It was June 2000.

Buffett couldn’t believe the dotcom mania had gone on so long. The S&P 500 cyclically adjusted P/E ratio was 42x!

That's when Buffett noticed something interesting.

He could simultaneously buy a put and sell a call on the S&P.

Here's how it worked:

After two years, if the S&P rose by more than 42%, Berkshire would pay out. If S&P dropped by more than 5%, Berkshire would get paid. If S&P ranged from -4% to +41%, there is no winner or loser.

Importantly, Berkshire put up ~$0 on day 1.

Essentially, if the market fell a little bit, Berkshire would make money. If the market ripped to something like 50-60x+ CAPE, Berkshire would lose money.

Anything in between, no money changes hands.

The market fell, and on a $400mm notional bet, Berkshire made $60 million.

People think of the Coke-sipping Buffett as a simple man who invests in great businesses and watches them compound for decades.

But he’s actually a genius oddsmaker that dedicated his life to a single craft.

When Buffett was 20 years old, he and a friend worked up a plan to buy options on local farms just outside of Omaha city limits.

He would pay the farmers a modest annual premium for the right to buy their farm at double its current value any time over the next several years.

Omaha would expand over time. Certain farmland might rise in value enormously over a decade as it ceased to be valued as farmland, and was instead valued as land used for a housing development or shopping center.

Inflation could increase prices dramatically.

All kinds of things could happen.

Buffett intuitively understood the value of options in a complex adaptive system.

I like the idea of owning an option, too.

But there’s one problem. I hate spending money. The idea of laying out a small premium year after year with nothing to show for it makes me sick.

I want the option value on real estate, or securities, or anything for that matter.

I just don’t want to pay for it.

I want my options for free…

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So how do I get a free option?

Well, let’s think about this. If I want option-like characteristics, I need to own a security with the broadest claim on future events.

I can’t own debt, for instance.

If I own senior debt, the most I can make is the printed return on the debt agreement. So that’s out.

I can’t own preferred stock or some hybrid security. That only gives me some of the economic impact of an option.

If I want option value for free, I need to own common stock.

Here’s a fictional example.

Let’s say we have a business that manufactures machine components. It’s called MachineTech.

MachineTech owns 3 distribution centers to deliver its products.

It’s a subscale business. It has a market cap of $45mm. It’s got $8mm of net cash and it earns $6mm of annual profit. 6x earnings net of cash for a consistently profitable little business. Not bad.

The distribution centers aren’t properly utilized, though. MachineTech really just uses them as a way to reduce COGS. They aren’t thinking about allowing third parties onto the dock. This could be another revenue stream, but nobody in the business wants to take on the project.

The CEO is 68 years old, and he’s got $20mm of cash stowed away in his own piggy bank from a lifetime of running this business. Plus he owns 40% of this $45mm company which will probably be sold in the next 15 years. He’s rich, he doesn’t need the hassle for the potential to make a few more bucks.

Then an enterprising young real estate investor comes along one day. And he offers MachineTech $30mm of cold hard cash to buy the three distribution centers. Mr. CEO accepts, and a $30mm cash windfall showers our little business.

These distribution centers were owned free and clear. Anyone with an internet connection could’ve figured out the square footage and comparable prices in the region.

It’s pretty clear that the value of the RE was not being reflected in the share price at a $45mm market cap.

That implies an adjusted enterprise value of ~$7mm ($45mm market cap - $8mm cash - $30mm RE).

Think about it.

If MachineTech had been renting its distribution centers, $45mm might have been a reasonable valuation. But it owned them outright and the market acted like it didn’t.

There’s your free option.

Ideal Setup

Alright, so we’ve established the best way to get our free option. Own common stock.

Now we need to find companies that have some hidden or undervalued asset. This can be real estate, excess cash, marketable securities, royalty interests, or anything along those lines.

The best way to find a list of these businesses is to look at every company on an exchange. Sometimes they screen, but usually they don’t.

The “free option” business is generally an older company. That excess real estate needed to build equity over and above book value. Shareholders needed to get tired and cycle out of that company with the excess cash equal to 75% of its market cap.

Personally, I like businesses that are heavy on cash, light on debt and continuously earn a profit.

