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Seth

 Hamot,  48,  is  the  founder  and  managing  partner  of  Roark,  Rearden,  &  
Hamot  Capital  Management.  His  fund  has  over  $150  Million  under  
management,  has  performed  well  through  2-­3  recessions,  and  returned  an  
annualized  17%  to  investors  net  of  fees.    
 
The  following  is  an  interview  to  try  and  learn  a  little  bit  about  his  experience.  
As  you  read  this,  do  remember  that  he  has  spent  15+  years  building  this  
investment  fund  and  this  interview  cannot  capture  that,  but  hopes  to  bring  a  
small  portion  to  the  public  surface.  
 
Dr.  Sergio  Magistri,  who  led  a  company  through  the  dot-­com  bubble  and  exited  
with  a  large  acquisition  by  GE  also  shares  this  thoughts  on  what  happened.  He  
led  InVision  Technologies,  which  turned  out  to  be  an  amazing  investment  for  
Seth’s  fund,  and  today,  InVision’s  products  can  be  found  in  airports  helping  to  
prevent  terrorism.  With  his  input,  we  can  analyze  this  amazing  investment  
from  the  side  of  Seth  and  Sergio,  both.  
 
Seth  Hamot  –  “…really  great  companies  make  errors,  but  they  can  move  on.  “  
 
When  did  you  launch  your  investment  fund  and  what  were  you  doing  leading  
up  to  that?  
 
RRH  launched  in  the  mid  to  late  90’s  and  prior  to  that,  I  was  working  with  partners  
buying  distressed  and  defaulted  debt  backed  by  real  estate.  I  started  doing  that  in  
1989  and  1990.  Prior  to  that,  I  was  the  President  of  College  Pro  Painters,  a  painting  
contracting  company  with  a  student  labor  force.  I  graduated  college  and  since  CPP  
was  owned  by  a  foreigner,  and  needed  a  local  president  and  leadership,  I  was  
brought  on  board.  It  was  going  through  financial  distress,  had  no  local  leadership,  
and  so  I  was  brought  in  to  turn  it  around.  We  went  from  $3  Million/year  in  revenue  
to  $11  Million  when  I  left.  Shortly  after,  a  real  estate  recession  kicked  and,  and  so  I  
began  looking  for  turnaround  situations  with  distressed  debt  that  could  be  bought.  
My  partners  from  those  ventures  eventually  retired  and  so  I  continued  what  I  was  
doing  into  the  public  markets.  We  found  poorly  performing  assets  that  were  either  
too  encumbered  with  too  much  debt  or  too  little  leadership,  focusing  on  hard  assets  
like  real  estate  and  mining  assets.  
 
What  is  your  fund’s  underlying  approach?  What  wrong  do  you  right  in  the  
markets?  
 
I  want  to  find  companies  going  through  a  transition.  Eventually,  that  transition  will  
translate  into  others  seeing  that  the  company  will  be  worth  more  than  they  
originally  thought.  It  might  be  divesting  a  cash  burning  division,  or  new  credit  
facility,  or  maybe  the  company  just  did  a  merger  or  acquisition  allowing  the  
business  model  to  be  leveraged,  etc.  The  objective  is  to  NOT  be  an  activist  in  these  
situations.  There  are  a  lot  of  great  opportunities  because  really  great  companies  
make  errors,  but  they  can  move  on.  We  enjoy  dealing  with  smart  businessmen  on  a  
daily  basis.  Often  times  though,  managers  slowly  become  content  to  have  a  larger  
span  of  control  and  more  remuneration.  They  change  by  rationalizing  their  business  
to  make  themselves  better  focused  and  more  efficient  and  effective.  
 
Where  did  you  get  your  first  5  investors  for  your  fund  and  how  many  are  still  
with  you  today?  
 
College  roommates,  families  of  college  roommates,  friends,  my  own  money,  etc.  
 
What  were  the  first  5  years  of  your  fund  like?  How  many  employees  did  you  
have  and  what  were  some  of  the  larger  challenges?  
 
