In this episode of The Acquirer’s Podcast Tobias chats with Jeff Gramm, Founder of Bandera Partners and author of Dear Chairman. During the interview Jeff provided some great insights into:
- Dear Chairman & Ross Perot’s Campaign To Fix GM’s Broken Culture
- How To Successfully Invest In Small & Micro Caps
- So You Want To Be An Activist Investor
- The True Definition of A Net-Net
- A Lot Of The Great Investors Started In Distressed Investing
- Concentrated Investing Is A Double Edged Sword
- Valuable Lessons Learnt From Watching A Hedge Fund Blow Up
- Jeff Gramm – From Musician To Hedge Fund Manager
You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Tobias Carlisle:
All right, let’s do it. Hi, I’m Tobias Carlisle, this is the Acquirers Podcast. My very special guest today is my old friend Jeff Gramm of Bandera Partners. We’re going to talk about his fabulous book, Dear Chairman, and how he invests what he does as an activist, what he likes in a small-kept space. We’ll be talking to him right after this.
Speaker 3:
Tobias Carlisle is the founder and principal of Acquirers Funds, the regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.
Tobias Carlisle:
Hi Jeff, how are you?
Jeff Gramm:
I’m good, I’m good. It’s good to see you!
Tobias Carlisle:
It’s great to see you too since we did our tour of CFA societies around the state. How many did we get through? Three?
Jeff Gramm:
It’s a fair number.
Tobias Carlisle:
States in Canada.
Jeff Gramm:
You know, the one thing that I do feel like is like when you tour with people, that you really get to know them better.
Tobias Carlisle:
You’re rider was much more impressive than me.
Jeff Gramm:
When you travel with people.
Tobias Carlisle:
You had the big rider. All the brown M&Ms taken out of the …
Jeff Gramm:
Yeah. Yep, exactly. Four sticks of butter, you know, nine kinds of different beers on the rider, that kind of thing.
Jeff Gramm – From Musician To Hedge Fund Manager
Tobias Carlisle:
How do you transition from being a musician to being a hedge fund manager? That’s one of the more unusual routes that I’ve heard.
Jeff Gramm:
Yeah. I think there were two big factors there. The first was this magical thing called business school. I think for all that people crap on MBAs, it is a versatile degree. There’s a lot of career-changers that go through it. Look, an MBA might not be the right choice if you’re a junior analyst at a hedge fund and you want to continue in the hedge fund business, but for someone like me it was perfect.
Jeff Gramm:
It gave me this little bit of credibility that I basically didn’t have. The second half of that equation was just incredibly fortuitous timing, to the extent I had any credibility, it was pretty much just as an MBA, which today probably wouldn’t get you that far if you’re trying to get a job at a hedge fund.
Tobias Carlisle:
Even a Colombia MBA?
Jeff Gramm:
Well, you know, a funny thing has happened at Colombia in that if you want to be in the investing program there and take all the best investing classes, that you have to apply for it and you have to kind of have a background of interests in investing. You know, I didn’t have that, so I was very lucky that I even got to take all those classes.
Jeff Gramm:
After taking them, it was … You know, I came out in 2003. I began looking for internships in 2002 and that was the wild west. There were all these brand-new funds launching. The fund I ended up working for was not the world’s best fund. It ended up blowing up spectacularly. It’s probably in some ways a blight on my record, but it was great for me.
Jeff Gramm:
I learned so much there. I loved all my bosses.
Valuable Lessons Learnt From Watching A Hedge Fund Blow Up
Tobias Carlisle:
What do you learn in a fund that blows up?
Jeff Gramm:
Well, it blew up after I was there, but I mean, I’m sure that being there, if you were junior and not, you know, suffering the pain like I’m sure that you learn a lot about. Just bad decisions and emotional decisions … Even when I was there, it was, you know, one of these funds that began as a merger arb fund. It was called called HBV Capital, and it was essentially the merge arb desk from Allen and Company.
Tobias Carlisle:
Right.
Jeff Gramm:
The guy who ran it was this guy Mickey Harley, who was a brilliant guy, had lots of energy. He was a real believer in building to grow, you know? He would always quote Bill Parsells about building the team even when you’re losing, all this kind of stuff. We’ll build, build, build.
Jeff Gramm:
He kind of had the vision of moving beyond merge arb, right? He built a multi-strategy fund, got lots of institutional investors, and was clever about being, “Well, we’re here in the cycle. Now you need to, you know, take some capital out of your merge arb allocation and put it into stress. We’ve built a great distress team.” Blah blah blah.
Jeff Gramm:
You know, so I was on that distress team. It got, I think in 2003, that fund got to a billion three, which for that time was a very big fund. I feel like could have become, you know, one of the mega hedge funds if they had played their cards right. Now, what they did is they sold to Melon Bank, and so Melon owned fifty percent of us.
