This week, Sidecar Investor ( SidecarCap on “X”) brings an interesting perspective to our Investor Notebook Q&A conversations. He is a private investor, but his background spans trading, fund management, institutional asset management and wealth management, and he is also runs Sidecar Partners, an investment firm built around “partnering with exceptional business operators for the long run.”
He has a simple approach to investing: find good businesses, back great management teams and give the best ideas enough time to play out. He is especially interested in smaller companies where the financials may still be messy, businesses going through a change in capital allocation, and situations where the market may be underestimating how far a company can go. His comments on management, concentration and the advantages individual investors have over large funds are particularly relevant for anyone investing in microcaps.
We also get into some of Sidecar’s biggest wins and mistakes, including why he has held Amazon since 2015, why he wishes he had never sold Winmark (Nasdaq: WINA), and why Sears Holdings (formerly: SHLD) remains a reminder of the dangers of making an investment more complicated than it needs to be. He also discusses Happy Belly Food Group (CNSX: HBFG) and Innovative Aerosystems (Nasdaq: IA), explains why some asset-sale situations are not really turnarounds, and shares the books and investors that have influenced his thinking.
Skull Sessions is a collaboration with Geoinvesting.com, a full-stack microcap research platform and MS Microcaps LLC , home of the Microcap Quality Index (MSMqi).
Standard Questions:
1. Tell us about your investing journey. What is your investing framework and research process like today and how has it evolved over time? I see that you actually come from a finance background.
I have been investing since I was 12, starting with money earned from cutting grass. I have always been fascinated by the game and the independence it can provide. In school, business and investing were the only subjects that held my interest which showed in my grades.
I have never been the smartest person in the room but found myself in a variety of roles including operations, trading, fund management, institutional asset management and wealth management. This helped me understand how the machine that drives the market works, and perhaps how to take advantage of its mistakes. Outsiders may be surprised at how many decisions are driven by career risk and benchmark-awareness and trying to keep different stakeholders happy at the same time.
I also noticed that many legendary investors put more weight on management as they gained experience, so I implemented that immediately, before really appreciating its power. How fantastic is it that with the push of a button, you can hire an exceptional CEO to work for you? And stock prices fluctuate wildly, creating the opportunity to do it at prices that would never be available in private markets.
My goal is to do a few simple things very well. It’s hard to overstate the advantage individual investors have by just playing a simpler game. It is absurd that one person at a desk can outperform billion-dollar funds but it happens all the time.
2. How long will you hold a stock and what have you learned from being a concentrated investor? Do you have an example of a stock you hung on way too long that did not work? And one that is currently playing out well? What is a stock you sold too soon that you wish you still owned? I’m particularly interested in understanding what you learned from the ones you held too long and the ones you sold too early.
It’s not unusual for me to buy a starter position then if I don’t develop the confidence to make it larger, sell within 6 to 12 months.
What works for me is building 5-10% positions then letting the portfolio concentrate itself. I have found the strongest returns don’t come from lottery-ticket investments. More often, they come from situations where a low double-digit annualized return seems likely, then management pulls a few rabbits out of their hat which drives the fundamentals significantly higher.
Sears Holdings (formerly: SHLD) is the stock I held too long. I still own it and keep the shares as a reminder to look for simpler ways to make money. Too many things had to go right and even if they did, it was never going to be a great business.
On the other hand, I have owned Amazon (Nasdaq: AMZN) since 2015. It’s fascinating that the same long-term focus that led to the Sears disaster also helped me own Amazon through lots of ups and downs. Maj - you recently had a tweet about forgetting that you own a stock that just keeps executing. I feel that way about Amazon which has delivered a 25% annualized return for more than a decade. They just keep building on new opportunities and I don’t have any plans to sell it.
Winmark (Nasdaq: WINA) is the one that got away. I sold it for around $35 on valuation, to book a quick profit. Investors should study John Morgan who is a talented entrepreneur and a straight-shooter. I invested based on reading a single article about him. The rationality just jumped off the page. Winmark’s model was certainly understandable and also a good example of how a great business can become far larger than anyone, even those who are building it, expect. If you ask 10 investors what their biggest mistake was, the answer is often selling a great business too soon.
Sam Walton said “I believe the folks who’ve done the best with Wal-Mart stock are those who have studied the company, who have understood our strengths and our management approach, and who, like me, have just decided to invest with us for the long run.” My goal is to be this confident in every investment although only a few will earn/deserve this level of commitment.
3. What types of companies or situations are you actively looking for right now? What are up to 3 stocks you’re excited about today, and what is the market missing?
I am most interested in early stage companies where the financials are still messy or more established businesses where I expect the way they allocate capital to shift, usually because management has changed. I am very comfortable with the uncertainty these situations come with.
Happy Belly Food Group (CNSX: HBFG) is a good example. When I invested, the company was a hodgepodge of assets and an unfocused business model. Shawn Moniz and his family controlled the company and brought in restaurateur Sean Black to help chart a new direction, first as CIO and eventually as CEO. From a near standing start, they have acquired about 10 brands and have grown the business to about 100 units, with a pipeline of roughly 700 and counting.
The business model is crossing into profitability and has the potential to generate excellent economics. The market seems to understand the geographic footprint in Canada but may be sleeping on the opportunity in the United States, where I expect franchising deals to be lumpier but larger. This is not management’s first rodeo as Black built several other restaurant brands with exits to MTY and Fairfax-owned Recipe. This experience significantly reduces execution risk. The company is also at the size where institutional fund managers may get more involved, potentially creating additional demand for the shares.