It  was  a  small  fund  and  so  picking  investments  was  the  main  challenge.  It  was  just  
myself  initially.  We  took  a  very  large  position  in  a  liquidating  insurance  company  
that  lasted  2-­‐3  years,  but  was  very  profitable  because  the  markets  misunderstood  it  
entirely.  It  took  a  little  bit  of  activism  and  at  the  end  of  it,  I  met  someone,  who  
introduced  me  to  his  own  limited  partners,  and  that’s  where  I  brought  in  some  fresh  
capital.    One  of  the  joys  there  was  that  I  met  some  great  people  who  were  also  doing  
small  cap  value  investing.  Eventually  I  was  introduced  to  a  well-­‐run  fund  of  funds  on  
the  west  coast.  I  was  told  that  we  made  some  great  investments,  but  our  
documentation  was  on  napkins  and  we  used  grid  pads  for  calculations.  We  got  a  real  
lawyer,  real  documentation,  put  together  information  for  investors,  and  then  began  
to  grow.  From  the  original  $2  Million  that  we  started  with,  we  had  grown  to  
somewhere  around  $15-­‐20  Million,  and  then  these  guys  came  in.  We’ve  been  
successful  in  our  performance  with  investors:  Over  the  last  decade,  ended  
December  2009,  we’ve  returned  17%  annualized,  net  of  all  fees.  
 
The  name  of  your  fund  has  a  very  unique  name  –  it  has  names  of  characters  
from  the  books  of  Ayn  Rand.  Can  you  tell  us  why  you  did  this?  
 
In  general,  we  take  a  contrarian  view.  Doing  it  all  the  time  is  not  contrarian  and  so  
this  allows  us  to  take  investments  from  a  unique  vantage  point.  
 
What  do  you  look  for  in  an  investment?  
 
A  perfect  investment  would  be  in  a  business  that  was  once  well  covered  by  
investors,  analysts,  raised  a  lot  of  money,  etc.  and  then  the  company  and  industry  
went  through  a  transformation  and  the  stock  trades  very  cheaply.  Even  after  that,  
the  underlying  business  itself  makes  sense  and  with  some  tough  decisions,  it  can  
regain  its  value  and  it  will  right  itself.  
 
A  simplistic  example  is  a  REIT  that  for  some  reason  no  longer  pays  its  dividend,  
driving  the  stock  price  very  low.  It’s  a  hard  asset  business  that  won’t  just  disappear.  
If  you  can  foresee  the  dividend  coming  back,  it  will  get  bought  again  for  its  yield  
eventually.  
 
So  if  someone  calls  in  and  says,  “I’ve  got  this  REIT  I  want  you  to  look  at,”  I’ll  respond  
by  asking,  “Is  it  paying  a  dividend?”  If  the  answer  is  yes,  then  I  don’t  care,  but  if  the  
answer  is  no,  then  let’s  talk!  
 
How  do  you  find  your  investments?  Are  they  brought  to  you  or  do  you  screen  
for  them?  
 
We  don’t  use  as  many  screens  as  our  competitors  –  we  look  for  situations  of  
transition.  We  monitor  a  lot  of  announcements  for  spinoffs,  acquisitions,  
divestitures,  distributions  and  one-­‐time  dividends,  etc.  A  good  1/3rd  of  our  
investments  come  from  people  who  call  about  how  they’ve  lost  a  lot  of  money  and  
they  don’t  understand  why  the  equity  is  performing  so  poorly.  They  want  
information,  but  in  another  sense,  they’re  questioning  whether  an  activist  could  help  
out.  More  often  than  not,  present  management  and  the  board  of  directors  will  deal  
with  the  issues.  
 
We  don’t  want  to  be  activists,  generally,  but  to  the  extent  that  we’re  wrong  that  the  
CEO  isn’t  good,  we  have  to  do  it.  If  it’s  activism,  it’s  because  the  board  or  CEO  is  not  
reasonable.  
 
When  we  are  activists,  we  always  say  to  CEO’s  and  board  members  that  we  see  this  
(something  specific)  as  a  problem  and  that  any  reasonable  businessman  would  see  
this  as  a  problem.  Reasonable  owners,  your  shareholders,  see  this  as  a  problem.  
“Why  don’t  you  get  in  front  of  this  and  solve  it?”    
 
It’s  only  when  they  refuse  to  address  the  issue  and  completely  ignore  rational  
shareholders  that  we  become  activists.  It’s  not  a  case  of  them  not  being  granted  an  
opportunity  to  fix  it.  
 
