FRMO - FRMO Corp.

[Liberty]

The amount of rationalizing of this as "but Buffett did it too" is hilarious.

 

Carry on.

 

I'm just saying that when you don't know any details about a situation, it's easy make snide comments about it.

 

Can you clarify: do you object to my evaluation in general without looking at the company/press release or you have looked at WELX and the press release and you believe that this was a great thing to do?

 

I'm saying I don't know, and I don't think you can either. These deals usually have all kinds of hidden angles that won't show after a quick scan through a few documents.

[Jurgis]

- that Winland was a heavily promoted stock by Stahl & Bregman (I presume)

- that Winland was taking resources away from its operating business and putting into other ventures

- that a rationale for this investment is because of synergetic effects

- that servicing museums with exhibitional content is a lousy or inferior business.

 

All of what you opine is either wrong or misleading.

 

Winland is taking resources away from its operating business and putting into other ventures. That's what it is.

Servicing museums with exhibitional content is a lousy or inferior business. Edit: look at PRXI.

 

You invented your bullet 3.

[Jurgis]

I'm saying I don't know, and I don't think you can either. These deals usually have all kinds of hidden angles that won't show after a quick scan through a few documents.

 

Right, especially when the investment goes through double special entities.  ;)

 

Anyway, my point is that WELX is $6M company. A company at a size where it should be looking to grow its main business and not diworsify into unrelated ventures. Sure, it has extra cash. Great. Deploy it in your main business or related businesses.

 

WELX is not FRMO. It is not a company whose charter is capital allocation to unrelated businesses. If they want to change to be capital allocator, they perhaps should talk to Prasad who is doing it correctly: you tell your investors that now you are no longer a medical device company and instead you are capital allocator. Apparently in Canada you also need shareholders approval. I'm fine with just a press release. Can the Murray Stahl defenders show me such press release from WELX?

 

Anyway, this possibly should not be an answer to you, since you have not looked at the company in detail.

 

Take care.

[AtlCDore]

I know this is not directly relevant to the current discussion about FRMO but I subscribed to a number of Stahl's newsletters prior to 2009.  I always thought Stahl was an original thinker and he would present a lot of interesting ideas in his letters.  Where I think he faltered was that he had a tendency to extrapolate growth rates that were too great in a number of his ideas. 

 

For example, if I am remembering it correctly he would have an interesting take on Dream Works but then make the assumption they would release a number of films that would generate significant revenue.  I remember thinking that he was too aggressive with his growth numbers in a lot of his ideas.  Just something to keep in mind about them.  I did greatly enjoy reading their letters and write-ups on ideas.

 

What was sort of interesting is that the sales rep I dealt with never knew that FRMO was a publicly traded company.  He seemed shocked when I told him. 

[oddballstocks]

I'm saying I don't know, and I don't think you can either. These deals usually have all kinds of hidden angles that won't show after a quick scan through a few documents.

 

Right, especially when the investment goes through double special entities.  ;)

 

Anyway, my point is that WELX is $6M company. A company at a size where it should be looking to grow its main business and not diworsify into unrelated ventures. Sure, it has extra cash. Great. Deploy it in your main business or related businesses.

 

WELX is not FRMO. It is not a company whose charter is capital allocation to unrelated businesses. If they want to change to be capital allocator, they perhaps should talk to Prasad who is doing it correctly: you tell your investors that now you are no longer a medical device company and instead you are capital allocator. Apparently in Canada you also need shareholders approval. I'm fine with just a press release. Can the Murray Stahl defenders show me such press release from WELX?

 

Anyway, this possibly should not be an answer to you, since you have not looked at the company in detail.

 

Take care.

 

Having talked to someone close to this (entire situation, FRMO, WLEX etc) I would say there is more and less than meets the eye here. I'd be wary of trying to extrapolate something that isn't.

[Jurgis]

OK, thanks oddball. :)

 

Looking at WELX Q2 results, there's definitely less than meets the eye. We'll see if there's more in the future.

