(Ep.77) The Acquirers Podcast: Nate Tobik – Odd Ball, Of-The-Run Stocks, Lego And Bank Data

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In this episode of The Acquirers Podcast Tobias chats with Nate Tobik. He’s the founder of CompleteBankData, author of The Bank Investor’s Handbook, and he writes about deep value stocks online at his newsletter oddballstocksnewsletter.com. During the interview Nate provided some great insights into:

  • Investing In Oddball Stocks
  • The Genesis For CompleteBankData
  • Value Investing In Lego
  • Generating Outsized Returns In Japanese Net-Nets
  • Frontier Investing In South America And Africa
  • Approach Value Stocks Like A Credit Analysis
  • Unlocking Value Like Larry Goldstein
  • Buy Stocks When They’re Limping, Sell When They’re Walking
  • Finding Deep Value In Vacuum Systems
  • Trading Silver Star-War Coin Collectables

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Nate Tobik. He’s the founder of CompleteBankData, author of The Bank Investor’s Handbook. And he writes about deep value stocks on Oddball Stocks and online on oddballstocks.com. I’ve been following Nate for a decade. He’s got one of the most eclectic approaches to investing you’re ever going to hear, coming up right after this.

So, you’re still doing Oddball Stocks? The bank data thing is super interesting, I want to talk to you about that because I know you’ve been doing it for a while now, is it? Five years more than that?

Nate: Yeah, we’ve changed. We’re doing stuff on the Bloomberg Terminal for a while.

Tobias: Is that still happening?

Nate: Thankfully, no. Those bills were killer. [crosstalk]

Tobias: How does it work? They charge you to be on it?

Nate: Yeah, I want to say $500 a month per terminal, but they had some deal where you had to buy three or something. So, I ended up with three terminals. I guess I was paying $1000 or something like that a month. Yeah, that hurt.

Tobias: Are you supplying them with the data or you’re getting the data?

Nate: They had like an app store just like Apple and we were in their app store. And then they–

Tobias: But you’ve got to subscribe to get access to it.

Nate: You’d have subscribed to ours, yeah. And then they would advertise us along so that we had like ads on the bottom of Bloomberg all the time. It’s a funky thing. There’s a guy, Demark Signals. They said something like $10 million a year, $12 million on this.

Tobias: Oh my God.

Nate: They were like, “Yeah. We’ve got another couple people doing a few million and then some people doing hundreds of thousands,” and I thought, “Why not? We’ll give it a shot.”

Tobias: Yeah, roll the dice.

Nate: Yeah. We made almost nothing on it. We lost money after you count in the subscription cost. It was a net loss. Yeah.

Tobias: What a bummer. I remember you going on, I was like, “That’s super cool. This thing’s really blown up.”

Nate: It was awesome. The PR from it was good. I was actually able to get a front-page story on bloomberg.com from it, but, yeah, it didn’t pan out financially.

Tobias: That’s a shame. That’s a bummer. So, how’s it going otherwise?

Nate: Good. We pivoted from selling to investors who are totally fickle to selling to banks and selling like– So, basically in a state, we know who owns every property, what their financial picture is. And then, you could build that out and say Citizens State Bank, here’s all their borrowers, here’s what their borrowers look like, here’s where they’re located, and here’s all their real-time activity and who’s borrowing. We’ve even done some stuff with clients where they’re supplying us deals that they missed out on. So, we have real-time rate data for specific products in the market. So, that’s cool.

Tobias: That’s very cool. So, you don’t use it to invest, how are they using it?

Nate: They are using it to find new lending, like new borrowers, and also to stay ahead of the competition real-time, so they know more about what the competitors are doing than they probably know about themselves and they could react to that.

Tobias: And still growing?

Nate: Yeah.

Tobias: What sort of growth rate do you see?

Nate: We’re doing really well. We’re doing 30%, 40% a year up until COVID. And then, we had a bunch of clients back in March and April who were like, “We want to wait on this.” So, now we’re retooling and we’re trying to push out a product for– so the problem is this, most banks are just run by idiots. They like the status of being a banker. Of the 4500 banks in the US, there’s probably like 200, maybe 300, that are forward-thinking, pretty aggressive. Ultimately, that was our prospect base, going after those. What we found out recently from some of these bankers who were like, we don’t know how to sell, we don’t care about selling, was they do care about deposits. So, we’ve retooled and we have an application now, where a tiny bank who knows nothing about selling loans could say, “Here’s our depositors. Here’s the 2000 people that we have deposit accounts with.” Then, we could find everyone in the area in the same radius of their branches that have similar characteristics and now they can market deposit products to them. We just really launched that about a week or two ago, and going to start pushing on that one now.

Tobias: So, how did you get your start? The first time I became aware of you was with Oddball Stocks. I didn’t know exactly when that started. I knew it was a long time ago–

Nate: It was like 2010.

Tobias: Yeah, I saw it in the note that you sent me. 2010, that’s amazing. So, Oddball Stocks. What were you doing before Oddball Stocks?

Nate: Yeah. I worked at a tech startup. My dad’s father left me some money to pay for college, and he had done phenomenally well investing in stocks. He owned a little insurance brokerage company. He would invest all of his extra money into growth companies in Latin America. It just so happened– this was like in the 80s, and all this stuff was being privatized. And he just had 10-bagger after 10-bagger. Then, he gave money to each of his grandkids. He just gave the stock to pay for college. So, I was able to go through college. I didn’t have to pay for it because my grandfather had done well investing. Coming out of college, I had 12 grand left over.