Furthermore,  when  they  stick  to  their  actions  –  often  to  feather  their  own  actions,  
they  refuse  to  accept  that  we  are  the  shareholders  and  owners  of  the  business.  
Instead,  they  try  to  publicize  that  we  are  a  “lesser  class”  of  shareholder,  a  hedge  
fund.  
 
One  extreme  example  is  a  board  that  said  they  had  a  program  in  place  to  find  new,  
more  docile,  shareholders.  Instead  of  realizing  value  by  spending  time  to  follow  
suggestions,  they  were  spending  time  on  finding  money  and  new  bosses.  
 
How  long  do  you  typically  hold  an  investment  for?  
 
Our  average  investment  period  is  well  over  a  year,  probably  closer  to  a  couple  of  
years.  I’m  the  chairman  at  TEAM,  chairman  at  ORNG,  both  of  which  we  have  owned  
for  over  4  years.  Some  of  our  other  big  positions  are  in  the  3rd  year  of  our  
ownership.  We’re  not  traders  and  our  investors  see  it  by  the  tax  bill  –  we’re  not  
paying  short-­‐term  taxes  nearly  as  much  as  others.  
 
Some  of  your  investments  are  in  pharmaceuticals  or  biotechs  along  with  
energy,  mortgage  processors,  etc.,  how  are  you  doing  this?  
 
We’re  generalists  and  start  digging  into  anything.  If  the  problem  is  product  based,  
we  don’t  dig  into  that.  We’re  focused  on  the  business.  If  the  company  has  successful  
products,  but  is  spending  too  much  on  R&D,  it’s  a  question  of  capital  allocation.  
 
We  avoid  biotech  companies  without  significant  revenues  because  we  don’t  have  a  
take  on  science.  At  the  same  time,  we  don’t  have  any  problem  in  investing  in  a  
pharmaceutical  spending  a  lot  on  biotech,  but  already  has  successful  drugs  in  the  
marketplace.  
 
If  there  is  a  mismatch  between  capitalization  and  value  of  drugs  that  are  already  in  
the  market,  there  will  be  a  major  discount  to  the  market  value  of  the  company.  A  big  
discount  points  out  that  investors  don’t  value  the  R&D  pipeline  even  though  the  
drugs  are  kicking  off  a  lot  of  cash.  
 
How  much  do  you  care  about  where  the  overall  markets  are  and  where  they  
are  headed?  
 
We  used  to  not  care  at  all,  and  through  2008,  a  lot  of  my  competitors  and  I  started  to  
care  very  greatly.  I  don’t  really  pay  all  that  much  attention  to  it  though,  because  I’m  
investing  longer  term  than  most,  2-­‐4  years,  and  if  they  can  turn  a  business  around  in  
2  years,  any  1  days  headlines  today  won’t  be  the  headlines  2  years  from  now.  
 
Do  you  take  long  positions  only  or  short  positions  as  well?  Is  any  of  this  as  a  
hedge  or  do  you  look  for  companies  with  something  that  is  fundamentally  
wrong  when  taking  a  short  position?    
 
We  do  take  short  positions,  but  we’re  not  nearly  as  good  at  them  as  our  longs.  We  
look  for  bad  business  models,  too  much  leverage,  and  companies  generally  run  for  
the  benefit  of  senior  management  and  board  members.  Shorts  tend  to  go  against  us  
because  whenever  any  activity  continues,  the  investment  community  rates  it  highly.  
We’re  not  too  good  at  anything  other  than  when  the  debt  comes  due  causing  the  
company  to  reorganize  or  hand  over  ownership  to  the  debt  holders.  
 
Your  firm  seems  to  be  okay  with  small  cap  positions.  Do  you  ever  worry  about  
a  complete  lack  of  liquidity  that  small  caps  will  see  whenever  there’s  a  
downturn?  
 
Yes,  we  worry  about  liquidity.  We  think  about  it  more  today  than  2  or  3  years  ago  
because  it  is  an  issue  and  with  many  stocks  that  we  used  to  get  involved  in,  we  will  
no  long  get  involved  in.    
 
How  do  you  manage  and  define  risk?  
 
