A Look Into My Mind: Investment Process & Perspective

"Doubt is not a pleasant condition, but certainty is absurd" - Volataire

As a value analyst my only mandate is to find businesses for my personal accounts and family office clients that subscribe to value principles. What this looks like in practice is the sifting through of businesses in unloved or forgotten industries, or small cap/nano cap names that are too small to warrant large swath of investor interest by their very nature. What I am not constrained by is a specific industry or quality class of business. Since my approach allows me to follow my interests and turn over any stone I see fit, my success will be predicated not by what stocks I pick but by the process by which I pick them. Since process is my true north and value is my mandate it would make sense to talk a bit about both my procedural framework, where it has led me, and how I think about value so that maybe you, the reader, can glean 1-2 lessons from my process, apply it to yours and be better for it. Conversely, and just as importantly, you might find something in my way of thinking you believe to be utterly stupid and that is first your right and two just as important of a process to examine what will not work for you as an investor as what will arguably, it is more important.

Process Fundamentals

There are two parts of a process with the first being theory and the second part being execution. In other words, there has to be a reason why you do what you do that is backed in logic and then there has to be a repeatable execution of said process. While each investor has to have a process that works for them one must understand that the best guide to investment process is a process that has a proven track record of working through out long periods of time. Simply inventing an investment process with no empirical evidence that it is ever going to work does not engender a lot of confidence. This does not mean the way in which you think about an investment or the process of investment has to be the same as one of the greats but what has worked and has a proven track record should, at the very least, be studied by the serious investor to determine if they like it or not, and why it worked and when it might not work.

Principles - Below is the list of principles core to my process that make up investment decision making.

Valuation

My own investment process is anchored first in Valuation. Valuation is the most important piece to any investment in my view. Inherent in Valuation is the Margin of Safety that we hear so often discussed. In my world, unless an adequate margin of safety is applied investment is not the activity in which you are partaking, it is speculating. When you let valuation be your true north one can be certain that you foundation for investment decision is made with some level of conviction so long as emotions can remain in tact as valuation can remained disconnected from price for a significant period of time. When I think about valuation my favorite method is replacement cost which is a way of looking at a business and asking what it would cost today to rebuild and replace an existing enterprise. This replacement value method immediately limits the kinds of businesses I can look at and I am fine with that. For example, businesses with a large amount of intangible assets are not going to be valued by the replacement value of their asset base. Rather, businesses with a high intangible asset base are going to be valued based on the earnings generated. After replacement cost my second valuation method I use most often is book value. Book value is a great method of valuation for the businesses I spend time on because hard asset companies will trade with some connection to book value. For example, Arcelor Mittal is the largest steel company in the world outside China with massive productive capability across the planet. While I did not know the exact dollar figure it would cost to replace every asset the business operated, I had a rough idea and from what I could tell 0.30x book value for a business of that size and quality was inappropriate. When thinking about something like replacement cost this is not a cure all for investment success. First, just because there is a massive discount to assets does not mean that it is not a warranted discount. The second reason is while asset values can be disconnected from actual business value, until earnings manifest to prove the assets are worth more that discount will persist. All replacement value does for me, the investor, is say in a normal price environment for the service or product this company sells what is the price of that asset and what does the underlying product or service need to be at for that asset to generate a 13-15% IRR. In this way we are anchoring the valuation to a set earnings power that we can then estimate for earnings when the service or product is back in favor.

Solvency Risk

Some investors avoid high levels of debt or debt in general when selecting their investment opportunities and that is their prerogative to do so. For me I do not mind a company with financial leverage and I own businesses with very large amounts of debt and some with net cash balance sheets. Debt gets a negative connotation and for good reason. The largest melt downs in business and overall market history have been on the back of an overleveraged system that got ahead of itself and ultimately collapsed. These are not the kinds of situations we look to get involved with. For example, when we bought Transocean the business had 10.4x Debt/EBITDA in 2023 at its peak. To some, this was untouchable - for me I decided to look a little further. When I looked at the capital structure I thought there was obviously going to be a drag on the business from continued dilution as well as high debt amortization that would basically eat all of its free cash flow. What interested me about Transocean despite its balance sheet is it was the only oil services business in the last down turn to not file for chapter 11 bankruptcy. Rather than run for the hills, given I felt I had an edge in understanding the oil services business I decided to look into why the business did not file for Chapter 11 and what a reasonable plan could be going forward. The first assumption I felt comfortable in making before I dug into the "why" they did not file, was that peak Debt/EBITDA was in 2023 and the trough in the cycle was 2019-2020 when oil prices literally went negative for a while. My question was if they did not die then, what was the likelihood of the business encountering a worse macro environment than it did in 2019-2020. I thought it was very unlikely this would happen say, over a 3-7 year investment time horizon. My next piece of digging was where were we at the in offshore capital expenditure cycle - as this would be the determining factor for where Transoceans free cash flow would trend in the next 3-7 years. What I found was 2021-2022 was a major inflection and began the new cycle in capital spending offshore. Backlogs for companies like Technip and Subsea7 were historically high and trending higher, and I thought it was fairly reasonable to assume offshore capex would continue to grind higher as offshore economics became favored over onshore for the first time in a decade. Finally my question of why they did not go bankrupt to begin with and the answer was the company would have liked to but the banks did not allow them too because their back logs were too robust. This told me that there was a general interest and need for the services provided by Transocean and if they could have that kind of backlog then, and be able to take out additional debt if need be against their high value drillship assets in a crunch plus equity dilution I thought it likely that solvency would not be an issue. This was in the middle of the energy sector crunch from 2023-2025 where Transocean was trading for a $2-$3 handle.