I don’t want my free option to get thrown away because the company hits a slump and can’t make its debt payments.

Remember, we want the broadest claim on future events.

The best way to have the broadest claim is to own common stock with no senior capital instruments. If you own the common and there is no pref or debt standing between you and the money tree, your path will be that much easier.

Funny enough, companies that tend to hoard cash or excess RE, also tend to avoid debt.

Again, we want a business that continually earns a profit. That option will be worthless if the business runs itself into the ground before we can realize the excess value.

Investor Psychology

If you own a book of these kinds of stocks you’ll be accused of owning a bunch of value traps.

I have a different take on that. I’ve owned a whole bunch of “value traps” in my life. I’d have to look at the numbers, but I’d say ~15% of these “value traps” end up having some value realization event each year.

Maybe they get bought out, or distribute the excess cash, or do a sale-leaseback and pay a special dividend to shareholders.

So let’s say you owned 8 of these “value traps” and one of them re-rated each year. You have a book that’s basically flat (maybe up 1-2% with dividend) and then one stock that is up 120% as it gets bought out.

That would leave you earning a 16.5% IRR for the year. And you’d be earning this while taking very little risk.

It’s funny, people would rather pay 90 cents on the dollar for a business where they know what will happen with the cash flow, than 40 cents on the dollar for a business where they don’t know what will happen with the cash.

I think if you find a business that is debt free, cash rich, consistently profitable, and sitting on some unencumbered excess asset - that business is unlikely to do something stupid with the windfall from realization of an excess asset.

And if they do something stupid, it won’t be the day after they sell the excess asset. The stock will very likely re-rate and you can sell before management makes its next move.

I’ll pay 40 cents on the dollar all day long to get into bed with some shrewd cash hoarders.

But people hate this idea because they can’t stand to see the stock go nowhere for 3 years. It drives them nuts.

Said differently, people will pay a premium just for the perceived certainty of knowing where the cash will go. Of course, what they fail to realize that their “certainty” is more than offset by the premium you pay.

Buffett says “price is my due diligence”. And he’s right. Nothing matters more than the price you pay. Of course you can’t partner up with crooks or pirates just because the price is cheap.

Over time, if you underpay you will do well. If you over pay, you won’t.

Final Thoughts

I’ve written about all kinds of “free option” stocks on this page.

A few months ago I found a way to buy crypto assets for less than zero dollars.

I’ve talked about companies that own real estate worth multiples of their market cap.

I consistently mention profitable businesses selling for less than net cash.

I’ve covered businesses with cash and marketable securities substantially greater than their market caps.

Every time I buy one of these stocks somebody yells out “value trap!”. And every year that passes, I have one more value trap plucked from my basket at a big premium to whatever I paid.

If you buy consistently profitable businesses with strong balance sheets at a material discount to their private market value, you should do well over time.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THESE STOCKS OR ANY OTHER SECURITY. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

I am pitching that rare “wonderful business at a reasonable price”.

It’s a business with a household name. In fact, I would challenge you to even name a competing product.

And you can have it for a 7.5% FCF yield.

Management has said it intends to grow revenue 7-10% per year.

It takes no capital to operate.

The stock is trading at a depressed multiple as it was a recent spin-off from a Fortune 500 company. The spin off created forced selling.

Best of all, management has committed to returning 75%+ of FCF to shareholders.

Here’s the simple truth.

If a business pays you 7.5%, and that FCF can grow 7-10% per year, you will earn a 14.5-17.5% IRR, before accounting for any changes in FCF multiple.

It’s a business that is reminiscent of Moody’s or FICO. And I believe it’s for sale at the wrong price.

Today’s stock is…

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I went to crappy public schools in a rural part of Appalachia.

Then I went to a university with a 99% acceptance rate. I was proud to be in college at all. I didn’t know how far behind the curve I was.

After I graduated, my starting salary as an accountant was $48,000. I rented an apartment on the wrong side of town for $485/month, and never felt richer in my life.

The most money I ever made from an employer was $97,000. Eventually, my problems with authority and inability to accept anyone else’s point of view led me to work on my own.

I’m in my early 30’s now.

I don’t know the exact figure, but I believe I’ve contributed ~$85,000 into IRA accounts in my life.