I knew nothing about stocks. I took one economics class at college, I skipped everything but the tests and slept through the rest. I’d get these statements and it would show the yield on my portfolio was like, I don’t know, 1.5%. I remember thinking, I was like, “That’s crazy that they only think I’m going to make 1.5% over the next year on these companies. Aren’t they going to grow?” So, I started to read about it to try and figure out what do I own. From there, I got into learning about value investing and then I networked with some people locally who are in investing professionally, and I thought, “Well, I’ll turn this into a career.” They said, “Take your CFA.” So, I took the first level, the second level, and failed the second level, which was right as my first son was born. I was trying to study, I had a couple-month-old boy and–

Tobias: Impossible.

Successfully Investing In Japanese Net-Nets

Nate: Yeah, it just wasn’t working out. We’re down at the beach on vacation and I got this email saying I failed. I was just sitting there on the beach and I was like, “If I spent the same amount of time studying, researching stocks, I would be so much better off.” So, I started doing like spinoffs, probably when I learned about, kind of figured out investing, that made sense. That was probably around 2004-2005. I turned that 12 grand into $50,000 or $60,000. And I thought, “Okay, now, I have some money, I could do something with this.”

So, I just decided I’m going to just research a couple of hours every night. And I started Oddball Stocks because– I’m not a structured person. So, it was like, “I needed some place to store this information, so I could go back to it and get to it anytime.” And so that’s what it was. I started writing on there and started doing value stuff, the spinoffs eventually. There’s no juice left to squeeze from those, those became popular. You used to write about the–

Tobias: Net-nets.

Nate: The net-nets. I did a bunch of those. Also, the stuff where it’s a company doing the reverse split. Those were awesome for a while. And I was scalping a couple hundred dollars to—

Tobias: That’s where Odd Lots–

Nate: Yes, the Odd Lots. Some of those were phenomenal. You can make thousands on them. I just kept changing. I always thought it was like little pools of water, they would dry up and you just had to move on to the next thing. So, I did Japanese net-nets. Those were a funny investment because Mohnish Pabrai was talking about those and I thought, “Oh, this sounds awesome.” And he gave this really compelling talk. So, I started to invest in them, and I thought, “This is great. I’ll buy a bunch of these Japanese net-nets.” I was riding a bus to the office every day and so I bought the Japan company handbook. I actually went through that stinking book, like every page. I made a list and I had, I don’t know, 150 tickers and then I just bought a selection of them. I did so well on those that it paid for the down-payment on the house I’m in now.

Tobias: Congrats.

Nate: Thanks. The irony is, right around that time I was doing well, I was at a corner of Fairfax meetup in Toronto. Mohnish was there talking about how terrible his Japanese net-net investment worked out and it was the stupidest thing he’d ever done, and he wished no one had done this. I was sitting right by him and I’m thinking, “It worked out well for me.” [laughs]

Tobias: How did it not work out for him? What was the difference?

Nate: I think sometimes people overthink the deep value stuff. You could have paralysis by analysis where you’re trying to find the cheapest or you want to find something with a good business. I started buying stuff that was a net-net that had over a 10% return on equity or was below 50% of book value with a 10% return on equity. And I just bought them. I went from the Japan company book, and it would have a description like, “Makes refrigerators, toaster, and radiators for cars.” And I thought, “Okay, that’s what they do.” I knew nothing about these companies.

Tobias: That’s a business–

Nate: Yeah. It was just a statistical thing and it worked out really well. It worked out so well– I did not hedge my yen exposure. If I would have, I would have had– so I was working against the wind really because–

Tobias: The yen was striking against the US dollar most of the time at that period.

Nate: Yes. My investment overcame the strengthening. If I would have hedged, I would have done even better. There’s probably still an opportunity there now, but that worked out great. It was one of those, like you don’t have to be a genius to do this. You just need to be able to execute.

Tobias: You’ve just got to be able to actually go through and do what you’re supposed to do, which is buy them at a big discount to their net current asset value. And then, not think too much about the business because you’re only getting an opportunity because it’s a terrible business.

Nate: Yes. Well, some of them were good. I guess they were good businesses.

Tobias: [unintelligible [00:12:36] unusually had some good net-nets.


Value Investing In Lego

Nate: Yes. But the thing is, it actually works out better not knowing those details. I always think about it in real-world terms. So, I like to buy and sell random stuff on eBay just because you could buy it cheap and then you could sell it for two or three times the amount. That’s the same as like the net-nets. So, I need to know that the product isn’t broken when I buy it. If it’s not broken, then I just need to repackage it and put nicer print around it and a good description, and I could sell it for a multiple of what I bought it for. But you need to know the market and know that that this stuff is possible.

We’re doing this with– I was buying like computer equipment for a while off of government liquidation sites and then I would resell it. My youngest brother has this Lego Village, I guess you could say, and my boys like Legos, and so they were like, “Oh, we should buy these Legos.” So, we’re buying those off of a different auction site. You could buy like a Lego car, that’s like 95% complete. And then, there was this other site that my brother told me about where you could buy the individual little pieces. So, I would go on there and make like a $3 order for– the pieces are three cents or six cents. So, I’d buy all these little missing pieces, and then put the whole thing together, and then I sell it for 10 times what I paid. We kept doing that.