Jeff Gramm:
It just began to be hard to compensate the team. The partnership with Melon, I think, didn’t help on the fundraising side like they thought it would. You know, so they kind of gave up fifty percent of the upside with the promise of the benefits of being on this platform, and with hindsight they didn’t need that platform. I think that, you know, it became hard for them to keep people.
Jeff Gramm:
I left there with my boss because it just became economical for us to try to do it on our own.
A Lot Of The Great Investors Started In Distressed Investing
Tobias Carlisle:
How has starting in distress influenced the way you invest to this day?
Jeff Gramm:
I think that distress is an awesome place to learn because A, it’s like there are huge liquidity swings. You know, so you’re often buying things that become very liquid and they become extremely illiquid, so distress bonds … You know, there can be issues that will trade two million dollars in one day, and then over the next year will basically not trade.
Tobias Carlisle:
Right.
Jeff Gramm:
You know, learning how to kind of deal with the liquidity is extremely valuable. Learning how to value companies with debt and with leverage is extremely valuable. I’ve often been surprised how lots of investors can either be allergic to debt and not want to think about it at all or not really know how to think about it.
Jeff Gramm:
You’ll see people, and you saw this a lot in the financial crisis, where it’s like, well, this thing isn’t … well, three times, you know, TEV to [inaudible 00:07:14] or something. Well, yes, but you have to think about the debt and the liquidity.
Jeff Gramm:
Then I think distressed trading, you know, where you’re dealing with only voice brokers, they’re extremely sharp but extremely scummy. You know? You’re dealing with sharks. That’s a trial by fire. You learn so much the first five times that you just hosed on the trade.
Jeff Gramm:
Then I think you learn a lot about governance, because ultimately you know, when companies hit trouble, you learn a lot about the management team and whose side they’re on. I think it’s no coincidence that lots of early distress funds, you know, Elliott Associates, Appaloosa, all of these funds began in distress. Carmen is a great example.
Tobias Carlisle:
Right.
Jeff Gramm:
They all kind of branched into activism. They branched to more value equities. It’s a great place to start. By the time I got done with the stress, I kind of hated it. I feel like it’s a little bit of an economies of scale business, where if you’re … My first job was at a very big distressed fund, right? Then my boss and I went to launch a niche, you know, start-up distress fund, and it’s hard to get the flow and the information and the trading. You realize that that’s where there are extreme economies of scale.
Tobias Carlisle:
Right.
Jeff Gramm:
It’s not good for the little guy in the way that equities are.
Tobias Carlisle:
So you launched a distressed fund after working in the bigger one. Is that Bandera, or is that a pre ..
Jeff Gramm:
No, so that was a fund called Arklow. I went to HBV, which was Harley Bean VonFurstenburg in 2002. Then they got bought by Melon I think that same year. In 2004 my boss at HBV, the director of research on the distress fund was this guy named Greg Shrock. He and I launched a long-short distress fund called Arklow Capital. We were seeded by a seed investor called Protégé Partners. We did the kind of classic deal. I think it was 25 million with Protégé.
Jeff Gramm:
Got an office at you know, like a classic hedge fund hotel that the broker ran. Tried to raise institutionalized money beginning at 25. That was a really hard, hard game, and the game to get disgruntled with the stress, and so in 2006, I did Bandera, which was a lot more … Bandera’s just a concentrated, mostly value, mostly long-only.
—
Tobias Carlisle:
Well, let’s talk about Bandera. What was the initial plan? What was the strategy for Bandera when you launched?
Jeff Gramm:
I was coming out of this long-short distress, so you know, has to be distress and then you have to keep a diverse long book. There were two of us, so it’s a shitload of work, and I felt like a lot of the work was not on stuff that was really going to, you know, impact the returns, and I wanted to just have the kind of classic Joel Greenblatt style. Back in the day, which is not his usual Greenblatt style.
Tobias Carlisle:
The special situations version, yeah.
Jeff Gramm:
But the concentrated, like eight positions.
Tobias Carlisle:
The yellow book, the blue book.
Jeff Gramm:
Exactly, exactly. You know, so I kind of began asking around. Is there anyone who would go in on this with me? I remember I met with Joel Greenblatt and John Petri. It was a nice meeting, but they were like, “We’ll keep in touch.” You know, you’re still learning.
Jeff Gramm:
I had met this guy Greg Balinski, who is my current partner. He ran a fund called Lime Capital that was doing essentially what I wanted to do. You know, concentrated long-biased, mostly equities. He was in a funny situation where Lime was a part of this … the Limewire tower research empire that was mostly a high-frequency trading brokerage and shop, so it was not a great fit for him being a part of Tower.