My IRA balances today are over $1,000,000.

That’s not meant to be a boastful statement. There are plenty of folks with far greater balances than mine. I’m just a normal guy of average intelligence. Seriously.

There’s been a lot of discussion lately about capping IRA sizes, and I want to share my story on the off chance that someone who matters might read this and give a shit.

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The proposed legislation aims to force a tiered withdrawal of accounts greater than $10mm.

I have ~40 years until I reach retirement/RMD age.

Even if there is an inflation adjustment mechanism in this legislation, I think it’s highly likely my IRA balances will ultimately exceed whatever threshold is set in my lifetime.

I want to again emphasize that I only ever had one real job. I was an accountant.

I don’t own interests in private companies.

I didn’t load founder shares into an IRA prior to some IPO.

I didn’t backdoor tens of thousands of dollars into a Roth.

I bought publicly traded securities with publicly available information.

I followed the letter of the law, and the spirit of the law.

But if you tell the lay person that you turned $85k into $1 million, they’ll look at you the way a cow looks at a new gate.

The human brain does not intuitively understand compounding. And it especially doesn’t understand the outcomes of compounding at high rates.

There are 58 million American households with an IRA account.

Put 58 million accounts on a bell curve and 150,000 will end up with outcomes that are three standard deviations from the center. I believe my outcome based on my age has been a ~3 standard deviation event.

To get an extraordinary outcome you need some extraordinary feature. My extraordinary feature was obsession.

I’ve spent virtually every waking hour of my adult life thinking about investing in some fashion. If it wasn’t the sole thought at a given moment, it was in the back of my mind rattling around somewhere.

I spent many thousands of dollars traveling the countryside to podunk-ass towns in Ohio or Nebraska or Indiana or God knows where, to be the only guy at an annual meeting and get an audience with a CEO for 12 minutes - with the sole purpose of looking a man in the eye and making a judgement as to how he would treat my precious capital.

I rolled the dice. I took real, calculated risk. I wonder if any government body would’ve stepped in to reinstate my IRA balances had I wagered in the wrong direction?

While my ownership stakes were passive, their impression on my psyche could not have been more active. I don’t know how many times I’ve walked into a wall or caught myself driving to no place in particular when my wife sent me out for an errand.

It has always been with me.

So, while I capitalized on the efforts of others, it has come with its own personal toll.

If my outcome has been in the top 1% for my age group, it’s only because my effort has been in the top 0.1%.

I didn’t make the rules of this game.

I didn’t lobby for them.

These rules were made by a class of person that I’ve never met and will never fully understand.

Just as they’ll never fully understand me.

I played by the rules, and now they want to change the rules halfway through the game.

My first reaction is to get angry. I see the future and realize it will cost me a ton of money.

If an IRA cap isn’t created now, I believe there will be one at some future point in my life.

If you had shown me the IRA legislation originally laid out in the 1970’s, or the Roth legislation introduced in the 1990’s, I would’ve told you that we will one day reach a place where certain folks have hundreds of millions of dollars in their accounts.

Unless you’re a complete dumbass, you’ll realize that a certain subset will have extreme outcomes. Extreme outcomes when applied to compound interest result in very high dollar balances.

My second reaction, after a deep breath, is to admit that I’ve been the beneficiary of federal tax dollars designed to help youth in underserved communities. Someone had to put up those dollars.

So, when my time comes to pay, I’ll grit my teeth and fork over my share.

My heart hates it, but my head believes it’s a reasonable initiative.

My main goal in writing this article is to help shape the perception of what a “mega-IRA” owner looks like. Sure, there are the Peter Thiel’s of the world. But there are folks like me, too. Or at least an older, more financially mature version of me.

If you passed me on the street, or stopped me for a conversation, you might realize that I’m just like you.

Above all else, I’m grateful the IRA was invented at a point in time where I could take advantage of it. It’s been an incredible investment vehicle.

A small amount of money invested in a basket of profitable businesses at a reasonable price, growing tax deferred, is nearly destined to turn into a big pile of money someday.

If you’ve got kids or young people in your life, do them one of the best financial favors you can.

Get them to open an IRA, and get them to start contributing.

It will change their life.