We  define  risk  as  leverage  –  certainly  not  beta.  Our  only  use  of  leverage  will  be  used  
to  trade  around  positions.  That  said,  liquidity  is  the  first  coward  and  when  liquidity  
dries  up,  you  just  have  to  put  up  with  the  bumpy  road.  There’s  a  desire  to  avoid  
volatility  at  all  costs.  The  flip  side  is  that  you’re  paying  for  it  in  liquidity.  Our  17%  
annualized  return  partly  comes  due  to  an  illiquidity  premium.  Neither  the  auditor  
nor  the  IRS  makes  us  give  back  our  excess  return  due  to  that  though!  
 
Your  fund  has  lived  through  2  or  3  economic  downturns  –  which  one  were  you  
most  prepared  for?  
 
2000  Internet  crackup.  In  2002,  when  the  S&P500  fell  22%,  we  were  up  almost  
10%.  These  crises  are  very  good  for  us,  eventually.  They’re  not  so  good  short  term  
because  we  go  through  hell  too.  Just  after  it  though,  we  tend  to  double  and  show  
over  100%  returns.  Leading  up  to  the  recent  troubles,  we  were  short  on  
homebuilders  and  held  CDS’s  at  one  point,  however  gave  those  up  on  suspicions  that  
the  markets  were  rigged.    
 
Do  you  ever  notice  that  it’s  easier  to  be  right  than  it  is  to  know  when  you’ll  be  
proven  right?  
 
Yes,  very  much  so.  It  happens  in  real  estate  quite  a  bit.  You  can  buy  a  property  one  
minute  and  then  in  the  next  minute,  you  can  come  up  with  a  number  for  what  it’s  
worth.  Sometimes,  it  takes  longer,  and  sometimes  it’s  shorter.  This  applies  to  stocks  
too  –  you  know  what  it’s  worth  when  you  buy  it,  you  have  to  wait  though.  We  were  
investing  3-­‐4  years  ago  and  are  still  waiting  for  the  investments  to  complete.  We  see  
how  they  will,  but  the  markets  have  not  recognized  it  yet.  
 
Historically,  do  you  have  any  investments  that  you  remember  as  amazing?  
Maybe  an  investment  where  you  were  just  so  darn  right  that  it  was  
memorable?  
 
Yes,  two  in  specific:  
 
1.  Nursing  Homes  
 
In  the  early  parts  of  the  last  decade,  nursing  homes  were  providing  elderly  
housing  and  elderly  care.  They  were  expanding  the  elderly  care  to  provide  
ancillary  types  of  procedures,  like  occupational  therapy,  breath  therapy,  etc.  
and  all  these  things  made  tons  of  money.  The  underlying  business  was  great,  
and  then  they  issued  a  ton  of  debt,  raised  capital,  etc.  Shortly  after,  congress  
cut  back  funding.  With  that,  the  top  lines  and  margins  went  through  the  floor,  
leveraged  ones  went  bankrupt,  and  the  industry  in  itself  went  through  a  
transition.  
 
The  markets  priced  that  as  if  nursing  homes  would  go  away.  In  reality,  there  
would  only  be  more  elderly  people  given  enough  time.  We  were  buying  
healthcare  REITS,  preferred  shares  with  20%  yields,  dividend-­‐paying  
instruments  for  50%  of  pay,  etc.  Lo  and  behold,  the  Internet  stocks  went  to  
hell  and  these  nursing  homes  were  going  through  a  change  too.  Even  while  
they  went  through  a  change,  they  had  to  keep  paying  rent,  and  so  the  REIT  
dividends  kept  coming  in.  It  was  priced  like  a  junk  bond,  but  the  yields  were  
better  and  actual  ratings  were  better  too!  
 