Jeff Gramm:
He shut that down, you know, joined forces with me, and we launched Bandera at the end of ’06.
Tobias Carlisle:
What was the, do you remember the first position you put on in the fund?
Jeff Gramm:
Yeah, I do. The first thing that we bought, we had this long-term kind of … We had met, we both had bought this thing called UCI Medical Affiliates. It was a PPM that did doctor’s clinics. I had looked at it on the HBV, my first job. It had gone into bankruptcy, but they preserved the equity.
Jeff Gramm:
I knew that I liked it then, and so when we launched our Arklow’s, the first Arklow position, at some point, I got Lime into it and so Lime and Arklow both owned it. When we launched Bandera, we bought it and then we ultimately bought out the Lime and Arklow positions.
Tobias Carlisle:
Right.
Jeff Gramm:
That was our first one, and it was fascinating situation where it was … The PPM industry, you know, which is a physician practice management, had been this huge bubble in the late ’90s. All these things failed, but this company had a little niche where it was actually performing well. It over expanded and filed for bankruptcy but at its core was a good business.
Jeff Gramm:
We bought up about 15 percent of the company, and in the time that we were buying it up, this catastrophe happened that the local Blue Cross affiliate, they were based in South Carolina. The Blue Cross affiliate bought control. They got over 50 percent, and so we were the minority holder with this big … Blue Cross had a conflict of interest.
Jeff Gramm:
They loved the network. You know, this was the first urgent care chain, and they loved the network because it provided cheaper care to their customers. There’s this inherent conflict, and then shortly after that the CFO stole from the company, the stock got de-listed, they went dark on their filings, the CFO went to jail. It was this whole crazy saga, and that was our first investment.
Tobias Carlisle:
You were already holding at that stage. It wasn’t …
Jeff Gramm:
Yeah, yeah, yeah. We made this kind of … Once this CFO fraud had happened, we went down there to figure out what was going on and made the foolish mistake of signing an NDA.
Tobias Carlisle:
Oh.
Jeff Gramm:
We got locked in. The stock got down to five cents at one point.
Tobias Carlisle:
You can’t buy?
Jeff Gramm:
We couldn’t buy them more because we were restricted. We ultimately sold that business for six fifty in 2011. It got down to five cents, I think it was ’09 or 2010.
Tobias Carlisle:
How did you assess …
Jeff Gramm:
We just watched it.
Tobias Carlisle:
How did you assess saying that it was still a good business despite the fact that it had gone into bankruptcy? What was the insight that you had there?
Jeff Gramm:
Yeah, so they had done this thing where they had expanded regionally, had bought some clinics and some adjoining states in Georgia and Tennessee, but the core business in South Carolina was still good, and it was mostly home-grown. The real problem with the physician practice management model is not so much that it was inherently a bad business to roll up doctor practices. It was that a lot of these roll ups in the late ’90s were done really stupidly. They basically cashed out the doctor.
Tobias Carlisle:
Right.
Jeff Gramm:
And eliminated their incentive to work.
Tobias Carlisle:
Right.
Jeff Gramm:
These core clinics that UCI owned, they were called Doctors Care. They had built up that network over a decade, and they opened all the sites themselves. It was a really good business. It was generating positive cash flow. It traded at an absurdly low multiple. You know, once you backed out the money-losing parts.
Jeff Gramm:
Through bankruptcy they negotiated this deal to basically keep the creditors at bay … To have a payment plan, but to keep the equity whole. It was kind of the perfect situation. It was like, post-bankruptcy, small, completely illiquid in this industry that everyone thinks that every company in that industry is a house of cards.
Jeff Gramm:
It all kind of came together right. Then we bought it and it went to five cents.
Tobias Carlisle:
And couldn’t buy more.
Jeff Gramm:
Exactly.
Concentrated Investing Is A Double Edged Sword
Tobias Carlisle:
Do you continue to run as concentrated as you set out? Are you still eight positions, or do you hold more positions now?
Jeff Gramm:
You know, I would answer that by saying, the answer to that question is that we are pretty much the same concentration as we were back then. We’ll do fewer 20 percent positions, I guess, so slightly less concentrated. I’m certainly as I’ve done this for longer, I’m way more dubious of concentration.
Tobias Carlisle:
Right.
Jeff Gramm:
I think that concentration is an incredible … It’s like a double-edged sword in that it, you know, I mean, I’ve told you this before but so much of investing is just trying to stay rational. Concentration just totally mucks that up.
Tobias Carlisle:
Yeah, I’ve been …
Jeff Gramm:
Mucks, I said. Mucks.
