I was asked today if I was worried about the relative underperformance of my deep value strategy as the market works higher. The answer is an unqualified no. I have seen to before and I will see it again. As bull market age our approach underperforms. The only concern I had was the mistakes I made with energy and resource stocks last year and with assistance from some good friends I have made the changes to our credit rating service that should prevent these mistakes form reoccurring. We hold a lot of cash and I am comfortable with that. According to Investech the average bull market last a little less than 4 years and this one has just celebrated its 6th birthday. Hetty Green may have been an ugly mean old woman but she’s the best dance partner I ever had when it comes to making money in the stock market over time. Her suggestion that “More money is made in the end by an over-supply of caution than by indiscriminate recklessness” rings even more true today that it usually does.

We can argue all day about whether the current market is fully valued, overvalued or even as James Montier- no slouch at valuation recently warned hideously over valued but the argument that it is cheap simply cannot be made using any number you care to use or make up on the spot. Investing in the market and the vast majority of stocks cannot be described as an extraordinary. As Charlie Munger once put it “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” We just have to sit and wait for extraordinary conditions.

I have also been doing a fair amount of testing some research on the idea of using net asset value, or what I have taken to calling Rational Liquidation Value. The results are very promising and I have been using it in my regular search for cheap stocks. It isn’t really turning up anything much we do not already own but it has the potential to help find bargains when we do get a turn in the stock market. Although it looks like nothing much is going on with the deep value approach right now the current lack of bargains has freed up some extra research time and I have been using it to improve methodologies and strategies with solid results so far.

There continues to be an extraordinary opportunity in small banks stocks. The changes in the Small Bank Holding Company rules that raise the threshold for qualification to $1 billion in total assets gives smaller banks a powerful tool to boost stock price performance. They can now borrow more money at the holding company level that can be used to buy back stock, pay dividends and of course to buy smaller banks. As Thomas Killian of Sandler O’Neill noted a few months ago before the implementation date of May 15 “When implemented in May 2015, the Small Bank Holding Company Policy Statement will provide substantial financial flexibility for bank and savings and loan holding companies with less than $1 billion in assets to add BHC level debt that can bolster capital levels, facilitate funding of M&A and strategic transactions, and lower the cost of capital for small BHCs.” This is huge for those of us that see and are taking advantage of the trade of the decade in small banks. Most folks are too busy watching the fed and counting the number of Apple watches being sold and will overlook this tremendous opportunity.

I have to apologize for not getting a video out this week. Summer is a bust time around Chez Melvin and this year we are hosting a Florida College league ballplayer from Texas so there is a lot of Winter Garden Squeeze baseball added into the mix this year as well. I’ will be doing father day on the beach over at new Smyrna this year so if you are in the area and see a guy reading on a lawn chair on the sandbar come on over and say hi!

Have a great weekend everyone

Tim

Song of the week

It looks like small bank stock investors are headed for https://www.youtube.com/watch?v=_NVVe1DkVsQ&index=4&list=PLFAC8DE79FD4547F6