And then, I turned to a buddy of mine who lives down the street. I told him about this. I’d say he’s made almost $10,000 doing this with these Lego things. So, he’s like scavenging these pictures for a half-broken Star Wars ship or something. And then, he’s like, the kids are getting all the extra parts and then you sell it.


Buy Stocks When They’re Limping, Sell When They’re Walking

Nate: To me, that’s the essence of the value stuff. You bought the car and it’s missing some pieces, but at the worst, you could make more than– if you just sell it and pretty it up, you can make more than what you paid. Or if things work out and they get those pieces, you could sell it for five times as much.

Tobias: Yeah, I think about them the same way. You basically bought them when they limping a little bit. I think it’s Buffett’s analogy. Then, when they start walking properly, then you sell them, but you don’t get in your mind that this is secretariat. You just sell it when it’s not limping anymore.

Nate: Yes, that’s exactly it. Thinking in real life, I’ve interacted with some of these businesses, they’d probably be a net-net. People recognize things are wrong, and they want to change it. Sometimes, just through sheer force of human will, they’re able to change enough. It goes from being, “We’re going to close every day,” to, “Hey, we’ll survive.” When it looks like it’s going to close, if that’s when you’re able to buy it, then when they survive, people get optimistic, and yeah, you just want to sell it when they’re walking. That’s exactly it.

Tobias: I feel the same way. Even as a business, you look at these things and if your only analysis is, I think this thing’s going to survive rather than this thing’s going to be incredible, that’s a much simpler level of analysis. Yeah, they get some liquidity. They want to change, they want to do a little bit better. Even sometimes just a quarter or given a few years, this thing will be a much different beast. And then, you’re buying it on broken-down parts and selling it as a little business. It’s a really easy way to make money in small stocks, I think.

Approach Value Stocks Like A Credit Analysis

Nate: Yes, it is. I mean, the thing I learned as well with small stocks and value stocks is, you really need to approach them more as a credit analyst. And so, you say like, “Would I give them a line of credit for a few million dollars for their continuing operations?” If you look at it like that and say, “Are they creditworthy? Are they going to figure out a way to pay the bills going forward? Would you extend them credit?” I always see first-time investors, their biggest mistake is they come in and they’re like, “Hey, look at this net-net.” We’ll just say it has $50 million market cap, and it has $100 million in assets and stuff. And then, it’s got all this debt laying out there. It’s like, yes, it is barely worth more than its market cap, but the debt is going to sink it. If I was lending money, I would not lend them any more money. Those creditors are trying very hard to collateralize what they have, whereas if you have some little cashbox, with an old-fashioned business or something, it’s like, “I would lend them money.”

So, if you think about it as a lender, it’s like, “Sure, I’d make a loan, they would be able to pay it back.” You’re basically validating their survivability. If you’re able to validate that, and then you say, “How much would I lend them? Oh, that’s far and excessive.” You back into like, this is another way to value them and it’s a stable business that’s worth investing.

Tobias: Yeah, I have a similar approach, I think. What would happen if I got control of this thing and just ran it, rather than trying to extract all the value which the current management team is doing in the form of salaries and options and all that sort of stuff. i saw one yesterday, just got there a little bit late. It’s like a $30 million market cap. Makes small engines and equipment and stuff like that. Clearly, the management is just extracting as much as they possibly can. And they’ve given themselves all a big bonus in the event that it goes into bankruptcy and then they’ve got the prepacked bankruptcy. So, they’ve gone and found someone who bid $550 million. So, it is massively undervalued, it’s carrying a lot of debt.

I just think if you just get there in time, and you realize that this thing’s going to fall probably through the equity into the debtholders’ hands, maybe you can pick it up in the debt, but they’re just too tough. I think it’s really hard to find them at this point in the cycle that everything’s just so expensive at this point. What do you do in the markets like this?

Nate: We’ve seen a lot. It’s two separate stories. If you’re buying the tech companies, they’re flying very high, which is crazy. At the same time, some of the stuff we followed is at 15 and 20-year lows, and it’s just there’s no interest. I think compounding that is there’s also the potential upcoming SEC rule that you can’t invest in dark companies and a mutual fund. So, there’s been a lot of force selling, and there’s really no one to buy it. I think these things work themselves out.

My favorite dead company is Hanover Foods, which is here in Pennsylvania. No one likes them. I have yet to find it in– every value investor I’ve talked to on this one, they’re like, “I gave up years ago.” I don’t know who owns the shares. There’s no one. They had this crazy fight with the family at the top, and the brothers and the sister all hated each other. And then, this crazy trust and the one brother maintained control through it. Then, a couple years ago, they cleaned all that up, and their annual reports suddenly had all the shares and all of that structure was gone. You say like, “Well, something’s going on behind the scenes. What is it? We don’t know.” And then that founding, where the controlling chairman, he passed away this spring.


Unlocking Value Like Larry Goldstein

So, there was some sort of estate planning. So, now you have the children running it and it’s a cleaner structure. And it’s like, they have their own incentive to eventually work things out. It might be that they get squeezed in the market and they want to sell to someone. Have you ever talked to Larry Goldstein from Santa Monica Partners?