Tobias Carlisle:
I have been through a fund winding up because it was excessively concentrated into a single security, so it’s the thing that I’m the most nervous about. That was my introduction. That can go backwards. Even in very good positions, if the liquidity goes away, it doesn’t matter how undervalued the thing is, even if it’s trading at discounted cash. It just doesn’t matter.
Jeff Gramm:
Yeah. You see it over and over again in value funds and activist funds and in distress funds. You get your one big position that you’re involved with, so you kind of fall in love with it and then you’re locked into it and … You know, you can still be right. I mean, you know, my first kind of big investment at HBV was in Denny’s. Denny’s 20 percent of Denny’s was owned by Gotham, which was Bill Ackman’s fund.
Jeff Gramm:
We bought a lot of our shares from Gotham, and we owned the bonds too, and I remember I had been involved in the stock and the bonds, and someone emailed me his quarterly letter from, I don’t know, it was like maybe a year ago that explained their whole long thesis on Denny’s. He was exactly right.
Jeff Gramm:
He got everything about it right. I talked to him on the phone about it. He was extremely gracious and explained that he still believed in Thesis, but … They had to sell, and you can be right and still get hosed by concentration.
—
So You Want To Be An Activist Investor
Tobias Carlisle:
Right. Your first position, was that … would you characterize that as an activist position, or when did the activist philosophy and strategy develop? How did that occur?
Jeff Gramm:
Well, you know, so HBV at my very first job, because it was a distress fund, it inherently did lots of activism. Then I … because I was not a lawyer, I kind of carved out a niche there as the equities guy, or just like I did more of the equities or the post, re-orgs. A lot of that was activism.
Jeff Gramm:
When we bought into Denny’s, we owned the bond and the stock. We ended up doing a 13 D. I got the write the 13 D myself. We led on a PIPE that you know, ultimately, led to …
Tobias Carlisle:
What’s the PIPE for folks who don’t, who haven’t heard that expression before?
Jeff Gramm:
Sure. It’s a private investment in private equity. You know, so we had tried to do just a rights offering to backstop a rights offering, but the company wanted to raise more and so the way to do that was to do a PIPE. We got a bunch of other investors, and we did it. I remember it was at a dollar ninety. I don’t remember how many, how big it was.
Jeff Gramm:
I think it was like sixty or eighty million dollars. Maybe more, because I think that HBV did sixty. You know, they had a lot of debt and this allowed them to refinance all their debt. It really gave that business a fresh start.
Jeff Gramm:
You know, that was in the day where … There were lots of ideas back in the early 2000s that were like, here’s a very easy, simple to understand business. It trades at a discount because of a leverage and we can fix this leverage with a little bit of activism.
Jeff Gramm:
I mean, we did a lot of those kind of deals, and they almost always worked. It’s not as easy anymore. You know, that’s more priced-in now than it was back then.
Tobias Carlisle:
Right. So Bandera was in that initial position probably, I don’t know if you characterize this as an accidental activist position. What about the first position where you went into it anticipating that you might have to do some activism, or where activism was the thesis for what you were going to do?
Jeff Gramm:
Yeah, and I think to be honest there was a little bit of naivete there. I think if I was in that position now, when Blue Cross gets to 50 percent, I don’t know what I’d do. I think I’d go to them and just say buy me out for my cost basis and let’s just … You know, you won. You know?
Jeff Gramm:
But back then I was young, and I had lots of energy. I was like, “F this, I’m going to make these guys do the right thing.” It was like a campaign of letters, of persuasion. I talked to every board member. I sent lots of letters to the guy who ran Blue Cross of South Carolina.
Jeff Gramm:
Blue Cross of South Carolina was actually a very big business. It was a multi-billion dollar business. They owned a data processing firm in Dallas that was a billion dollar company. It was in the top five in value of the state Blue Cross affiliates at that time. Of the independent ones left.
Jeff Gramm:
This company had, I can’t remember what the market cap was, but it was like 20 million, maybe 15 or 20 million before it went to five cents. Then it was … You know, like effectively zero. I mean, I do remember, because there were 10 million shares outstanding, so it was about a 20 million dollar business when we first reached out to Blue Cross, and we very much tried to play it as we can work together here. We’re perfectly aligned, but we can get aligned. You can get what you want, which is expanded, affordable coverage for your customer base, and you know, we can get what we want, which is a little bit … You know, better governance and oversight and to run this thing like a business.
Jeff Gramm:
We really pitched them on that. We went to them with a whole lot of different plans. We had pitched to them, you know, sell down to like, go to 49 percent. You’ll have effective control of the board, but we’ll split the board.