2.  InVision  Technologies  (Seth  Hamot’s  point  of  view)  
 
INVN,  InVision  Technologies.  During  the  internet  bust,  you  would  hear  tons  
of  ideas  that  all  began,  “This  company  has  so  much  cash  on  hand  and  is  only  
burning  this  much  per  quarter.”  We  found  INVN,  which  was  a  collection  of  
venture  ideas  that  were  being  commercialized.  The  CEO  of  this  company,  
though,  was  committed  to  being  profitable.  Same  sort  of  upside,  but  without  
the  cash  burn,  as  the  Internet  investments.  The  CEO  basically  said  this:  
“They  (our  investments)  turn  positive  NOW,  not  later  on.”  Meanwhile,  
I’m  getting  a  ton  of  calls  from  people  to  buy  1  of  6  online  pet  food  supplier  
stocks,  they  have  a  ton  of  cash  and  little  burn  –  they  don’t  need  money  for  
two  years!  I  heard  that  all  day  long  and  then  went  to  buy  Invision.  I  paid  less  
than  the  cash  they  had  and  saw  some  upside  on  a  logger  product  that  was  
going  to  make  logging  much  more  efficient.  They  weren’t  burning  cash  either,  
and  that’s  what  made  it  attractive.  
 
I  went  over  just  1%  of  the  company  by  September  10th,  2001.  On  the  next  
morning,  terrorists  attack  the  country  and  so  the  markets  don’t  open  for  a  
while.  Invision  actually  had  technology  that  sniffs  for  bomb  threats  in  
airports.  At  this  time,  it  was  in  beta  testing  at  a  few  regional  airports.  I  hadn’t  
paid  attention  to  this  part  of  INVN  at  all,  but  now  it  was  a  lot  more  important  
than  all  the  other  activity  at  the  company.  I  had  been  buying  the  stock  for  $3  
per  share,  less  than  net  cash.  It  was  a  “net  net.”  As  you  know,  the  markets  
remained  closed  until  September  17th,  when  it  opened  around  $7.50.  By  that  
afternoon,  it  traded  around  $9.  This  is  when  all  the  value  investors  got  out  
right  away.  Around  this  time,  I  said,  “You  know,  if  it’s  a  real  business,  and  it’s  
up  to  $9  today,  because  it  was  installed  as  a  beta  test,  the  government  will  
want  hundreds  and  thousands  of  these  in  the  recent  future,  these  will  be  
hot.”  Eventually,  I  got  out  between  $17-­‐20.  If  you  travel  now  and  look  behind  
the  check  in  counter,  those  machines  that  they  put  your  luggage  through  are  
Invision  machines.  I  have  no  idea  what  happened  to  the  log  cutting  
advancements  or  anything  else,  I  was  following  a  CEO  who  wanted  
profitability  even  when  everyone  else  had  different  ideas.  
 
2a.  InVision  Technologies  
 
Dr.  Sergio  Magistri  was  the  President  the  CEO  of  InVision  Technologies,  which  
developed  technologies  for  Explosive  Detection  Systems  (EDS)  and  other  civil  
aviation  security.  He  joined  in  1992,  raised  $21M  in  1997,  and  entered  into  a  
merger  agreement  for  $900M,  or  $50  per  share,  on  December  6th,  2004.  
 
1. Does  the  description  that  Seth  gave  of  the  situation  sound  adequate?  
 
Yes,  from  a  contrarian  investor  point  of  view  looking  at  the  overall  high-­‐
tech  space  near  the  end  of  the  dot-­‐com  bubble.  
 
At  InVision  (INVN)  though,  we  never  felt  that  we  were  part  of  the  dot-­‐com  
mania.  We  had  a  long-­‐term  strategy  that  was  quite  simple:  
(1) Security  is  an  event  driven  market  
(2) The  best  marketing  is  the  quality  of  our  products  
(3) Keep  developing  the  best  technology  in  the  industry  without  
running  out  of  money  and  maintaining  at  least  a  cash  flow  break  
even  or  better  
(4) At  some  point  in  time,  the  market  demand  will  come.  
 
In  retrospect,  I  wish  we  would  have  been  wrong  or  at  least  the  demand  
(as  a  consequence  of  a  terrorist  event)  would  have  been  lesser.  
 
2. Why  did  you  care  about  cash  flow  break  even  or  positive  at  a  time  
when  most  others  did  not?  
 
At  the  valuation  we  had  before  September  11th  and  during  the  dot-­‐com  
period,  the  company  was  not  re-­‐financeable  almost  at  any  valuation,  
because  we  were  not  “fashionable.”  We  had  real  products,  revenues,  and  
even  some  profit.  
 