Money Losing / Break Even

The market cannot value businesses that are losing money or teetering between money losing and break even. Since the market does not have the ability to accurately price assets that are losing money due to high levels of uncertainty it simply sells first and asks questions later. When a business is losing money assets will trade for massive discounts to the market accepted price to recreate those asset and that is why I enjoy starting with a money losing business. Important to this step is the solvency risk principle listed above. In order to even consider investment in a business temporarily losing money you have to understand how the business can remain solvent in such an environment. While I detailed a highly leveraged business in the example above let me paint you a picture of a much less leveraged company going through a similar dynamic. Intrepid Potash is a potash producer and the only one in the United States. Intrepid's products have multiple use cases but the most common is as a fertilizer for crops though it is used in something like the salt we use for de-icing in the winter. In 2022 Intrepid had a great year and traded for roughly $90 a share at the peak before crashing into the high teens of $17-18 per share. At that point we got involved and started going our digging. The business was losing money in 2023 & 2024 before making a slight profit in 2025. On the cash generation side the business generated cash in every year except 2023. In the meantime the business had a net cash position with roughly $70M of cash in excess of its financial debt. It was clear to us that the balance sheet was robust and could survive a few lean years and already had survived what our evidence suggested was the trough in potash pricing. What the money losing component did for me here was provided a huge valuation advantaged business (meaning valuation was an advantage to long term returns rather than a risk) that made a critical product that had no solvency risk.

Consolidation/Bankruptcy

Bankruptcy and Consolidation go hand and hand and are a critical component to my investment philosophy. When businesses go bankrupt they typically spin off with advantaged balance sheets and no one wants to touch them because they literally just wiped out the equity of the previous shareholders. In addition, all the legacy guys who were interested in the name are now jaded because they got smoked in bankruptcy and want nothing to do with the name again. While we do not look for bankruptcy broadly, we apply it by industry. It is our goal to examine what industries are having a bankruptcy cycle or are experiencing more bankruptcies than normal and start digging. Coming out of bankruptcy many companies are still struggling to earn money and with the reduced debt load might be losing slightly less money so what they realize is they can no longer be subscale. At the same time, businesses coming out of bankruptcy are not valued highly and assets trade for pennies on the dollar. Given the subscale position of the operations what often happens is businesses within industry that have gone bankrupt will be bought by adjacent industries or, more interesting, will merge together with other players in the space. For example, Tidewater and Gulfmark both went bankrupt in the last cyclical downturn and both came out with net cash balance sheets and were both basically breaking even. What they did was merge and by doing so reduced redundant cost like overlapping SG&A and actually were making some money at the bottom of the market. When the tide finally turned in 2021-2022 the stage was set for a massive repricing and that is exactly what happened. Industries that consolidate become more rational in large part because the companies that remain through hard times and reemerge end up being the "tough mudder" types who are ran by capable managements - because of this there is a new found predictability in supply to market, more focus on achieving a fair price and to get a higher price for goods and service.

How Value is Realized

A core piece of our investment process is based on understanding fully how we are going to make our money. The first way that everyone knows is that when earnings manifest stocks are bought by the market and value is realized through these means. The other way is that companies will buy companies with the economics of doing so makes sense. This second part allows us to be okay with the waiting. If we have conviction on a name that has low solvency risk, making a critical product with a good management team trading for 50% of replacement value we can allow the thesis to play out knowing that if the market does not care for long enough eventually another company in the industry will public or private and will be taken out at a premium to our original purchase price.

Critical Product/Service

This entire process of waiting and buying temporarily depressed businesses only works if there is no replacement/obsolesce risk. I will venture to guess that buying a horse and buggy company would have been a bad idea the day before the Model T came to market. Horse and Buggy Inc could have been incredibly cheap but the underlying product they made was able to be disrupted by a better more cost effective offering. A critical piece of my framework is that the company makes a product that has no substitution risk - this is a non negotiable. If, we can buy a business thats net cash, breaking even or losing money, with a massive valuation advantage in a consolidating industry I can be convicted to wait for the cycle to turn knowing that say, as a steel producer, I am not going to be replaced. This is the same argument with many critical commodity products and services, for example. This is increasingly prevalent today in the software world - if you bought a cable company right before Netflix IPO'd or an HR services software company on the eve of ChatGPT coming to market you may just be in the sights of major obsolesce risk.