Jeff Gramm:
We had heard through the grapevine at some point that they were likely going to do that, because their … The company, you know, once it got back to being healthy, wanted to go back and expand in Georgia and Tennessee again, but Blue Cross, you know, didn’t want to be perceived as stomping on the toes of the Georgia and Tennessee plans.
Jeff Gramm:
We were pushing that angle and ultimately in the end they decided that they just wanted to own it. We had … I mean, I think it was like a three or four month negotiation where they would name a price, you know … because it began like the stock was at two, they bid us like two and I asked for 10.
Jeff Gramm:
We went back and forth, and it got to five. They were like, “Well, look, we’re offering you five. It’s an absurd premium.” I think they thought that five was probably my number, and so they got mad and they walked away. Then at some point we finally settled on six fifty.
Jeff Gramm:
Yeah, that was …
Tobias Carlisle:
In terms of …
Jeff Gramm:
Oh no, sorry. Well, I was just going to say that that was the craziest, you know, when we announced that deal, they wanted to be in charge and so they did it as an 8K. No press release during market hours. It was a confusing deal to a lot of people. It looked to some people like they were just buying out us, and so the stocks at two, there’s this thing like announced at six fifty, which is a buyout from like a company that was going to close the deal. The stock got traded up to like two fifty.
Jeff Gramm:
It traded there for awhile, so you could buy that stock at two fifty knowing with full certainty that you’re going to get six fifty.
Tobias Carlisle:
For how long?
Jeff Gramm:
It was crazy. It was like … I think it was like a week.
Tobias Carlisle:
Yeah. Right.
Jeff Gramm:
You know, and I couldn’t buy any. You know, and I had people call me like, “I’m buying this thing!” I was like, “Well, you’re a lucky motherfucker. I can’t believe that you’re buying it,” you know?
Tobias Carlisle:
What about the first position that you sort of … You knew that you would have to be the prime mover, activist to sort of achieve the ends that you were seeking.
Jeff Gramm:
Well, I mean that …
Tobias Carlisle:
Anything that you can think of that really, that stand out.
Jeff Gramm:
Yeah, I mean that was that one. That was certainly an activist one. I can’t remember what … Oh yeah, okay. We did one in Purliss Systems.
Tobias Carlisle:
Mm-hmm (affirmative). What, vintage?
Jeff Gramm:
So, Purliss was … This was during the financial crisis, so this was ’08. Purliss … PR …
Tobias Carlisle:
He was submitting it around about that time.
Jeff Gramm:
It was in that net, and it was … It was a company that did software for printing software, you know? They would have like … Yeah, like when people would make printers, they would pay Purliss a little licensing fee to use a little bit of our stuff to service these old Nobel networks and systems that … I guess they kept them in the printers because it didn’t cost them anything, and perhaps there were a few hospitals and schools that were still using it.
Jeff Gramm:
They had a little royalty stream, and there had been an activist who took control of the business effectively and then his fund had to close and so then he, you know, essentially just began to run, got to run Purliss. We were like, “Hey, wait a minute.”
Tobias Carlisle:
Was that Locksmith?
Jeff Gramm:
Yeah, that was Tim Brock.
Tobias Carlisle:
Right.
Jeff Gramm:
We didn’t really know Brock well. We were like suspicious. Is he just doing what the old guys were doing? We bought 20 percent. There was a huge ownership by the Wisconsin investment board, and it was like … I mean, and I’ve had this happen multiple times. You’ll call up a big holder, you know, ask if they’re selling. Would they like to do a transaction, would they like to do a private transaction without a brokers fee?
Jeff Gramm:
They’re like, “No, we’re not selling, we’re not selling. We’re not selling.” Then one day on the open market, like bam bam bam, every bit gets hit. That is what happened to us on Tandy, too. You know, so all of a sudden we’re like at 20 percent, and we ultimately got two of the five board seats.
Jeff Gramm:
We ultimately pushed for that company to do a self tender and to effectively liquidate. It was contentious. Tim didn’t want to do it, like he thought it was … You know, better for shareholders to create value by finding a deal. After we did the self tender, so we bought it, I think it was around … I could be wrong on the numbers. I think it was around a buck 30 or a buck 40. We did the self tender at 325. That bought out us and a lot of other shareholders.
Jeff Gramm:
He took this remaining ten million or five million dollar stub, and he ultimately bought a business and sold Purliss for seven dollars a share.
Tobias Carlisle:
Wow.
Jeff Gramm:
You know, Tim actually created a lot of value for shareholders. We, and I’ve become extremely close friends with him. We were very, you know, like a lot of contention at the time. I kind of wish I could go back in time and have the relationship that I have with him now because that, you know, I have a very high opinion of him.
