 80 something Jewish grandmother from Boca Raton - long story…) about being paid a literally 0.01% interest rate by my bank. (I mean, at that point, why not just drop the charade that you're paying me interest.) She suggested a high-yield bond fund, and the 10-year chart taught me the wonders of compounding…

From there I rapidly immersed myself in learning about finance; I (cluelessly) day-traded my way through my first semester in college, and pretty quickly decided that wasn't for me. I eventually started writing for Seeking Alpha and applied for an editorial position. Eli and George were kind enough to take a flyer on an inexperienced but absurdly ambitious 18-year-old kid from the suburbs, and I was hired as one of the founding editors of SA Pro.

In addition to editing articles, my job was to build relationships with professional investors, many of whom were kind enough to point me in the direction of good reading material.

I ended up getting a job with a small-cap hedge fund a year later (again, grateful to the principal for hiring a 19-year old with no formal finance education) and thereby gained a much more sophisticated understanding of the analytical process, started interviewing management teams, etc.

To make a long story short, I had my mid-life crisis at 20 and figured out the things that made me a good investor also made me a very bad employee - to achieve my personal and professional goals, I needed to run my own show. Concurrently, I also realized I had a somewhat intractable sleep disorder - I'm physically incapable of falling asleep prior to 2:30 or 3:00 AM most of the time, and also don't do very well on low sleep - the combination of which obviates the possibility of most professional employment.

I launched the fund with my own capital in January 2016 and started accepting outside investors once I completed the regulatory process. Most of my current and prospective clients are professionals in my network, but I'm also starting to talk to family offices.

Challenges of starting a hedge fund?

It's an expensive and time-consuming process thanks to the regulations. However long you think it'll take, budget more time. And money. The cheap lawyers end up costing you more than the expensive ones…

That's really the game at all stages - patience. Capital raising is equally challenging: unless you're a Tiger (grand?) Cub or happen to know a lot of really wealthy people, it can feel like climbing Mount Everest without food, water or oxygen. Perhaps the biggest surprise has been the length of delay from a verbal commit to money actually showing up in my account - people are busy and it's not unusual for it to take several months.

Once the snowball gets rolling, things start to get a lot easier - looking at how my pipeline has developed, it feels like picking up clients 10-20 will take a lot less time (and yield a lot more AUM) than picking up clients 1-10. But getting out the door is hard. It's like that classic Warren Buffett girl quote about getting nine girls pregnant - you still won't have a baby in a month. It just takes time and there's not a lot you can do to speed the process up. All in all, from a purely financial standpoint, early in your career, working as an analyst anywhere is likely far more lucrative than launching your own shop. But that's not why I'm doing this.

What is your investing style?

I run a concentrated portfolio of high-quality small-caps that I believe will deliver teens-to-twenties annualized returns over my investment horizon.

I emphasize margin of safety in a very multidimensional way. The first is quality - independent of valuation, investing in companies with good management, good products, good industries, good balance sheets and similar factors tend to allow you to weather challenges better.

The second dimension of margin of safety is valuation - I typically only purchase securities when they're trading at enough of a discount from my estimate of fair value that I believe they will generate a 20% compounded return over my investment horizon (typically three years; occasionally longer or shorter). I almost never build explicit DCFs, but I still use intrinsically-derived multiples on normalized cash flow to determine what I'm willing to pay for a business. I tend to be pretty conservative in what I underwrite… so if management is projecting X% revenue growth and Y% incremental EBITDA margins, my internal assumptions are almost always several points lower. I don't have a lot of confidence in my ability (or anyone else's) to predict the future, so I usually am unwilling to underwrite more than mid-single-digit revenue growth or dramatic long-term margin expansion unless I see a rock solid path.

My logic here is that a) I will make analytical mistakes, b) bad stuff will happen. As such, if I'm willing to make investments assuming an average or modestly above-average rate of return, my performance net of a) b) and fees probably won't look very good. On the other hand, using a robust hurdle rate forces me to be patient and selective, only investing in those companies that seem to have a very high probability of delivering very high returns. (Note that my preference for good balance sheets, good governance and low cyclicality means that those returns are not the function of idiosyncratic business risk, but rather market sentiment or misunderstanding.)

The risk here is that I don't swing often enough - which is something I'm willing to bear, for now.

The third and final dimension of margin of safety, for me, is epistemology. I think a lot about not just what I think I know, but why I think I know it - and whether it's actually knowable to begin with. I spend a lot less time hand-wringing over periodic results and a lot more time thinking about underlying business characteristics, industry dynamics and what that means (directionally) for margins/revenues over a reasonable forecast period. Taking a page from Peter Thiel's book, I think a lot about durability and through-cycle expected performance vs. current-period growth trends.

I know that sounds a little academic, so here's a practical example: I tend to skew away from companies with severely above-average cyclicality or discretionary demand. For example, while I think Polaris (NYSE:PII) would qualify as a "high-quality" company in many regards, it's just hard for me to get comfortable with the investment case at a non-distressed valuation because few people need to buy ATVs… in an economic pullback, the combination of lower income, lower consumer confidence and tighter lending standards tends to challenge companies that make expensive toys (no matter how well they do so). None of this is to say Polaris isn't a great company - I think it is - but I'm just not smart enough to have any clue how to underwrite the cycle. So I don't. I have plenty of other pitches that are easier to figure out, so I stick to those.