It changed mine.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

• Share Price: $100

• Net Cash: $102

• Free Cash Flow: $23

• Gross Margin: 95%

“You will see things in public markets in your lifetime that you will not believe.” - Warren Buffett

I’ve pitched all kinds of stocks on here that are valued as if they’re dead.

But I don’t think I’ve ever pitched one quite like this.

In today’s instance, net cash represents the entire market cap. Nothing new there.

It earns a nice profit, but the market seems content to value the operating business at $0. Again, nothing new.

So what’s different?

Today’s stock has consistently earned gross margins over 90%.

That is extremely rare.

This business operates a time tested business model - one that has been around for hundreds of years, and has a long history of producing outsized returns on invested capital.

So, why does the stock trade so cheap?

Is it in Bangladesh or something?

Nope.

It’s right here in the United States.

Shares recently got crushed due to an event that has no bearing on unit economics or future cash flows of the business.

It’s just one of those times where public markets create a unique opportunity.

Today’s stock is…

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Warren Buffett graduated from Columbia in 1951. He had $19,700 to his name.

Over the next five years, he would compound his net worth at a rate of 55% annually.

He bought things like Western Insurance at 1x earnings. He bought Greif Brothers Cooperage at 2.5x earnings.

When he launched his investment partnership in 1956, he had today’s equivalent of $1.3 million under management.

But as his assets grew, the game got harder. He became an activist, forcing businesses like Sanborn Map and Dempster Mill to do what he wanted.

He was also forced to own more securities. By the time Buffett became a millionaire (1962), his partnership owned stakes in dozens of businesses:

Seeing as how Buffett is the greatest investor to ever live, he found a way to evolve his strategy, go up market and continue to deliver world class returns to his investors.

He compounded his investors’ capital at a 24% CAGR for more than a decade.

But as the market took off in the late 1960’s, even the Oracle knew he couldn’t keep up. And he didn’t want to deal with the fallout that would inevitably come when prices shot back.

So he closed his partnership in 1969.

And he waited…

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It took a while for the frothiness to unwind.

In the early 1970’s the Nifty Fifty were all the rage. Investors would seemingly pay any multiple for blue chip growth stocks (funny how history repeats itself).

Polaroid was selling for 91x earnings.

McDonald’s sold for 86x earnings.

Johnson & Johnson went for 62x earnings.

Then the music stopped.

The market was down nearly 50% from its highs in 1972.

That’s when Buffett got busy buying.

Blue Chip Stamps

Buffett’s most important purchase in the early part of the 1970’s was Blue Chip Stamps as the zero cost float provided leverage for other investments. He added to his position throughout the decade. Some of the prices paid were absurdly low.

During 1974, Blue Chip’s market cap got down to $23mm.

(Table came from Turtle Bay - it’s an excellent website run by an honorable friend)

• Blue Chip traded down to 2x EBIT.

• Cash and securities ($105mm) net of all stamp liabilities and debt ($79mm) were greater than Blue Chip’s market cap.

• Shares were trading at 34% of book value.

Ogilvy & Mather

Buffett bought O&M throughout 1973 and 1974.

His basis valued the business at $29mm.

Ogilvy’s enterprise value was roughly the same as its market cap. So, Buffett was buying the shares at ~3x EBIT.

O&M grew its operating profit at a 23% CAGR from 1970 to 1974.

Buffett’s shares doubled in value within 2 years of his purchase.

Interpublic Group

Interpublic fell 73% from its 1972 highs when Buffett began buying.

Buffett’s basis valued the business at a $25mm market cap. The enterprise value was only $19mm. Interpublic earned $14.8mm of operating income in 1973.

Buffett’s investment was up 10x in 10 years!

Newspapers

Buffett famously invested in The Washington Post at an $80mm valuation. He said the Post could’ve easily sold for at least $400mm in a negotiated transaction at that time.

The Post was doing $28mm of EBIT when Buffett invested, so it was selling for ~3x operating income.

Affiliated Publications was selling for a similar valuation as the Post and had a dominant franchise.

Then there was Knight-Ridder Newspapers. Look at its valuation:

• Market Cap: $540mm

• Enterprise Value: $480mm

• EBIT: $111mm

• EV/EBIT: 4.3x

Final Thoughts

Berkshire’s book value compounded at a 30% CAGR from 1973 to 1985.