Tobias Carlisle:
I followed it because I was buying net net at the time, and I met Tim at a value investor … An activist conference. By the time he’d got control, and so that would have been 2008 or ’09, I would say. I just followed, I didn’t ever have a position in it after he got control, after it wasn’t net net. I just sort of watched it and followed it. I didn’t know what had happened to it. That’s great.
—
The True Definition of A Net-Net
Jeff Gramm:
I still love net nets, and we’ve owned, you know, we own Hilltop Holdings as a core position, that was a net net, Purliss. At any given time in our portfolio, we have net nets. You know, today we own two things. Rubicon Technologies, which Tim is the CEO of, that’s a net net now. Then we own this thing Dyatic, DYAI, which we bought as a net net.
Jeff Gramm:
You know, on one level the net net line is an arbitrary line.
Tobias Carlisle:
Yeah.
Jeff Gramm:
The fact it’s like below cash, I mean, it’s …
Tobias Carlisle:
Yeah.
Jeff Gramm:
It just kind of means it’s cheap. You drew a line in the sand. It’s a moving target. It kind of shows you if you have a little bit of discipline and you draw that line in the sand, and that line happens to be trading at a discount to liquid assets, you know, minus all liabilities and you do a little bit of homework on the governance. You can … We’ll still make money that way, and I’m a firm believer in …
Jeff Gramm:
I think that investing is hard, but I think a lot of people tend to kind of overplay how you have to have a differentiated view, and you have to be a deep thinker. You have to be the brightest guy in the room and you have to beat the other guy that’s on the other side of the trade. I’m just like, I don’t believe that. I think usually when I’m buying a stock, the guy on the other side of the trade often knows that I’m getting a good deal.
Tobias Carlisle:
Yeah, it’s a false setup.
Jeff Gramm:
They want to sell for whatever reason they have to sell. A lot of it is really supply, demand, and balances.
Tobias Carlisle:
Yeah, I couldn’t agree more. Do you want to discuss Tandy Leather?
Jeff Gramm:
Sure. I mean, so that was a classic same situation. It was extremely cheap, I went down to meet with the company. I thought they were nice and honest. It seemed like they knew their business, and there was a 16 percent holder, Wellington. For some reason they owned 16 percent of this very small company. It was probably 30 million or 35 million TEV at that point.
Tobias Carlisle:
Was it a net net or a near net net?
Jeff Gramm:
No. No, no it wasn’t. I think it was about like 20 or 30 million dollar market cap, and then they had some cash, but they only had like five or 10 million cash. Not that much. They were building cash.
Tobias Carlisle:
I get the feeling that it was at one stage because they have a lot of inventory. I think that was …
Jeff Gramm:
Yeah, well, I don’t count inventory.
Tobias Carlisle:
That’s really … I think the old definition, the grand definition we have to write down. You get 100 cents on the dollar for cash, you get 75 cents on the dollar for inventory, or maybe it’s 60 cents for inventory. It’s 75 cents for payables, something like that. I think on that basis it was.
Jeff Gramm:
Yeah, no, yeah, when I say net net, like I mean cash and liquid investments.
Tobias Carlisle:
You mean cash.
Jeff Gramm:
Yeah. Yeah, that’s what I mean. I might be using the word wrong. So net cash. That’s, so with Hilltop and Dyatic and Rubicon and Purliss, we’re all …
Tobias Carlisle:
Net cash.
Jeff Gramm:
Cash on the balance sheet, subtract all liabilities. That’s the, you know, so Tandy didn’t get there.
Tobias Carlisle:
Right.
Jeff Gramm:
But it was cheap, and Wellington just decided to blow out one day. I got to buy at a price where the company probably should have bought it, but they had a policy where they only bought back blocks at a six percent discount to market.
Tobias Carlisle:
Mm-hmm (affirmative).
Jeff Gramm:
I got that block. It just was this kind of weird supply, demand, and balance. Now, it later turned into a debacle. I’m on the board now, and we’re going through an accounting restatement. If you’ve ever gone through an accounting restatement, it’s pure misery. When I bought in, it seemed like the liquidity demands of the biggest holder set the price at the wrong level.
—
How To Successfully Invest In Small & Micro Caps
Tobias Carlisle:
Right. What about The Joint? That’s a name that lots of folks who trade in micro caps will know.
Jeff Gramm:
Yeah. You know, I love The Joint.
Tobias Carlisle:
What’s the thesis there?
Jeff Gramm:
Sure. So it’s a chain of chiropractic clinics. They have kind of an interesting model where they don’t take insurance, it’s all private pay. It’s like an open floor plan, like they don’t take appointments. Like you walk in, like after your kind of initial assessment, you know, for your subsequent appointments, you’re in there like five to seven minutes.