[no_thanks]

I'm saying I don't know, and I don't think you can either. These deals usually have all kinds of hidden angles that won't show after a quick scan through a few documents.

 

Right, especially when the investment goes through double special entities.  ;)

 

Anyway, my point is that WELX is $6M company. A company at a size where it should be looking to grow its main business and not diworsify into unrelated ventures. Sure, it has extra cash. Great. Deploy it in your main business or related businesses.

 

WELX is not FRMO. It is not a company whose charter is capital allocation to unrelated businesses. If they want to change to be capital allocator, they perhaps should talk to Prasad who is doing it correctly: you tell your investors that now you are no longer a medical device company and instead you are capital allocator. Apparently in Canada you also need shareholders approval. I'm fine with just a press release. Can the Murray Stahl defenders show me such press release from WELX?

 

Anyway, this possibly should not be an answer to you, since you have not looked at the company in detail.

 

 

Take care.

 

Having talked to someone close to this (entire situation, FRMO, WLEX etc) I would say there is more and less than meets the eye here. I'd be wary of trying to extrapolate something that isn't.

 

I think they call that statement a riddle wrapped in an enigma :)  Thanks for the help in understanding this though (not being sarcastic, really thank you). 

[rohitc99]

OK, thanks oddball. :)

 

Looking at WELX Q2 results, there's definitely less than meets the eye. We'll see if there's more in the future.

 

Have the Q2 results been declared ? i am not able to see the report on their website. can you share the link ?

[Jurgis]

OK, thanks oddball. :)

 

Looking at WELX Q2 results, there's definitely less than meets the eye. We'll see if there's more in the future.

 

Have the Q2 results been declared ? i am not able to see the report on their website. can you share the link ?

 

http://www.otcmarkets.com/financialReportViewer?symbol=WELX&id=141971

[Sportgamma]

Annual report and letter out

 

http://www.frmocorp.com/_content/letters/2015.pdf

 

http://www.frmocorp.com/_content/10k/FRMO_Annual_Report_2015.pdf

[Fowci]

Annual report and letter out

 

http://www.frmocorp.com/_content/letters/2015.pdf

 

http://www.frmocorp.com/_content/10k/FRMO_Annual_Report_2015.pdf

 

Was going to blog some of this and still may if I tidy it up. My thoughts:

 

 

Performance fees vs management fees

 

FRMO receives a revenue share from Horizon Kinetics – the wealth management company. Revenue was down this year because “fiscal year 2015 includes essentially no performance fees as opposed to the prior fiscal year”.

 

FRMO is double exposed to performance fees because it is invested in the partnerships (as well as receiving the revenue share). So outperformance in the HK partnerships benefits them twice over (and underperformance hits twice too…) Stahl and Bregman claim an interesting point that I’m not so sure is right. They say that a smaller amount of AUM is better when it allows you to outperform:

 

In fact, in order to achieve such an impact [“dramatic positive impact upon shareholders’ equity”], a large amount of assets under management is not necessary. Indeed, it might even be an advantage not to raise large sums, since we enjoy great liberty of action with smaller sums. In any case the lesson that we ultimately learned is that in the realm of asset management, smaller is better.

 

I’d say that in asset management, smaller funds are only better when:

• Management fees are very competitive (becoming more true), but

• You can charge a large performance fee, and

• You are genuinely good at outperforming (historically true for HK), and

• Your strategies are limited in their application to only small amounts of money (I guess we take Stahl and Bregman’s word for it).

 

Perhaps that’s right. I can see it could be true, but I still think 99% of asset managers would prefer more money rather than less. Maybe FRMO prefers HK to have less money, given they get both outperformance, and a share of the management fee and they think HK can outperform materially if they have smaller amounts of money, and larger amounts don't generate enough of a management fee to exceed the performance fee opportunity cost.

