Notes From Nate Tobik’s interview on Planet Microcap Podcast
I made some brief notes on a recent podcast Nate Tobik had on the Planet Microcap Podcast. Nate runs the “oddballstocks.com” blog which I love to read and he also runs “completebankdata.com”. I’ve enjoyed his writing for some time and hope you find some value in the notes below.
Nate’s background is in computer science but has managed to self-learn the most important things in investing. He highlighted he hasn’t taken formal economics, finance or banking course but from what I may have read elsewhere has completed 1 or 2 levels of the CFA program. He also mentioned that his investing style has evolved over time and at points in time included a focus on spinoffs, net nets and compounders.
Later on he recommended the investment classics. I can’t recall which books if any he recommended but when I think of investment classics I think of Security Analysis, Common Stocks and Uncommon Profits and You Can Be a Stock Market Genius. Books should be re-read in an attempt to absorb what you may not have understood the first read or what may not have initially spoken to you. Shane at Farnam Street also recommends this and is also a big fan of the Feynman Technique. I agree with both of them, the more active of a reader you are the more you have the potential to retain and understand. Without retention or understanding what’s the point of reading anyways. Writing about what have read could be helpful as well.
Then Nate and the host get into his views on banks. This was one of my favorite parts of the interview. To start they discuss how accounting for banks is quite different compared to industrial or brick and mortar businesses. In simple terms banks take deposits and loan proceeds to businesses and individuals at a higher rate. Since US disclosure requirements are very standardized it’s very easy to compare particular details from each bank. One of the unique aspects of a bank is that it can give you specific regional exposure and the exposure that you do obtain is driven by the success of small businesses in the area. Let’s say you are looking for exposure to central Omaha, it just might be possible. Banks are leveraged institutions so it is important that the managers have good skill and/or systems in place to manage risk and lend prudently. The majority of the businesses in the world are private and as a result banks are one of the few ways to obtain indirect exposure to these assets. When evaluating a bank you want Net Interest Margins (NIM) to be positive and relatively low non-interest expenses compared to revenue (Efficiency Ratio). A 1% return on assets is a good anchor to keep in mind when evaluating the quality of a bank’s assets. Take the ROA * Assets / Equity to arrive at an ROE. Return on Equity target of ~10% is reasonable in Nate’s view. If banks have a significant amount of assets from businesses this may be a good sign because commercial deposits usually require little to no interest which results in an attractive funding base. The next higher cost accounts are chequing and then savings accounts for individuals. In today’s low rate environment banks that do not understand how to lend prudently have made very long term loans and results in significant yield curve risk. Overall, Nate recommends that people own a basket of banks rather than just one “perfect” bank.
On screening – He likes it and uses various tools to help him screen. Nate stated that everyone uses a screen of some sort to find ideas whether it’s a news article, podcasts, Wikipedia or Bloomberg machine. Nate likes when people he admires as an investor already own a stock despite the potential risks of confirmation bias and group think. He thinks watch lists are misused by investors at times because only few investors need to be invested at all times. Taking a more patient view and attempting to evaluate how a business has changed is probably more worth the effort in my view.
Nate’s favorite “dead money” stock idea is Hanover Foods. It’s a frozen food supplier to grocers and other businesses. They trade at 0.3x book value and a low single digit multiple of current earnings. Management has paid itself lavishly for a long period of time while there are also some issues with the controlling family. Despite the very high compensation book value is still growing and the business is still profitable. They already own a jet and he doesn’t think compensation can go substantially higher than today. He thinks it’s a reasonably good investment but the enemy of this type of investment is boredom. You just have to wait. No other way to approach it.
To close the conversation ended with Nate saying that when you know the least, is typically when you think you know the most. It’s over time that many people see how little they used to know and they begin to expand their understanding how truly little they understand today. Keep reading, thinking and trying to figure it all out.