We’ve all heard the stories of See’s, GEICO and The Washington Post, so I won’t go over those companies.

I wanted to show financials and valuations for dominant household names so we can all understand how cheap stocks were at this point.

The 1970’s made Buffett, but he was also perfectly prepared for the opportunity.

He didn’t stretch to buy businesses at lofty valuations. He waited for the prices to come to him.

This was a difficult time for American business, but it was hardly unprecedented. I believe there is a reasonable probability that businesses get this cheap again.

The good thing for small investors is that you don’t have to wait for blue chips to get bombed out. You can find cheap, durable, profitable businesses today.

Here’s a business I wrote about recently.

At the time it was trading at a 77% of its net cash and investments and less than 5x EBIT. It was also buying in shares in a large and systematic manner.

Amazingly, even though the stock is up 50% in the last year, its even cheaper today.

Now it’s trading at 62% of net cash/investments. It’s got a profitable business, and they keep buying in ~8% of the stock each year. I’m intending to write an update next week, but for anyone doubting these great bargains still exist, you should read the original piece here:

Cheap Stock For Sale Today.

Thanks for reading.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS ARE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

Idea #1:

• How to buy bitcoin for $6,306.

Idea #2:

• 5.9x EV/EBITDA.

• Repurchased ~5% of shares last quarter.

• Masterful capital allocation.

Idea #3:

• Cash rich industry leader at all time low valuation.

• Cyclical bottom likely behind us.

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Here were the metrics:

• Purchased at 38% of NAV.

• 3.5% interest-only, fixed rate debt for five years.

• 4.3x NOI.

• 8.4% dividend yield.

• 94% occupancy.

• 54% LTV.

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Why would a stable, consistently profitable, cash-rich, low-debt property sell for that kind of valuation?

Simple.

It was inside a tiny publicly traded REIT.

Worse, it was a Toronto listed REIT that owned a 51% interest in a Florida aparment building.

And the REIT only owned one building.

Said differently - it was a bastard asset in a forgotten market.

It was called Sun Residential Real Estate Investment Trust.

Here was the basic setup:

• Market Cap = $6.7mm

• Building Appraisal (51% ownership) = $29.5mm

• Debt (51% ownership) = $15.7mm

• Property Equity = $13.8mm

So the stock was priced at 48% (6.7mm / 13.8mm) of the apartment building’s equity value.

But there was also cash and other assets in the business.

All told, Sun Residential was selling for 38% of its net assets.

Cash on the balance sheet was $3.3mm - nearly half of the market cap.

And our share of NOI was $1.5mm - and growing!

The real value was in the debt. It had a super low rate as they financed the building in the middle of Covid.

And somehow their lender allowed for interest only payments through 2029.

So when I showed up to buy shares in 2024, we still had another 5 years of interest only financing.

The math was simple.

The business had $3.3mm of cash. By the time we had to refinance the debt in 2029, the business would’ve earned another ~$3.5mm of cash earnings.

Cash + earnings over the next five years was likely to exceed the market cap.

You got the building plus 5 years of potential property appreciation for free.

Within a year, Sun Residential sold its interest in the apartment building for $15.3mm.

Shortly thereafter, the profits were distributed to shareholders.

Investors in July 2024 earned an IRR greater than 100%.

And they did it while taking very little risk.

It’s the kind of thing that can only happen in public markets.

And it happens all the time.

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DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN THESE SECURITIES. I MAY BUY OR SELL THESE OR ANY OTHER SECURITIES AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS ARE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

• High teens ROE.

• 30% of market cap in cash.

• Dominant industry leader.

• Valuation near all-time lows.

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Wall Street hates a certain kind of business.

Wall Street loves the high margin, predictable, steady grower. It loves the business where it has near certainty around next quarter’s earnings. If you combine this kind of business with some sexy sounding new “thing”, Wall Street loves it even more.

I love them too.

But there’s a problem.

They get bid to the moon.

And when stocks get bid up like crazy, bad things happen. The new “thing” is sexy, and prone to disruption.

Take Saas for instance.