Tobias: No, I haven’t.

Nate: Okay. He had been doing net-net investing and deep value stuff. He’s been doing it since the early 80s, and he returned something like 22% after fees since then. He would always tell a story about going to– it was somewhere in rural Pennsylvania. I don’t remember that– I used to know the company name. Anyways, he went and sat down with the directors and said, “Look, you’re selling for less than net current assets. Here’s what this means. Did you know that comparable companies are selling at this crazy amount?” And he said, “Here’s how much money you’d make from this.” And then his last slide was, “Here’s my investment banker’s name and phone number, and do what you want with it.” He said about a month later, there’s the press release, we’re selling, because the executives just didn’t even understand how cheap it was and when they realized they could unlock all this value and walk away, it was like, we just need the number of the guy to do it. He provided that and that was it.

Tobias: I worked for an activist. That was basically exactly what he did, just walked in and explained to them how undervalued they were. Often, they were being run by a founder who was of engineering background who just didn’t think in terms of capital structure or didn’t understand it as an investment. And he just explained to them that you can pay out some money, or you can buy back some stock. And that will radically change the way that you’re viewed in the market, and then you have a high share price, you can go and do other things. And when he did that, like, it was amazing how often they’re like, “I just never thought of that before.”

Nate: Yeah. It is a crazy thing, although I’ll say the pool of companies that works with has shrunk. A lot of what’s left is, for lack of a better term, run by crooks or people who– they’re trying to pull the value out themselves. What we’ve found is, we’ve done a couple of lawsuits, I guess activism lawsuits. When you start to go looking in file cabinets and opening dusty closets, there’s a lot of things that these companies are doing wrong that if you hold them to the law, which is have these annual meetings– here’s one, a lot of companies will pay friends and family a similar or the same amount as a bonus. And you could say, by law, if you’re paying 10 people the same $200,000 a year, that’s actually a dividend that all shareholders should get, and the court sides on that’s actually what it is. And so, then it’s like, well, they need to pay this stuff out.

A lot of them won’t do it until they have that pressure. We’ve had some success with that. We’re actually in a lawsuit right now with Life Insurance Company of Alabama. Similar thing, I think they’re like 30% or 40% of book value, all sorts of crazy stuff. The case is moving forward, and we’ll see where it goes.

The mistake many of these companies make is, they hire the lawyer across the street. They hire somebody who has no idea what being a listed company means. That’s great pressure because then when they realize they have to comply with these things, the alternative is do we pay out some crazy settlement to shareholders or should we sell? What we’ve told Life Insurance Company of Alabama same thing is this story about Larry is, “Look, here’s all these comps. You’re worth so much more. Just sell. And then, it works out and this is behind you.” The problem with that is for many executives, there’s a status to being an executive, seen at the Country Club.

Tobias: Plus salary.

Nate: Yeah, plus the salary versus a private investor or independently wealthy or whatever that. So, they would rather be the CEO of a tiny little machine shop that’s on the rocks versus they have all the money from that sitting in an account, and they have to explain that they’re a private investor.

Tobias: Sounds pretty good to me. I guess it’s horses for courses.

Nate: Yeah. I know of a local bank here where that’s the case. The CEO loves being a bank president and loves walking around the Country Club as a bank president. This bank has just been undervalued forever. They were ranting about how interest rates needed to be 6% before they loan money, it’ll never happen again.

Tobias: Not in our lifetime.

Nate: Yeah, not in our lifetime. But he liked being an executive and so he’ll stick around.

Tobias: What about suggesting an LBO or something like that?


Finding Deep Value In Vacuum Systems

Nate: A lot of these companies need someone sophisticated to help them with those things. Back to what I was saying earlier about being creditworthy, if a company is creditworthy and they’re investable like that, then, yeah, an LBO is a totally valid way to go. And there’s little private equity groups that look to do this. I think as public market investors, we just see a small sliver. One of my brothers, he’s in sales at– it would be like a deep value company. They do vacuum systems for machine like– If you stamp a credit card, there’s the little rounded corners. When it goes from squared around to those little pieces–

Tobias: That’s what they do.

Nate: Yeah, they get sucked up into this vacuum system. They do it. The whole line goes down if they can’t suck these things up. This vacuum company, it’s crazy profitable and it was just run by a family. There was a little local private equity group that was buying industrials, and they paid some crazy price for them. My brother’s company is also– for a while there’s the fad of the hidden champions, and this company would really fit. They were doing probably a 15% or 20% return on equity, or maybe even more, and their only competitor is a company in the UK worldwide. There’s just two companies that do these systems in the world, but you can’t really grow the market. Everybody who has them has them and they break down, they get replaced. But it’s phenomenally profitable for the owner, but it’s in a Rust Belt city and it’s sleepy. He said the factory’s from 1940 and it’s just what it is. So, that would be a deep value type thing. But, yeah, the private equity company came in, and I think they loaded them up with debt, they started paying themselves dividends. And it’s that playbook.

Tobias: Did it run into trouble or it’s working?

Nate: It’s working so far. Yeah. It’s actually working so well, he told me during COVID that his company is floating the rest of the companies in the portfolio.

Tobias: Wow.