Jeff Gramm:
You get your adjustment, you have a membership key card, and when you talk to people, everyone, the customers love it. The chiros love it. The owner of the franchise loves it. You know, one funny thing about a value investing is I feel like you know, we kind of … Everyone puts a discount on growth, right, because if you’re wrong about the growth rate, you get killed.
Tobias Carlisle:
I think deep value guys put a discount on growth. I think there are lots of compoundists out there.
Jeff Gramm:
Well, they put a huge discount on mine. Yeah. Yeah.
Tobias Carlisle:
They love it.
Jeff Gramm:
But deep value guys will, they’ll look at a terrible, declining business and view trailing earnings as …
Tobias Carlisle:
Gospel.
Jeff Gramm:
Some kind of impenetrable fortress. Like, well, this isn’t five times earning. The Joint trades at a high multiple, but the path to domestic growth is just, it’s clear. This company is going to grow. The growth is very low-risk. It’s a question of how long it takes. You know, that’s the kind of … The big factor with this one.
Jeff Gramm:
I feel like that’s just a dynamic I’ve seen before. Probably the best investment in the history of our fund was Popeye’s. I don’t think it was the best percentage return, but in terms of the risk, reward and the impact on our portfolio and the kind of … You know, we … Owned that thing for many, many, many multiples. It always felt like the path to creating the value was just clear.
Jeff Gramm:
I feel like The Joint is very similar. With Popeye’s, it’s a little bit easier to describe with Popeye’s because all of the listeners will know what Popeye’s is. It was a fried chicken chain. In the domestic US, they had a very good following. The unit economics were good and improving, and they had a good CEO.
Jeff Gramm:
They had these huge holes in their geographic footprint, so they were based in Atlanta. When I bought the stock, there were less than 10 Popeye’s in North Carolina. You know, holes like that. Then they had a huge opportunity for infill. They were strong like in Houston, and then there was like a two-year period where they built like 30 more restaurants in Houston and they all performed well.
Tobias Carlisle:
Mm-hmm (affirmative).
Jeff Gramm:
You see this and you’re like, “Oh my god, this thing.” With franchising, you can only grow at a particular rate. You can do the Bo Jangles thing and just, get any old franchise G that applies and grow extremely fast, but that’s really the way to do it. You know, so Popeye’s, it took time to get the machine going, the franchise growth machine, but they had it in place and you just knew for the next 10 years, this is going to be very low-risk growth.
Jeff Gramm:
That’s how it played out, and we got the added bonus of an excellent CEO. I think with The Joint, I like the management team. I think the CEO is good. I think it’s the same thing where we’re finally, like we have this franchise machine. It’s stronger in some regions than others, but there are lots of pockets with like very dependable growth. You know, so I can get to some pretty big numbers.
Jeff Gramm:
It’s a 200 million dollar company now, I can easily get to 300 million. I don’t know if it’s going to be a 500 million dollar company or a billion dollar company but I don’t feel like I have to know. I’m buying it for so cheap that I’m going to do well. The real question is, am I going to do exceptionally well?
Tobias Carlisle:
Right.
Jeff Gramm:
Unless coronavirus becomes like a terminal risk for all of us, you know.
—
Dear Chairman & Ross Perot’s Campaign To Fix GM’s Broken Culture
Tobias Carlisle:
Your book Dear Chairman. What was the reason for writing and how did that come about?
Jeff Gramm:
Yeah. I had been teaching at Colombia, and I had begun to collect these 13 D letters, and I’d give them to students. I kind of had this idea of well, someone should just collect a bunch of 13 D letters in a book.
Tobias Carlisle:
That’s a great idea.
Jeff Gramm:
I was like, well, you know … Yeah! I just thought, like, it must exist. I even thought about at some point I began to think about that and then said, “Well, why do that? I should just actually write a book. I should do a narrative book,” and it turned into a history. I did think about, you know, that I should put out a Dear Chairman companion with just a whole bunch of 13 D letters and some commentary from me.
Jeff Gramm:
I had planned to do that, and I just, I never got around to it.
Tobias Carlisle:
That’s still a great idea!
Jeff Gramm:
I know, I should do it. It’s a good idea.
Tobias Carlisle:
So this is an interesting question. Would you start with say, like the Robert Chapman, Dan Loeb vintage letters? Is that where it starts or do you start earlier than that?
Jeff Gramm:
No.
Tobias Carlisle:
Where do you start?
Jeff Gramm:
I think you would begin with … You know, to the extent that you can find things from the 1800s, like with the railroads and …
Tobias Carlisle:
Are they 13 Ds, or you just mean that style of activist letter?
Jeff Gramm:
Yeah, just like angry shareholder letters.
