Sunday, November 6, 2011

Diary: Sellers Capital

I thought it would be interesting to write further about Mark Sellers, a manager at Sellers Capital Fund. This whole post is dedicated to him.


There is a 3-part interview and a bio at Investors Hotline.

Part 1: "average joe" should lower their expectations (time 09:12). If you're going to pick your own stocks, it's not that difficult even for the average person: look at really well run companies with good honest management teams and wait until they hit a 52-week low and buy a basket of 20-25 them, then just wait - not a Buffett level performance, but above average.

Part 2: avoid risk of permanent capital impairment - don't loose money! he doesn't go for the big winners. it's avoiding the losses that it important

Part 3: don't buy levered companies because they can go to 0 if you're wrong - it's a general problem with financials like banks . He said some of his big mistakes is selling too early, you're generally too conservative about the fair value

Bio: return since inception in Aug 2003 to Nov 30 2007  its was 34% pa.

01-Jun-2007: Wide moats, hidden assets

In an article in the FT, Sellers said he focussed on companies with wide moats and/or hidden assets. Most wide-moat companies are large caps because the moat allows them to grow large over time.

Hidden asset plays tend to be small companies with illiquid shares. They are harder to find because you can't screen for them, analysts don't cover them, they usually aren't currently very profitable, and can be hard to value. Examples: oil and gas leases not yet generating cash, old real estate listed at cost.

PRXI (Premier Exhibitions) is an example where you get it all: there is a wide moat, hidden assets, and it's cheap. In 1994 it was granted salvor-in-possession for the Titanic - meaning that it had exclusive rights to salvage the shipwreck, but it does not own the artifacts or the wreck itself. The market value of the artefacts is very high, and there is money to be made from exhibitions.

12-Dec-2007: TMF article

The Motley Fool USA has an article on Sellers, dated 12-Dec-2007.

Getting investment ideas: every company we buy has a problem with it, otherwise it wouldn't be cheap. The first thing to do is figure out what the problem is. 90% of making money in stocks is not losing it, so you have to know how the problem can be solved.

Judging management is very important.

Don't take bankruptcy risk.

11-Oct-2008: Quitting

An article in Seeking Alpha reports that Sellers is to quit the hedge fund game because of the psychological toll. Presumably it is due to the losses (see below). The author speculates that Sellers violated Buffett's first and second rule (don't lose money).

19-Nov-2008: 49.9% loss

In an article by FIN Alternatives, it was noted that the fund made a net loss of 49.9% in Q3, after having gained 65% in H1. Hmmm.

28-Oct-2009: PRXI overvalued?

An article in Seeking Alpha says that Sellers got PRXI wrong. "He goes on to say that the market value of these artifacts is in the hundreds of millions of dollars. Where Mr. Sellers made his mistake was in his presumption that Premier OWNS the artifacts.   ... Mr. Sellers didn’t do his homework and incorrectly valued the business based off its assets, which technically aren’t theirs. This goes to show why it’s so important not to buy a stock just because your favorite investor buys the stock. Sometimes they are wrong."

The author says, further:

Premier has been increasing their spending at the same time as bringing in less revenue. After I finished my valuation of the company, I believe the fair market value of the firm is $0.26 per share. The company is currently trading for $1.16 per share.
An update to the article is:
Premier had to agree to NEVER sell those artifacts or dispose of them in any way. Regarding all artifacts salvaged after 1987, U.S. Courts ruled that Premier could have exclusive salvage right to them but DID NOT grant Premier ownership of those artifacts. ... Therefore, the asset related to the Titanic artifacts have no material value to the shareholders of PRXI.
Ah, the joys of investing.

06-Sep-2010: Risk first, return second

An article reports the following:   We look for stocks that have at least 3 times as much upside potential as they have downside risk. So, for example, if the worst-case scenario fair value for a stock is, in our estimation $24, and the current market price is $30, that's 20% downside risk. If we are wrong, we lose 20%. So we need to feel comfortable that if we're going to risk losing 20% on a stock, we expect to make in a reasonably likely scenario, 60% or more. As such we would only buy this stock if the fair value in a likely scenario was $48 or higher.

22-Nov-2010: Grand Rapids

An article reports that Sellers owns the bars Hopcat, Stella's Lounge, and Viceroy. Bizaare. It further reports that in Jan 2009, Sellers won a battle against incumbent directors at PRXI - apparently the company was headed for bankruptcy. "In retrospect, I wish I hadn't gotten involved in the company. If I can get out of it and break even or better, I'd have to say that's a big victory".

Today: Does anybody know?

So, was Sellers a genius investor, or just lucky? Aug 2003 to Nov 2007 is not what I'd call an extended track record. It was a period (almost presciently so) where there was a great run-up in the Dow during that period. I hope the chronology was interesting to you.

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