 

Bermuda Stock Exchange

 

FRMO increased its investment in the Bermuda Stock Exchange to 40.8%. Their interest seems to be based on the listed Insurance Linked Securities. These do sound interesting. In their words, “These are essentially investment grade bonds with coupons of perhaps 7.5% to 8.0% with 4-year maturities.” But if certain insurance-related catastrophe events occur (like a hurricane), you forfeit “most or even all of its [the security’s] value”.

 

I can see the appeal to efficient frontier and extreme diversification investors. Some pension funds must love these as a new alternative alternative.

 

Winland Electronics

 

Winland sells sensors that monitor environmental conditions like moisture, humidity etc. FRMO owns 15% of the company.

 

I buy the argument in the letter that Winland is undervalued because it has excess capital, but Winland’s plans for that capital are… unusual. Winland has decided to use its excess capital by investing $200 000 in a museum exhibition project operated by Exhibits Development Group. This exhibition is a Beatles memorabilia retrospective called Magical History Tour. Stahl and Bregman explain that the structure of the deal is favourable to Winland, and I guess they’re right.

 

But this is strange for three reasons.

 

The first is that we later in the letter we find out that Winland has six employees. So how on earth does a company with six employees in the environmental condition monitoring market find and decide to invest in this sort of side business?

 

The second is that it’s even mentioned in this letter. As explained in the letter, “Since FRMO owns approximately 15% of Winland Electronics and the investment amounts to $200 000, FRMO is risking only $30 000 on a look through basis.” FRMO is a company with assets of $118m. Do we really need to know about an investment of $30 000?

 

Perhaps the second puzzle is answered by the third, which is that apparently Stahl and Bregman see “optionality” in this type of deal. “If successful, this could be the basis for a new business line”.

What business line would that be? Venture capital for travelling circuses?

 

Very weird, but whatever, I still like these guys.

 

OneChicago

 

FRMO invested in OneChicago, a single stock futures marketplace. The investment is only $246 000. Primary investors are CME, CBOE, and Interactive Brokers. Is it odd that FRMO can even find these sorts of deals? The deal was after FY2015, so the annual report doesn’t help with what % $246 000 buys.

 

Indexing

 

The letter ends with a dig at indexation:

 

We will conclude this already lengthy letter with the following cynical observation. We view index investing as the functional equivalent of mortgages with no individual income verification, since index investing rejects the value of individual security research. No-income-verification mortgages apparently worked so well that now that approach is being implemented as a philosophy over the entire range of investments. We are moving our business in the opposite direction.

 

I think they analogy is wrong. Indexation free rides off of fundamental research being done by active participants in the market. There is no market to free ride off with mortgages.

There has been screeds written on the relationship between active and passive investors. There’s nothing wrong with being a passive investor. It’s not clear to me that there has been so much indexation that finding mispriced securities is truly easy. In fact I tend to think that finding mispriced securities is as hard as it’s ever been. Bregman and Stahl think differently, and they’re smarter than I am, but they’re also more confident than I am, and I’m not so sure that last one is so good.

 

 

 

[vinod1]

The letter ends with a dig at indexation:

 

We will conclude this already lengthy letter with the following cynical observation. We view index investing as the functional equivalent of mortgages with no individual income verification, since index investing rejects the value of individual security research. No-income-verification mortgages apparently worked so well that now that approach is being implemented as a philosophy over the entire range of investments. We are moving our business in the opposite direction.

 

I think they analogy is wrong. Indexation free rides off of fundamental research being done by active participants in the market. There is no market to free ride off with mortgages.

There has been screeds written on the relationship between active and passive investors. There’s nothing wrong with being a passive investor. It’s not clear to me that there has been so much indexation that finding mispriced securities is truly easy. In fact I tend to think that finding mispriced securities is as hard as it’s ever been. Bregman and Stahl think differently, and they’re smarter than I am, but they’re also more confident than I am, and I’m not so sure that last one is so good.

 

You are being very charitable to Stahl.

 

I understand he is just talking his book, but his comments in this letter and past on indexing are idiotic.