3. Did  you  get  a  hard  time  from  anyone  for  pursuing  cash  flow  
breakeven  and  profitability  before  others?  
 
Quite  a  lot  of  our  investors  (and  our  own  people)  were  pushing  for  some  
kind  of  splash  change  in  strategy  to  appease  the  dot-­‐com  believers,  but  at  
the  level  of  management  and  board  of  directors,  we  decided  to  keep  
executing  our  security  strategy.  We  had  a  clear  understanding  that  we  
didn’t  belong  to  the  dot-­‐com  world.  
 
4. Seth  mentioned  a  logging  enhancement  that  your  firm  was  working  
on,  but  that  might  have  been  hidden  by  the  success  of  the  Explosive  
Detection  Systems.  Could  you  tell  us  what  eventually  happened?  
 
After  September  11th,  we  were  management  and  resource  limited.  For  a  
while,  we  tried  to  spin  it  off  as  an  independent  and  financed  entity  to  
avoid  defocusing  our  security  effort.  Once  this  failed,  we  decided  to  abort  
the  development.  Even  today,  while  recognizing  the  need  for  the  decision  
at  the  time,  I  believe  that  this  was  and  will  be  a  very  interesting  
opportunity.  
 
When  dealing  with  small  caps,  do  you  ever  think  about  why  some  of  them  are  
publicly  traded  to  begin  with?  
 
All  the  time.  If  you  actually  understand  the  classical  theory  of  public  markets,  they  
exist  for  raising  initial  capital.  No  one  would  actually  give  capital  unless  there’s  an  
exit  strategy,  and  the  public  markets  allow  that  exit  strategy  to  be  a  reality  for  small  
holders  of  stock.  
 
Looking  at  your  current  positions,  can  you  offer  any  insight  as  to  some  of  the  
more  interesting  ones?  
 
Aeropostale  (ARO)  –  Aeropostale  is  the  premier  teen  retailer  in  my  estimation.    
When  you  compare  the  company’s  fundamentals  to  the  other  large  players,  AEO  and  
ANF,  you  see  the  superiority  clearly.    Yet,  ARO  is  relatively  cheaper  than  its  
competitors.  
 
Let’s  first  look  at  the  ability  to  drive  same  store  sales.    In  2009,  arguably  the  worst  
year  for  retail  in  the  last  generation,  ARO  had  year  over  year  gains  every  month.      
Furthermore,  if  you  consider  the  gains  in  total  sales  compared  to  the  recent  
trimming  of  inventory  –  that’s  right,  the  decline  in  inventory  –  you  realize  the  
increasing  efficiencies  that  are  driving  huge  cash  flows  at  ARO.    [Specifically,  let’s  
take  the  summation  of  the  last  four  quarters  of  “percentage  yearly  revenue  gains”  
and  subtract  from  that  number  the  summation  of  the  last  four  quarters  of  
“percentage  of  yearly  inventory  gains,”  the  latest  quarter  being  actually  a  reduction  
in  inventory.    ARO’s  resulting  number  is  50.83  and  accelerating.      AEO’s  is  21.88,  and  
going  in  the  wrong  direction  and  ANF’s  is  34.68  and  also  headed  in  the  wrong  
direction.]  
 
Analysts  miss  all  this  though.    They  are  so  wed  to  their  bullish  calls  on  ANF  and  AEO  
that  they  have  conjured  up  a  story  that  once  the  recession  ends,  all  those  customers  
who  are  moving  to  a  lower  price  point  by  shopping  at  ARO  are  going  to  return  to  the  
competitors’  stores.    Hence,  ARO  trades  at  5.43x  its  LTM  EBITDA,  while  ANF  trades  
at  7.26x  and  AEO  traded  at  7.14x  until  it  lost  35%  of  its  value  in  the  last  quarter.    
Caught  up  in  their  past  view  of  the  world,  they  are  missing  one  of  the  great  retail  
stories  around  today,  which  continues  to  improve  its  business  quarter  over  quarter.  
 