Nate: So, these companies exist. I think there’s a lot of investors who are like, “Oh, if I could just find the private companies, that’s what I’ll do. I’ll buy these and roll them up and roll up the little conglomerate and stuff.” I think it’s easier said than done, but they do exist. They’re out there. It’s just hard to find selling that– the people who are looking to sell, that’s probably not a good deal. You need to find a company like this where they’re not interested in selling and then you cold-call them, get to know the owners. and it’s like same as the net-net. “Hey, you could make so much more money.” They’d never thought about it. And it’s eventually you work with them and they realize, maybe I do just want to be at the beach house and not coming to the grimy part of town to build vacuum machines, but yeah.

Tobias: Is that how Oddball Stocks has evolved? Have you gone from really off-the-run listed stuff to– or how has it evolved?

Nate: We still look at all the off-the-run stuff, and that’s really it to the level– so, I have a partner with the Oddball Stocks, Colin. He is able to really dig into a lot of, I guess, nonprimary sources. A perfect example is, a lot of these companies all have been parties to lawsuits and you could request the lawsuit information. There’s all sorts of information in there that you would never see in any filing that help understand what’s going on in the business. So, we’ve done a lot of research into these companies and kind of have this database of information on all these unlisted oddball names, small-cap names that– ebbs and flows. There’s stuff at 15, 20-year lows, and then there’s things that were cheap a couple years ago that are a hard pass right now. And so, it’s all over.

Tobias: Oddball Stocks, is that a paid newsletter now? Is that what it’s evolved into?

Nate: Yeah. So, we write on the blog, I think, once or twice a week, and then the Oddball Stocks newsletter comes out, I think it’s five times a year. So, it’s once a quarter. And then there’s an extra issue around– It’s in the spring, we get all the annual reports.


The Genesis For CompleteBankData

Tobias: What was the inspiration for the Bank Data?

Nate: It was a problem I was looking to solve. Coming out of the crisis, I was looking at bank stocks to buy because they were so cheap, and I couldn’t believe that some of these small banks were so cheap and they were profitable. And I just wanted a screener. I wanted a screener with bank-specific stats, and I couldn’t pay for SNL. So, I looked, and they had the FDIC Call Report data. I thought I had done programming, I was working in tech, had a good buddy who’d done programming. He said, “Look, maybe we could pull this in and write our own screener, and then screen for these stocks.” That’s how it started.

So, it was one of those, like, I thought this would be, everyone would want to do this. I don’t think screeners really make any money. But that evolved into let’s build tools for investors. That evolved to let’s build in-depth market analysis for banks and lead generation for banks. And then now, with this deposit thing, it’s like, now let’s build deposit analytics and find similar customers. So, it keeps changing. It went from the screener that I was thinking we would sell for some $50 or $100 a month subscription, to now it’s a full-fledged enterprise product. There’s consulting hours around building this and integrating. We integrate with their own core systems and all this stuff. So, it’s changed dramatically.

Tobias: Do you still use it as a screener for banks to find undervalued banks?

Nate: I have poked around with that. One thing I found, and this is a secret I’ll just let out. But most of these small banks, the time difference between when they release their financials to the FDIC and when you receive your annual report or letter in the mail, sometimes is between like a month and two or three months. And so, if you’re just able to look at that information as it comes out, you have an enormous advantage on anyone else who’s waiting for the report in the mail.

Tobias: That’s a pretty good ad for your service.

Nate: It is. We don’t really do much with the investing stuff now. We’ve looked at risk, we had some risk characteristics. One thing that I thought was really interesting– In terms of valuation, when we had the product inside the Bloomberg Terminal, we wanted to do some valuation stuff on bank. Let me think what we had, we had three models. It was a relative model based on price to book, price to earnings. It was a dividend discount model. And then, it was this takeout model that we had. So we had each model on the page and the value, and then you could adjust all the inputs. And then, we had an average of those three, and that was the average valuation, what it should be.

So, the thing I found crazy, I started to run some stats on these is, of the banks we covered, and we had like 1200 at the time that were publicly listed, the average price of the model of what it’s “fair value” should be was within about 10% of the stock price for 90% plus banks. What that means is for about 90% of the market, it was right within a band of fair value. If you adjusted these inputs just a little bit, it would be almost exactly what the price is. So, it’s one of those– the market was pretty fairly priced and is pretty efficient. And then, you could go digging in that last 10%. Usually in there, it was either the assumptions were wildly incorrect, or something else was happening. That was an advantage to– you could take advantage of that by finding something in there.

Tobias: Have those opportunities gone away? Why not continue to pursue them?

Nate: It was really the ongoing cost of being on the Terminal. But in terms of the opportunities in banks– right now they’ve been written off. In some ways, you could say the market is correct because with rates where they are– I just saw that headline before we started talking that mortgage rates hit 2.98%. It’s going to be very hard for a bank to make money lending at 2.8, 2.9, 2.7, because once it drops a little bit more, you’re basically lending money for no return. So, then you have to go into commercial mortgages to make more. What we’re seeing right now is like 4, 4.2.

Interestingly, commercial rates have not really dropped. Year over year, they’re about the same from what I’ve seen, except for some outlier banks kind of buying market share. But that’s really difficult. I don’t know if you’ve ever looked at the Australian banks. I mean, they lend money–

Tobias: There’s only big four Australian banks.

Nate: Yeah. They make almost no money on lending money because rates have just been so low for so long. We might be headed towards that same thing. Now, you have to make all your money on other products.