 

Vinod

[Sportgamma]

The letter ends with a dig at indexation:

 

We will conclude this already lengthy letter with the following cynical observation. We view index investing as the functional equivalent of mortgages with no individual income verification, since index investing rejects the value of individual security research. No-income-verification mortgages apparently worked so well that now that approach is being implemented as a philosophy over the entire range of investments. We are moving our business in the opposite direction.

 

I think they analogy is wrong. Indexation free rides off of fundamental research being done by active participants in the market. There is no market to free ride off with mortgages.

There has been screeds written on the relationship between active and passive investors. There’s nothing wrong with being a passive investor. It’s not clear to me that there has been so much indexation that finding mispriced securities is truly easy. In fact I tend to think that finding mispriced securities is as hard as it’s ever been. Bregman and Stahl think differently, and they’re smarter than I am, but they’re also more confident than I am, and I’m not so sure that last one is so good.

 

You are being very charitable to Stahl.

 

I understand he is just talking his book, but his comments in this letter and past on indexing are idiotic.

 

Vinod

 

Please elaborate Vinod, I would very much appreciate reading your view on indexation and how HK/frmo has it wrong.

 

[vinod1]

The letter ends with a dig at indexation:

 

We will conclude this already lengthy letter with the following cynical observation. We view index investing as the functional equivalent of mortgages with no individual income verification, since index investing rejects the value of individual security research. No-income-verification mortgages apparently worked so well that now that approach is being implemented as a philosophy over the entire range of investments. We are moving our business in the opposite direction.

 

I think they analogy is wrong. Indexation free rides off of fundamental research being done by active participants in the market. There is no market to free ride off with mortgages.

There has been screeds written on the relationship between active and passive investors. There’s nothing wrong with being a passive investor. It’s not clear to me that there has been so much indexation that finding mispriced securities is truly easy. In fact I tend to think that finding mispriced securities is as hard as it’s ever been. Bregman and Stahl think differently, and they’re smarter than I am, but they’re also more confident than I am, and I’m not so sure that last one is so good.

 

You are being very charitable to Stahl.

 

I understand he is just talking his book, but his comments in this letter and past on indexing are idiotic.

 

Vinod

 

Please elaborate Vinod, I would very much appreciate reading your view on indexation and how HK/frmo has it wrong.

 

Sportgamma,

 

Market participants as a whole earn the market return.

 

Active investors as a whole earn market returns less frictional costs (transaction costs, taxes, bid/ask spread costs, advisor/manager fees).

 

Index investors earn higher returns than active investors in aggregate as they have minimal frictional costs. Low costs are really the key to indexing. Diversification is an added benefit.

 

Frictional costs run anywhere from 1% to 2%. Very easy to see that these costs are a minimum of 1% - management fees of say 0.75%, assuming various turnover rates and capital gains taxes can add a minimum of 0.25% and ignoring all other costs like market impact costs, bid/spread costs, commissions which are more difficult to quantify. A drag of 1% to 2% compounded over a few decades would be a massive drag on investment returns, especially if future returns are going to be low.

 

Market might be inefficient or efficient, but indexing still makes a lot of sense for the vast majority of the people. As Bill Sharpe points out, as long as you believe in addition, subtraction, multiplication and division the conclusion that indexing in aggregate earns higher returns than active management in aggregate cannot be disputed. So comparing them to "mortgages with no individual income verification" is nonsense.

 

I have read his past letters and was shocked by many such comments. I would assume this is a marketing gimmick.

 

The idea of owning owner operators makes a lot of sense, but Stahl seems to be on a jihad against indexing. He also makes a few claims on out performance of the owner operator group that I have serious doubts about - only took a high level look that raised a few questions and am unable to answer them one way or other to my satisfaction. So I would leave it at that.

 

Vinod

 

[jay21]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

[Jurgis]

I wanted not to say anything... and I might regret saying something... but I thought that Q2 letter was very weak.