An example of capital allocation shifting is Innovative Aerosystems (Nasdaq: IA) , which makes flight controls and avionic equipment. Unfortunately, the founder and CEO passed away suddenly in 2022. He ran the business well but conservatively. The new CEO, Shahram Askarpour, has been with IA for more than 20 years and has jump-started the acquisition engine, including several opportunistic deals. Importantly, there has been little dilution.
The economics are very good, and other companies in the industry have created tremendous value for shareholders. The valuation is fair, which is about as much as you can ask for with a company of this quality and with this long of a runway.
If I had a time machine, I would go back and cancel the meeting where the style-box was invented. You can probably sense I am a go-anywhere investor and over the past five years have found the most compelling opportunities in microcaps.
Personalized Questions
4. You seem drawn to smaller service businesses; companies with recurring revenue and strong customer relationships. What characteristics make you believe a “boring” service business can become a great compounder? What are the red flags that tell you a service business is not a good fit, even if the numbers look attractive?
Exceptional operators are often drawn to mundane yet essential businesses because of the stability they create. Decisions on how to allocate capital are easier when you are confident 95% of this year’s revenue will come back next year. There also seems to be a glitch where the market often understands the near-term growth potential but underestimates the durability of that growth. In any given year, these companies are also unlikely to be among the best performers, perhaps putting a ceiling on the valuation. There is always something more exciting to do.
When it comes to red flags, I’ve found it’s best to trust your gut. If something doesn’t feel right, it’s often because a dozen small things don’t quite add up. Even if you can’t pinpoint what’s wrong, that feeling is a good reason to not buy or to sell. This has helped me avoid several investments that would have turned out very poorly.
5. When you invest in a company, how important is the relationship you build with the owner or management team? What are you looking for in that relationship?
I rarely talk to management and put most of the emphasis on how they engage with shareholders and their track record. People give themselves away through subtle clues and I am ultimately looking to partner with CEOs who are candid about the company’s potential and risks and are looking for like-minded shareholders, not trying to please everyone. The paradox is these companies rarely need outside capital and are not promotional, which can make them hard to find.
6. You have some great posts on X. I would say even a sort of a master class presentation. Let’s talk about a few of your posts on “X”.
● One of my favorites is about turnarounds because I invest in a lot of turnarounds, especially when there’s asset sales involved. But you don’t call these turnarounds. You said: “Some of the lowest risk, highest return investment opportunities come when management sells secondary assets that have been a distraction to go all-in on a strong core business. While often confused with a turnaround, it’s the exact opposite.” Maybe you can talk a little bit about what you mean here, and maybe give an example of some of your best “not a turnaround” asset sale wins.
○ I am building a position in one that perhaps we can talk about at another time. The point is that even management teams with solid businesses can get bored and look for new things to do, sometimes in the name of diversification. It takes a lot of discipline to stay in one’s lane and if the business produces more cash than it can intelligently reinvest, return it to shareholders. Special dividends and tender offers can be a strong signal management is thinking about this rationally.
● Here’s another one I love. It kind of reminds me of people taking Peter Lynch’s “buy what you know mantra a little too literally.”
“A company I own acquired a business that more than doubled its size. I had never heard of it before, and the temptation, and traditional route, is to dig in and see if I ‘understand’ it. While that may make me feel better, this level of precision is usually an illusion.”
○ I suspect a lot of fundamental research, especially on large companies, is collecting anecdotes that create a false sense of confidence about the future. A lot of what people see is a movie set and if they knew how messy companies are on the inside, they’d probably never invest. Smaller companies are different. They are simpler and it’s possible to pick up pieces of information and develop a unique perspective about its future. They are also going to come with surprises, and the whole point of partnering with exceptional operators is to try to skew them toward being more pleasant than not. I try to be realistic about what I can know about a company or its future and remember that Black Swans can also be positive.
This may sound extreme to people with a more traditional investment approach, but one of my largest holdings has been and will continue to be acquisitive because they have a huge NOL to take advantage of. To me, the crucial question isn’t whether I think the businesses they buy are attractive. It’s whether I trust their ability to assess those businesses correctly. Public market investing is ultimately about outsourcing capital allocation to someone else, and I try not to be an arm chair expert.
● And finally: “Legendary investors like Fisher, Price and Lynch never talked about mental models or variant perception. Suspect there’s a lesson there.”
○ The investment industry likes to dress things up with advanced math and fancy language. Stripping it away is liberating. Unlike supercomputing or flying a fighter jet, there isn’t a fundamental reason investing has to be complex. Many investors have a phase where they are exploring ideas and trying to apply what they learned in other domains. I certainly did. It’s important to get through this as quickly as possible. The goal is to be rational and pragmatic and complexity can make the truth harder to see.
7. Are there any off the beaten path books you would recommend?
The Power Law by Sebastian Mallaby, which is about venture capital, is especially relevant for microcaps. It is filled with case studies of how great investors like Arthur Rock were able to back some of the world’s largest businesses early, before their success was obvious and when there was little data to analyze. It is also very candid about how, by definition, the best founders are going to be eccentric, and some things that are often viewed as turn-offs should instead be seen as turn-ons. I plan to spend the rest of my life trying to find them, and it’s incredible that partnering with just one early and having the courage to hold can change the trajectory of an investor’s life.
8.Please give us one person you would like to see us interview.
Scott Felsenthal who has a unique combination of experience running private and investing in public businesses.