Tobias: And those other products are riskier? Is that the problem?

Nate: Well, some of the products would be like overdraft and credit cards. But what’s crazy is, ramping up to this year, JPMorgan kept showing all sorts of great growth, they had earnings beats, and if you dug into that, a lot of it was on consumer lending, so they were pumping up consumer lending. And you make a bunch of– [crosstalk]

Tobias: Is that mostly unsecured?

Nate: Unsecured stuff, yes. Credit cards, personal loans. Now, they put out a press release and it was, “Hey, we have this enormous credit loss provision on our consumer credit because it’s deteriorating quickly.” Well, that was the rocket fuel on the way up. Now, that’s a problem because the marginal borrower is terrible at the top of the cycle. There’s an analogy I heard that bears repeating for banks. They said, bank lending is like going to a bar. It’s not the first drink of the night that gets you in trouble. It’s the shots of tequila as you’re ready to walk out the door, that are the problem. It’s so perfect because at the top of the cycle right as you’re ready to leave the bar, you say, “I’ll take a couple of shots.” That’s the problem. That’s what messes you up. Versus, if right before that you would have said, “I think I’m done, I’m just going to go home,” you would have been fine. That’s the difference between banks that they lend into disaster versus ones that step away.


Frontier Investing In South America And Africa

Tobias: Let me just go back to– this is a complete non-sequitur, but I’ve got the question written down, I want to talk about it. Your grandfather who invested in South American companies, do you have any detail on what he did?

Nate: He made a bunch of money on Wang computer, that was a tech company.

Tobias: Did it have a South American listing? No, this is pre-before that.

Nate: No, that was American. Then, he started buying these Mexican stocks. Telmex, I think is the name or Telefonos de Mexico. That was one. Then, that split off into América Móvil, which is, I guess that’s a cell carrier. I owned that for a while because I had been given this and I rode the wave on it. In the early 2000s, they started to put cell service in Colombia and Peru and all these different companies, as it was all taking off. Their earnings, it was a rocket ship. I want to say — my cost basis on that stock, it was like $1 or something. And then, it was like at $20 or $30 for a while. It was crazy. And the cost basis on the Mexican stock was a couple of cents a share. At one point, I remember selling it for $35 a share after college because I was like, what do I know about telephones? I don’t know anything.

Tobias: What attracted your grandfather to it? Why was he interested in South American tech stocks? Growth stocks?

Nate: I don’t even know. He was not tech-savvy at all. I just think he had a sense of like, this is the trend. I have no idea. I’ve asked that same question.

Tobias: Didn’t he have Fisher, kind of scuttlebutt growth of structure to what he was doing? It’s reasonably entrepreneurial to be hunting around for growth stocks. Even today somebody doing that, that’s pretty entrepreneurial.

Nate: Yeah. This was back in the 80s. I wish I could have asked that. He passed away when I was in high school before I got into investing.

Tobias: Oh, what a shame.

Nate: Yeah. But I’ve asked my dad, he doesn’t really care much about investing, and his siblings the same. They never thought to ask, “Why are you doing this?” It has fascinated me though. He did a lot of tech stocks. I had found some statements from back in the 80s. It was other up and coming tech names that became really popular. I don’t know how he found these– I have no idea at all.

Tobias: He wasn’t tech-savvy. He was interested in the business. He was interested in the growth of the business.

Nate: Yeah. I think that’s what it was. He must have known that these were good companies, that there was something there that they were going to revolutionize things. But he was not tech-savvy though. He never owned a computer, but he invested in computer companies.

Tobias: Did he speak Spanish?

Nate: No. What’s interesting though was, he was in World War II and then as he started to become successful after my dad and his siblings all moved out of the house. He’s in his late 40s or 50s. He and his wife traveled the world. So, they would go to all these different countries. He enjoyed haggling in the markets and just checking places out. My thought is, he had one of these– when you’re in Singapore in 1975, it’s like, “Look, this is a real place. It’s not a scary thing. There’s companies making money here too, and I could invest in that.”

Tobias: Get a souvenir while you’re there.

Nate: Yeah, he had more of the globalist mindset, and it worked out really well.

Tobias: He might be one of the great undiscovered investors.

Nate: He always bragged that his biggest moment in investing was when Wang computer had their proxy contest and he forgot to vote. The company was calling him because he owned some percentage of shares and they said, “Mr. Tobik, we need your vote before we could proceed.” He was like, “I’m a big enough investor that they were calling me to get my vote.” So, that was his claim to fame.

Tobias: There are these very famous, well– not very famous session, I should say, but there are these two– the Kiwi brothers, the Chandlers, who started out as– I think they had one of the first department stores in New Zealand, and they sold it and they had some money to invest and so they bought Hong Kong real estate when they were negotiating the handover. So, it was pretty– not 1999, it was like ’86 or ’87, and they could buy them for like one times rental yields, these high rises. Which then they made a huge amount of money out of. And then the next step they sort of thought, well, telephones are going to– the fax is going to revolutionize business. So, they thought where are the cheapest telephone lines in the world, and they found them in South America. So there’s an article about them in like, Institutional Investor or something like that. One of the funny–

Nate: Yeah, I need to write this down. That’s really interesting.