 

Digs at indexation are cheap, especially this year when indexes have not been doing well and outperforming them should be easier than last 3 years. So how about outperform them instead of whine about them?

 

I would rather if they said straightly: "We believe market is expensive, we hold cash, we hold non-market-correlated securities, we may underperform, but we won't budge". At least this would avoid the cringeworthy comparisons to mortgages...

 

BTW, they did a rather u-turn on Winland. Their past letter/presentation claimed that Winland has growth opportunities within sensor market. Now they claim that Winland has excess capital that they can't deploy into the company. Anyway, this has been discussed above, my opinion remains that traveling circuses is funny (yeah, a pun here) place for extra capital.

 

I agree with Fowci about most of the other stuff.

[Jurgis]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

 

And how exactly this disagrees with anything vinod said?  ::)

[jay21]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

 

And how exactly this disagrees with anything vinod said?  ::)

 

His contention that active management earns the market/index minus friction. They don't because you can earn something other than the market in aggregate by owning non-indexed securities.

[Jurgis]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

 

And how exactly this disagrees with anything vinod said?  ::)

 

His contention that active management earns the market/index minus friction. They don't because you can earn something other than the market in aggregate by owning non-indexed securities.

 

He said "market", which by definition includes everything.

[vinod1]

I see that 8 of his 10 strategies that are listed are under performing the market over the last 10 years. Would be interesting to see how this would play out in future.

 

Vinod

[jay21]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

 

And how exactly this disagrees with anything vinod said?  ::)

 

His contention that active management earns the market/index minus friction. They don't because you can earn something other than the market in aggregate by owning non-indexed securities.

 

He said "market", which by definition includes everything.

 

I confess I am ignorant on indexing and constructing a market portfolio. What is the relationship between indexing and the market portfolio? I am assuming people think they can use indexing to construct a market portfolio. How do you account for securities not an index?

[Jurgis]

Disagree with what you are saying. Just one counterpoint, there are securities outside of the index that can earn a higher return than the index.

 

And how exactly this disagrees with anything vinod said?  ::)

 

His contention that active management earns the market/index minus friction. They don't because you can earn something other than the market in aggregate by owning non-indexed securities.

 

He said "market", which by definition includes everything.

 

I confess I am ignorant on indexing and constructing a market portfolio. What is the relationship between indexing and the market portfolio? I am assuming people think they can use indexing to construct a market portfolio. How do you account for securities not an index?

 

Some indexes don't include everything, but you could have a total market index that has everything sized by market cap.

 

Of course, some microcaps/nanocaps might escape even total market index.

 

But vinod1 is talking about aggregates, so he would be right about something like 99.9% of market and similar percentage of its participants.

 

Note that what he said does not mean that you or someone else can't outperform the index. Of course, you can. He is talking about aggregate though.

[no_free_lunch]

Fact of the matter is many famous value managers have under-performed the market over the last 10 years.  Fairholme is one example.  Many of the others that have out-performed have done so by 1% or smaller margins.  Yeah you can dig out some people who have out-performed but many who were famous a decade ago haven't.  When I start to see wide swaths of value-funds or any funds out-performing the index I will buy the FRMO thesis.  The proof is in the pudding.

[rohitc99]

Does the investment thesis in FRMO depend on stahl's view about indexation ? is that not equivalent to buffett's view on several topics which does not drive value at BRK

[merkhet]

I feel like the definitions for indexing are so vague that we might not have a productive conversation here.

 

For instance, while indexing is likely better than active investing, it's possible that market-weighted index could be worse -- it depends on whether the transaction costs of active investing are higher or lower than the costs of overweighting expensive holdings to cheap holdings.

 

That said, my guess is that index investing works only when fewer than the majority of investors practice it and when it is equal-weighted or value-weighted. Imagine what happens as tons of money gets poured into valuation-agnostic indexes -- it pushes up the prices of companies that are already expensive while possibly pushing down the prices of companies that are cheaper. (Assuming people are abandoning value strategies for the valuation-agnostic market-weighted indexes.)