July 22, 2011
We like to ask ourselves whether or not we have a unique insight. If the answer to that question is “No,” or “I’m not sure,” then perhaps we’re no better off than a weekend golfer challenging Tiger Woods to a high-stakes match.
Dear Fellow Members and Those that May Be Future Members, We have been pleased with the limited opportunities we have seen in which to deploy capital over the last several months,despite what we would describe as a generally resilient market. While we continue to hold significant amounts of cash,approximately 27% of our current capital has been deployed into investments since January 1
of this year. Of particularnote, a significant majority of this capital has been deployed to international ideas, an area where we continue to findintriguing small and micro-cap companies to study.In the second quarter Howard Marks, an investor we hold in the highest regard, published
The Most Important Thing: Uncommon Sense for the Thoughtful Investor
which we think warrants special mention. It is a clear synthesis of the investmentphilosophy of one of the world’s greatest investors. Mr. Marks writes in his book that “The markets are a classroom wherelessons are taught every day. The keys to investment success lie in observing and learning.” That is what we try to do every day and hope that we are continually improving our investment thinking and process. We highly recommend the book andquote it a few times in this letter.
A Weekend Match with Tiger for Money?
While all three members of the fund’s management are avid golfers, betting high stakes against a world-class golfer isobviously not a smart decision for any of us. As most golfers know, such formidable challenges are—if ever—best left totop amateur golfers and the professional guys or gals on television. In our case, there is a good possibility that after such amatch, we might not have a shirt to wear nor a house to live in at the end of the day. Us weekend golfers should avoid thistype of challenge, choosing instead a different game altogether, at which we excel and our opponent may prove weak.Investing without a unique insight is, in our opinion, much like attempting the nearly impossible, and financially tragic,struggle above.“Second-level thinkers know that, to achieve superior results, they have to have an edge in eitherinformation or analysis, or both. They are on the alert for instances of misperception.”
Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor
We came across one company earlier this year that, while previously known to us, we now believe provides an interesting opportunity for the fund. After some further work and research, we believed we had generated a genuinely unique insight.Previously disclosed as Company G, Butler National Corp. (BUKS.PK) is a $35 million (market cap) Pink-Sheet tradedcompany headquartered in Kansas City, Kansas, with a peculiar mix of businesses that on the whole appears quite cheap when you imagine what its financial profile might very well look like going forward. That future is being masked right now due to accounting peculiarities. The company has the following five segments:
Corporate/Professional Services The three business lines above and to the left are the key drivers of the group, and the gaming segment is the key to ourinvestment thesis. Several years ago the company was an instrumental party in support of gaming legislation in Kansas. Theresulting legislation provided for four state-owned casinos that would be managed by private entities. Butler was chosen asthe manager for the state’s southwest casino in Dodge City. The company commendably financed the entire project with very little capital. Prior to being announced as operator, the company purchased a tract of land in Dodge City for