For context, this is an approach that has developed as a result of thought and experience. Like many, I started out looking for "cheap stocks" in terms of metrics… and quickly realized that P/E and P/B ratios are not the sum total of value investing. Regarding the latter, I was burned on enough asset plays and low-quality companies that I am basically unwilling to underwrite value for any non-cash asset on or off the balance sheet if it isn't generating cash flow or rapid top-line growth with a clear path to future cash flow. I also dabbled with special sits/event-driven and figured out it wasn't a good fit for my personality and skill set.

Biggest influencers inside the investing landscape and outside?

Howard Marks is probably the biggest influence… I quote him all the time. I think he does a great job of introducing the idea of epistemology - i.e. that even if you buy something and it goes up and you make money, it wasn't necessarily a good investment decision - and vice versa… I think about this a lot, insofar as I try to focus on developing and sustaining a repeatable process. I want to be right for the right reasons. I really, really care about this.

So I judge myself more by what I feel are process mistakes (whether omission or commission) rather than by mark-to-market performance. However, that only applies over the short term - if you're underperforming for a multi-year span, I think you need to take a hard look at what you're doing to make sure you're not missing anything - obviously there are situations like Yacktman in the late 90s where you're going to be proved right in the end, but on the other hand, there are plenty of notable permabears who have so massively impaired client capital over the past few years that even if their doom-and-gloom predictions ever materialize, it doesn't really matter.

Mohnish Pabrai's "heads I win tails I don't lose" philosophy was a helpful starting point but it's not sufficient (as you can end up owning a lot of things that don't lose, but also don't go anywhere - i.e. asset plays or turnarounds.)

My old boss and a lot of the small-cap investors I've met were also helpful in clarifying my market cap focus and steering me away from L/S (because as glamorous as shorting may sound, there's very little to no alpha in it, especially in terms of return on invested brain damage). My sweet spot is smaller, less liquid companies (where there are perpetually fewer eyeballs and you can gain an edge), but only "real businesses" (by which I mean companies with an operating track record).

Outside of investing - love love LOVE Richard Thaler (behavioral economics). Also pretty big on self-awareness and emotional intelligence - we are not automatons, and all of our decisions are influenced by who we are and our conscious and unconscious biases. I think having a good grasp of who you are and what you're good at - and more importantly, what you're NOT good at - is important. To that end, I'm pretty big on self-awareness, and have found a lot of positive psychology research (Shawn Achor, Brene Brown, Ellen Langer) to be really helpful.

In terms of being an independent thinker/contrarian, I've found Ayn Rand (particularly Fountainhead) and Ralph Waldo Emerson's Self-Reliance to be very helpful. When you're doing something different, it can get real lonely out here… nice to be reminded from time to time that you're the sane one and it's the REST of the world that's crazy.

Charlie Munger is probably the ideal I aspire to, not so much as an investor, but more broadly.

I also generally spend a lot of time thinking about what makes people exceptional - I spent a week reading about Navy SEALs, for example - and as the fund progresses, I want to spend more time building mental models in history, psychology, etc., rather than on research. The value of making better decisions with your investors' money because you're looking at things from a more cogent angle outweighs the NPV of looking at one incremental company or filing or transcript, pretty much every time. Most investors spend far too much time on the latter - but without a map, you can be running really hard in the wrong direction. (Idea from Covey's 7 Habits.)

Worst investment mistake?

Asset and deep value plays. They all blew up - by which I mean either I didn't make any money while I could have made plenty elsewhere (opportunity cost) or I directly lost money. Quality matters; I massively underweighted this early in my investment career (as many do). So I now may err too far on the side of focusing strictly on quality, cash-flow based going concerns. That's not to say that there aren't plenty of people who can do well from resource conversion opportunities, but my internal policy is that if it's not cash/liquid securities and it isn't generating cash flow or growth with a clear path to future cash flow, it's worth zero for my valuation purposes.

Governance/management also matter a lot more than I once believed - having people at the helm who will choose the reasonable path at any fork rather than the utterly unreasonable one. It's hard to bake that into your valuation, but as a rule of thumb, I don't invest if I believe management is bad at either running the company or allocating capital. There are a lot of firms out there that are perfectly fine as businesses (regarding the cash flow/growth they generate) but management can't invest the cash flow properly - so value doesn't accrete to shareholders at an acceptable rate.

An overview of a company you find attractive.

Franklin Covey (NYSE:FC) is perfectly in my sweet spot - the summary is that it's a high-quality company with durable IP, a new go-to-market approach that provides a tremendous value proposition to clients, and yet it's trading at a substantially below-market FCF multiple with a clean balance sheet and honest/ethical/non-promotional/sharp management. I've been following it for a year and a half and the price fell to an attractive valuation while the business fundamentals stayed the same or improved. So I bought.

Advice for someone who wants to become a full-time investor?

Read widely, but remember that practice makes perfect. You can read all the value investing books in the world but some of it doesn't get internalized until you get your butt handed to you by the market. When you make mistakes (which you will), don't gloss over them or attribute them to bad luck - think very long and hard about the process that led to those mistakes and how you could avoid similar ones in the future.

Also, while you can and should network widely and find mentors/friends to bounce ideas off, too many chefs spoil the soup - as referenced, I personally realized that I was trying to be everything to everyone and that just wasn't working. Investing is a very personal endeavor and while there are plenty of profitable approaches that can be logically defended, the one you should pursue is the one that you are best able to execute - meaning, it aligns with your skill sets, interests and personality type.

Where can readers reach you?

Here or here.

Or just drive to Dallas and hang out at any random independent coffee shop, Mexican restaurant or BBQ joint - you're bound to run into me eventually.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.