Tobias Carlisle:
Right. That’s a great title. That’s a great title right there.
Jeff Gramm:
If you just did … yeah. Pissed Off Shareholders: A Dear Chairman Companion. You know, because even in Dear Chairman, of the eight letters, I think only two of them were actually 13 D letters.
Tobias Carlisle:
Mm-hmm (affirmative).
Jeff Gramm:
Now, there was proxy letters, which are essentially the same thing, but a few of them were private letters, so you could have a pretty broad definition. Yeah, so I had this idea, and I was at a point in my life where I had really little kids and I just felt super unproductive, like I felt like I wasn’t accomplishing anything with my time.
Jeff Gramm:
I would go to work, and I would just be tired and … I’d read a 10 K and just, I couldn’t really focus. I felt like I needed a project like …
Tobias Carlisle:
Writing a book will get you out of that.
Jeff Gramm:
To kick me back into gear. I mean, it really worked. I mean, it really worked. It felt like a dead time in the markets too where like if we, if coronavirus had hit in the middle of 2015, I would have put that book on the back burner and I would have probably never finished it.
Jeff Gramm:
I got very lucky that I got a kind of quiet, nine month stretch where I got to kind of pound it out. It was inspiring. I feel like I just, I got my mojo back from doing that.
Tobias Carlisle:
What’s your favorite campaign from the book?
Jeff Gramm:
I think the Ross Perot one is my favorite.
Tobias Carlisle:
GM.
Jeff Gramm:
Yeah. Just because it’s not so much a campaign, but having not known that much about him, and seeing how he, you know, really did correctly diagnose a lot of problems, it was pretty cool.
Tobias Carlisle:
Do you think it’s so much diagnosing the problems as … I get the feeling that a lot of people knew what the problems were. It’s just having the grit or the tenacity to kind of push it through to sort of go to war with them.
Jeff Gramm:
Yeah! Well, I mean, it’s even worse, right? It’s like, he didn’t ultimately do it, right? He correctly diagnosed the problem. Yes, I mean, you can completely argue a lot of other people had figured it out, but he figured it out like … The whole problem, and articulated it incredibly well in a speech to the board.
Jeff Gramm:
It’s a Harvard Business School case, so you know, you can find it online. Just the fact that he was the biggest shareholder, had articulated exactly what was wrong to the board. He was a business legend. He was Ross freaking Perot. It still didn’t work.
Jeff Gramm:
To me, that’s like the beauty of the story, you know? I remember I was listening to an interview with a Sheila Colletcar, Collatcar, who wrote Black Edge. She talked about how, when she was doing the book, the publishers and people would ask, “Well, what happens if he doesn’t go to jail?”
Jeff Gramm:
It’s like, is the book going to be ruined? It’s kind of actually, it ended exactly the right way, right? It’s like that book is kind of like a more interesting and important book because he didn’t go to jail.
Tobias Carlisle:
I have Black Edge and haven’t read it. I’m sorry. You’ve got to …
Jeff Gramm:
It’s good, it’s good. To me it was a real flashback to my first job. Just like a lot of that kind of, the junior analyst trying to get edge of any kind. It was like a reminder. I definitely worked with guys that … You know, definitely pushed the envelope on finding some insider that had loose lips, you know? That all kind of was interesting to relive. I think the Ross Peroe chapter is a better chapter for him having failed than if he had succeeding.
Tobias Carlisle:
Yeah, I wish he’d succeeded, but you might be right. From a literary perspective, maybe it’s a better chapter.
Jeff Gramm:
Yeah.
Tobias Carlisle:
We’re sort of coming up on time. Jeff, if folks want to get in contact with you …
Jeff Gramm:
Already?
Tobias Carlisle:
Yeah. That was a really enjoyable chat, I’m sad it’s almost over.
Jeff Gramm:
We didn’t even get started, you know?
Tobias Carlisle:
How do they go about getting in contact with you or where can they follow along?
Jeff Gramm:
Sure. I have a website, dearchairman.com. I think it’s still live, I haven’t even looked at it in awhile. I’m on Twitter, jeff_gramm at Twitter, jeffgramm@gmail.com is my email address. If you do one of these, “Hey, let’s get coffee sometime,” like I will likely do it, but probably after like a year of forgetting, so you have to be persistent. That’s it. I’m not hard to find. I’m on LinkedIn, too. I’m not on Bloomberg anymore. I canceled my Bloomberg, which I’m not regretting. I’m not on Bloomberg, but maybe I’ll be back soon.
Tobias Carlisle:
That’s great. Jeff Gramm, thank you very much.
Jeff Gramm:
Cool. Thanks for having me, Toby.
Tobias Carlisle:
My pleasure.
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