Tobias: It’s a great story about these guys, because they’re real frontier investors and they’ve gone and they’ve bought– It wasn’t even possible to invest in some of these countries. In order to make the investment, they had to find a UK fund that had a charter to invest into this country and they had to basically take over that fund, recapitalize that fund, and then push all the investment through the fund into this– I forget exactly which country, but South American. They bought the cheapest fax lines in the world and they’ve done spectacular. They’re multi-multi-billionaire as a result of doing all of this really frontier stuff.

Nate: That’s crazy.

Tobias: It’s interesting.

Nate: It is. I became really interested in the frontier stuff in 2012 when my second son was born. I bought this book, I think I threw it away. It was like, Investing in Africa or something. The book was all about how Africa’s really developing and it’s going to be great and it’s the next thing. I understood enough about Africa to spend some time googling. What I found was this company, I think it was Bralirwa, and I wrote about them. What I did was, I couldn’t figure out how do you invest. So, what the book was saying was, if you go to each exchange’s website, they would have a list of brokers who are licensed to trade. I want to say– hold on, let me just pull this up. I want to say they’re in Congo, maybe. And here it is.

I contacted all these brokers. They were just telling me, “Send me a check in the mail.” They’d email me from a hotmail.com address. Oh, it’s Rwanda. Here it is. So, it’s the Rwanda Exchange. And what do they do? They were doing Coca-Cola bottling, that’s what it was. The company, they had an 85% of earnings were paid out as a dividend. They had a 7% yield. They were growing crazy. So, I figured out how to invest. I emailed all these people, but I never pulled the trigger on it. And I wrote about it.

I started to get emails a couple of years later of people who I want to say it tripled or quadrupled. They said, “This was awesome.” I just sent the cheque to whoever the person in Rwanda was, and they had some brokerage account, and they rode the wave and it worked out. So, that stuff’s out there. You just have to dig a little bit, but it isn’t even– If you look at the Rwanda Exchange, whatever 30 companies are listed– they have them all listed with links to them. In most cases, everything’s in English, and you just have to be able to take the risk.

Tobias: Yeah, it’s real risk capital. You got to be prepared to lose the loss.

Nate: Yeah, the wire might never make it. That’s the risk. But it’s fun. I mean, here’s someone’s comment, “Rwanda could be the next Singapore of the world.” Okay, well, that investment worked out. But those aren’t things that you hold on forever. You try it out and if it works, just be happy that you’ve made a nice return.

Tobias: There’s a reasonable argument that Africa might be one of the great undiscovered growth stories of the world, and that– just to go back to the thing you’re saying about Mexico. A lot of countries in the world don’t have the legacy telephone networks built out because mobile cell towers don’t require legacy. They require a little bit of backhaul, but all telephones require backhaul. They don’t need to wire it, so they don’t have that competing. So, it’s much easier to roll out cell phones. Once you’ve got cell phones, you’ve got smartphones. They can make that great leap without having to build all of the infrastructure that a lot of the other developed nations have had to do. I think there’s some potential, I don’t know much. I’m making– [crosstalk]

Nate: You just said the thesis of this book, which was places develop at the baseline of modern technology. When, say, Central or Southern America developed, it was at a much higher level and they could get up to speed quicker. That’s the case with Africa. Now as it’s developing, they have cell towers, they have smartphones, they don’t need to wire the entire country. It’s ready to go. The big thing there is you could pay for anything on your phone, just like a Venmo. They escaped all of the crazy payment stuff that we’re stuck in because it’s from 50 or 100 years ago, and they started at a much higher level. So, that’s the argument, is if you fast forward 25 years, they’re going to be so far ahead of us because their legacy infrastructure is modern infrastructure. They have a better jumping-off point.


Investing In Oddball Stocks

Tobias: For Oddball Stocks, how are you filtering, sourcing, validating ideas?

Nate: That’s a good question. We’ve essentially just built up this database of names. The biggest thing is– we’ve had this database of names of unlisted OTC names. But if you start looking at OTC names, what we do is we look at the highest share prices first down to the lowest, so you’re going to waste so much time looking at things that are trading for 30 cents that are just junk. Don’t waste your time, but oftentimes a company with an $850 share price or $3,000 share price, that’s worth looking at. So, a good example is that–

Tobias: [unintelligible [00:53:05] with something like that.

Nate: Or right in your neck of the woods, Farmers & Merchants Bank is– I want to say they trade it like $5600 a share or $6000 a share. I just got their annual report yesterday and it says right on the front, California’s safest or strongest bank, that’s their tagline.

Tobias: That’s interesting. There’s a few big banks here.

Nate: Yes. But it’s this high share price and you look into these. Those are the ones that are interesting and then work your way down. Amongst the cheap stuff, like cheap in terms of nominal price, there’s some interesting things, but usually by the time you get down to those prices, you’ve already filled up your watchlist.

Tobias: What are the special risks to trading this sort of stuff because these are not listed, are they pink sheets?

Nate: Yeah, pink sheets sometimes. Some of them are listed. Some of these are just off-the-beaten path names. But the risk is really that they stop treating you as a shareholder and pretend you don’t exist. That’s true. The risk is, if you aren’t willing to do some work to potentially unlock value, you could just be stuck in it, until someone like us comes along and tries to unlock the value.