Management

Management is probably the hardest one of these to quantify. Track record matters but really all you want is a management team that thinks like an investor. This may require reading years of filings or trying to get IR on the phone etc but actions are more important than words. Your own business judgements will allow you to determine what a great manager looks like to YOU. For example, a business we own has a Founder/CEO that owns 40% of the stock and denies a salary from the company outside of a modest board fee of $140K when his executive staff are making 7 figures. Why would a founder/CEO do this? Well, obviously he is viewing this business as more than an ATM where he yanks cash from but instead has other incentives for doing what he does. On top of this, the same CEO/Founder has a track record of building successful businesses within the insurance space. So I have a good value add track record, with someone who is an owner alongside me, he turns down money that is rightfully his to claim for the betterment of the business and it just so happens he is also incredibly sharp as I found out when I met him a handful of times at their offices. Good managers are a dime a dozen but also the criteria for which a manager is valued and what you want to see comes down to your business judgements. If, you do not know what you want to see in a management team perhaps the best next step for you is to study and develop some additional business sense to develop a framework for evaluting managements.

Change

I do not need a catalyst to bring out the value of an idea I buy. Frankly, when there is no catalyst you get a better deal anyhow. With that said I do look to buy changing businesses that are different than they have historically been in a way that actually adds value to me, the shareholder. One of the most common I come across in my own book is businesses that were straddled with debt that are in the process not just of paying down substantial amounts of debt but are also renegotiating terms of said debt upon some sort of refinancing. Maybe you say, "refinancing is a catalyst, stupid" - if it is, it does nearly zero for any of the business I have owned and I do not look at the event as an event that will actually rerate the business. For example, Tidewater refinanced its Norwegian debt in 2025 and while the refinancing gave them access to a more simplified structure and a $250M RCF, what was far more important to me was the shedding of restrictive debt covenants that mandated how much capital could be returned via buybacks and dividends. among other things like restricted cash. Freeing the balance sheet up allowed the capable management team to properly allocate capital, reshape the capital structure, and free up cash on its balance sheet to do value add M&A and buyback stock, which it has done since.

Time Frame

I underwrite every initial investment on a 3-5 year time horizon. During that 3-5 year period I will continually monitor my book and as the thesis plays out will determine how much longer I want to hold in excess of that 3-5 year period. I mentioned to you also I do not care about a catalyst and do not prefer them. This goes hand in hand with timing. The reason I do not like catalysts that are easily seen is what happens is investors pile in ahead of that catalyst and arbitrage the price disparity away. In lumber today there is no catalyst to a recover and this is the same with Ag and Chemical stocks. They are all dirt cheap, critical in nature, and present interesting investment opportunity. By all measures these are great investments to make - the problem? Even true value people that I respect will not touch them because they do not know when the turn will occur. When this happens stocks get absurdly cheap and you can buy assets for $0.10 on the $1. In the meantime it actually does not matter if your return suffer short/medium term because if you are right about the valuation advantages in that business and that $0.10 becomes $1.00 you can be "wrong" for a really long time and still have incredibly competitive risk adjusted returns.

Capital Allocation - (tied to 3,6,7)

Capital allocation is important, but it is also a mosaic similar to management and should not be evaluated one size fits all. Buybacks, dividends, dilution, leveraging, debt reduction, asset divestiture all have their place in a businesses life cycle and knowing what lever is being pulled at what time is more important than what lever is being pulled. What I mean by that is the rationale behind any given decision and the way that decision was made is more important to me than what the decision is. Young companies can sell assets, old companies can do M&A typically these are seen as poor capital allocation decisions in each company and as a rule of thumb that is true but investment outperformance lives in nuance, in the grey. Rules of thumb, I have found, are very unhelpful for the thoughtful business analyst allocating family money or client capital.

Repeatability

It is important that whatever process you employ has a repeatable framework so that you can track success and failure and also, so you can make money long term. One off situations that fall into your lap can be wildly profitable but my suggestion is to find a process you feel can be employed across all market conditions that is backed by a track record either from your own success or the success of others better than you.

Independent Thought

Strive for independent thought not variant or contrarian thought. It is naive to think that the way to be successful is to just go against the crowd. The crowd is going to be right 50% of the time and so what is important isnt that you do the opposite of what the crowd likes but that you have independent thought that creates a unique view of the situation rather than relying on the research, ideas of sentiment of another group of people. Investors can be successful owning the same company with two polar opposite thesis. This happens and what that tells me is the important part is how you get to a buy or sell decision, not if you make the buy or sell decision itself.