Nabi  (NABI)  –  this  is  a  wonderful  story.  Nabi  has  a  vaccine  that  helps  with  smoking  
sensations.  Glaxo  Smith  Cline  (GSK)  actually  put  up  $45  Million  to  partner  with  them  
on  this  drug.  No  one  spends  $45M  on  a  drug  that  isn’t  credible.  That  will  probably  
move  forward  by  the  end  of  2011.  When  I  entered  my  position,  I  wasn’t  paying  more  
than  cash  and  the  NPV  of  royalties,  probably  lower  and  upper  3’s.  GSK  validated  the  
vaccine  and  the  ramifications  of  its  approval  are  mind-­‐boggling.  You  take  4-­‐5  shots  
over  6-­‐8  months  and  you  can  get  over  smoking.  Our  nation  spends  a  lot  of  money  on  
smoking  and  so  there  will  be  a  lot  of  push  behind  this  drug,  you  could  make  budgets  
balance  if  less  people  smoked.  Even  if  you  doubt  it,  the  GSK  guys  have  been  looking  
at  it  for  months  and  when  they’re  done  with  the  next  phase  of  development,  GSK  
will  pay  NABI  another  $30  Million  for  the  work  they’re  doing,  and  then  the  numbers  
get  really  crazy  for  royalty  payments.  When  I  was  buying,  I  got  in  at  prices  where  
most  of  the  story  was  for  “free”  because  of  where  the  stock  price  was  trading.  
 
BreitBurn  Energy  Partners  (BBEP)  –  This  company  found  they  were  
overleveraged  at  one  point  last  year  and  so  they  cut  the  dividend  distribution,  
causing  the  stock  to  go  down  to  $6.  Dividend  money  went  to  cut  down  debt  and  now  
it’s  at  $15.  We  went  from  $6  to  $15.  Baupost  is  there  and  the  interesting  thing  is  that  
they  got  involved  with  a  proxy  contest  with  the  largest  shareholder.  Quicksilver,  the  
largest  shareholder,  went  on  the  board  and  removed  2  guys  –  the  chairman  and  
CEO,  the  two  folks  whose  name  is  in  the  company  name  itself.  They  became  
management  employees.    
 
Quicksilver  (KWK)  is  overleveraged  and  owned  21  million  shares  of  this  company  at  
one  point,  or  about  40%  of  the  company.  They  had  a  proxy  contest  and  those  2  were  
removed.  You  have  to  take  a  step  back  and  wonder  what’s  going  on.  If  there  is  
nothing  going  on,  why  would  they  bother  to  remove  people  from  the  board  who  will  
object  and  not  be  happy  about  the  situation?  There’s  a  possibility  that  managers  
were  taken  off  the  board  of  directors  so  that  potential  M&A  activity  could  be  kept  
segregated  from  the  operations,  which  offers  a  potential  exit  strategy  for  
Quicksilver.  In  the  meantime,  I  got  a  10%  dividend  and  37.5  cents  per  quarter  per  
share,  not  too  bad  at  all,  and  mostly  tax-­‐free.  
 
How  do  you  try  and  structure  your  portfolio?  Your  top  holding  is  15%  of  your  
invested  portfolio  and  the  top  5  make  up  44%  of  your  portfolio,  even  though  
you  had  29  positions  at  the  last  13F  filing.  
 
We  tend  to  buy  as  much  as  6-­‐7%  of  the  portfolio  and  will  be  pruning  as  it  crosses  
the  10-­‐15%  threshold.  We’re  usually  always  pruning.  
 
How  do  you  deal  with  prices  at  which  you  are  okay  holding  a  stock,  but  not  
buying?  Opportunity  cost  would  say  that  if  you  aren’t  willing  to  buy  it  at  the  
current  price,  you  shouldn’t  be  holding  it,  because  by  not  selling,  you’re  
effectively  buying  at  the  current  price.  
 
One  of  the  pains  is  you  buy  stocks  out  of  favor.  Often  times,  they  become  in  favor!  
Just  because  they’ve  risen  past  fair  value,  and  you  saw  that  in  InVision,  where  the  
fundamentals  had  markedly  changed,  you  have  to  be  patient  and  see  it  runs  its  
course.  By  the  same  token,  if  I  was  buying  for  the  log  cutting  machine  software,  and  
if  it  was  done  with  the  beta  tests  without  much  business  activity,  I  would  have  found  
another  investment  to  move  onto.  From  my  point  of  view,  I  can  be  patient.