Now, the risk is that a lot of brokerages are cutting off some of these companies, and they say you’re not able to invest in them. Brokerages cutting off access is interesting in the sense of, it’s a negative and it’s an opportunity. The pool of investors who are going to be investing is significantly smaller. In some ways, it’s actually a better investor pool because most of them are very well educated as to what’s going on.

One thing we found with the Life Insurance Company of Alabama is that there’s the family, there’s a bunch of shareholders who maybe they own 100 shares from 1970 and they just had forgotten about it. Then, there’s this pool of sophisticated value investors who know the name. We got in touch with a lot of them and they said, “Yes, we absolutely want to be a part of this lawsuit,” because we’re all going in the same direction. So, I think in some ways, it distills the quality of who the shareholders are. The opportunity is if you are still able to buy them or you have a prime broker that could buy them, you can now get stuff a lot cheaper, because people are being forced out because Fidelity won’t let you buy it or– TD Ameritrade will let you buy almost everything. So, there’s still a broker that’s okay.

Tobias: How do you work with these campaigns? Do people invest behind you and you’re managing a pool of capital? Or do you split expenses with them? How does that work?

Nate: Right now, we just split expenses, just as a bunch of different entities. We’ve tossed around the idea of building out an activist fund that actually does this, that takes a pool of capital, invests, and as a fund works, to unlock the value of these different names. We’re kind of testing the waters on that. But I think that would be the next evolution of some of these.

Tobias: You could even do them on a case-by-case basis, just raise a special purpose vehicle for a single name.

Nate: Yeah. That’s the idea, is if you look at the universe of what’s out there, and you say– I’m just making numbers up. Let’s just say that there’s 10 companies that are perfect for this. You start to build your position in the things that you’re going to do a campaign against last and slowly build your position, and then come in with an entry position on a couple of the ones you’re going to do right away. In theory, over a lifetime of say five years, you’re hoping to realize value on most of those names. And then it’s like, we did the 10 campaigns, we’re done. We’ll spin that down. Here’s another 5 or 10. You know what you’re investing into it. It’s like, here’s the companies, here’s what our mandate is, this is what we’re going after.

Tobias: That’s interesting. It’s almost like a private equity venture capital approach to activism.

Nate: It kind of is. Yes. And we don’t want to own the companies. That’s the other thing is, we don’t want to be Empire builders and own a bunch of things and roll them up. A friend of mine always had this analogy. He said a lot of these names to him is like, “A vault in North Korea full of gold.” He goes, “To me, the vault is there and the gold is there, but you’re never going to get the money out.” What we’re saying is, in essence, we’re going to create a specialized SEAL team to go and get the money out of each of these vaults, and that’s it. Once it’s out, the mission is accomplished.


Investing In Silver Star War Coins

Tobias: I like that analogy. I saw yesterday someone has a silver deposit and rather than mining the silver and storing the silver, what they’ve done is they’ve turned into coins. So, you just store the silver in the ground, and you trade the coins based on where they think is the–

Nate: that’s interesting. Yes. I’ve been fascinated by the metals. We’re talking about like collecting and stupid value stuff like, “I’ll give this away too.” There are silver coins of– N-U-I-E, Niue I think is the name of the island. It’s somewhere in the Pacific. I want to say it’s part of New Zealand. They put Star Wars people on the coins, and each year they have a release. When they come out, they’re sold at the silver spot price. Earlier this year, you could buy a coin, and it would be $17 and it had– I bought a bunch of them with Darth Vader and then the other guy– I’m not a person Star Wars person, my kids are. The same kind of guys, the Mandalorian, he has that like helmet with the line in it. Anyways, I bought a bunch of these, and they roll off each year.

I bought the Darth Vader ones right before they were done selling them. Suddenly, there’s no more supply and prices on eBay– now the sale prices are $35 apiece. I basically doubled my money on Darth Vader. I need to wait until this year ends for this other Mandalorian kind of guy. But if you look back like two, three, four years, the prices are– they’re like $60, $100 a coin or more. It’s just incidental that they’re silver. I was explaining to my kids, I said, “Look, this is a perfect investment because we’re paying the silver value. And at worst, we sell it back for spot and we lose the spread.” I said, “But at best, some Star Wars collector wants to buy these things and we make some multiple of our money.” So, they love that. They think it’s great. That’s like a learning lesson for them.

Tobias: Absolutely fascinating, Nate. One of the most eclectic discussions I’ve ever had. If folks want to follow along with what you’re doing or get in contact, how do they go about doing that?

Nate: Yeah, so you could shoot me an email directly. That’s ntobik@completebankdata.com or check us out at oddballstocks.com or the newsletters, oddballstocksnewsletter.com, completebankdata.com. I post a lot on Twitter now, and my handle is just @OddballStocks.

Tobias: And you wrote a book on banking. Don’t forget to mention that.

Nate: That’s true. Yeah. I wrote a book, The Bank Investor’s Handbook. Basically, I did that because when I was getting into investing in banks– this is the story of my life. I can’t ever find the things I need myself, so I created. I wanted a simple book that told me how do I understand banks, how do I look at them as an investment. There was nothing out there except some old PDF someone wrote in 2002. I wrote the book. So, if you’re interested in learning about banks, or just understanding banking and bank investing, that’s a way to go as well.

Tobias: That’s fantastic. Nate Tobik, Oddball Stocks. Thank you very much.

Nate: Thank you for having me.

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