Look at this chart from Jamin Ball back in October 2021:

The median stock on this list is down 65% since this chart was posted.

Only two of the ten companies listed have seen an increase in their share price over this 5 year period.

If you buy this kind of stuff, you are begging to get your ass blown off.

What if instead of buying the business Wall Street loves, you bought the one it hated?

You’ve got to find the right kind of business, though. Not some money losing pile of garbage.

Let’s go find a business in an unsexy industry. Better yet, let’s find a cyclical business in an unsexy industry.

An industry where stocks boom and bust regularly.

And let’s take the market leader in that industry.

One that’s antifragile.

The low cost producer.

When the industry breaks, it emerges stronger.

And let’s make sure it’s got a fortress balance sheet. Piles and piles of cash - and no debt.

It’s an industry that isn’t prone to disruption. AI doesn’t matter here.

We buy a cash rich, market leader when we’re near the bottom of the cycle. And when the industry picks itself up off the floor - as it always does - we watch the share price rise.

If you zoom out, you’d love to own this business.

Something that earns high teens ROE over a cycle. The industry leader that’s nearly certain to take market share over time based solely on the structure of the industry.

A stock that has outperformed the market anytime it’s been priced at these levels previously.

But people don’t want it because they are all prone to the same short term biases.

Today’s stock is…

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1. EV/EBIT below 5x.

2. Net cash on the balance sheet.

3. Long history of profitability (earning a profit 90%+ of the time).

4. Reasonable capital allocation.

Today’s stock has all those characteristics, and more.

• Shares trade for 4x EV/EBIT.

• Net cash is more than 40% of the market cap.

• Earned a net profit for 30+ consecutive years.

• 15% of the float was repurchased in Q1.

Operating margins are consistently north of 30%, and when you adjust for excess cash, the business earns near infinite returns on incremental invested capital.

Strange things happen in public markets. I can’t imagine this business being sold anywhere near the current share price in a negotiated transaction. In fact, comparable businesses are being taken private at much higher multiples.

Management must feel this way too, as they are inhaling every share they can get their hands on.

Today’s stock is…

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- Chuck Prince, CEO Citigroup; July 2007

Here’s the simple math.

Assume you want to earn a 10% return on your investment.

Let’s say you pay 32x earnings for a business with a 1% dividend yield.

In order to achieve your 10% return, you need two things to happen:

1. Business grows earnings at 9% per year.

2. Multiple remains at 32x when you decide to sell.

That’s not impossible. Some businesses grow earnings at far greater than 9% for a very long time.

But what if the business you were buying had not demonstrated any ability to grow at that pace? What if this were a large, stable business that really can’t grow earnings more than 6-7% per year historically?

Worse yet, what if the comps for this business trade at 15x earnings, instead of 32x?

Well, then, you might be in trouble.

As you probably guessed by now, I’m not talking about the valuation metrics of one particular business.

I’m talking about the S&P 500 today.

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There are a few counterpoints to be made to my argument.

AI is going to change the world. It’s incredible technology. But can it permanently lift the growth rate of corporate earnings from 6.5% to 9%? That’s a huge task when your economy is already the largest in the world.

In the short to medium run, will AI cause more destruction in corporate earnings that expansion? I don’t know, it’s at least a possibility.

Then we’ve got the whole ciruclar nature of suppliers investing in customers - a practice that I believe is likely to cause more harm than good. The bulls say these circular relationships are immaterial to the large companies. But if it’s immaterial, why would you engage in the behavior at all?

And finally, we’ve got reinvestment risk associated with some of the largest companies in the index. Google earned $130B of net income in 2025. In 2026, it expects capex to be ~$185B. Amazon is worse. It earned $78B of net income last year and is expecting to spend $200B on capex in 2026. Meta earned $70B last year and they’ll spend $135B on capex this year.

These companies represent material portions of the index, and their earnings are becoming increasingly reliant on the prosperity of AI.

If your business earns $100B of profit but ultimately invests that $100B in a zero return investment, your business may as well have earned zero.

I think it’s extremely unlikely that AI capex results in zero incremental profit in the long run, but it’s not at all certain that these companies will achieve reasonable returns on the incremental capital deployed.

But I don’t want to spend too much time trashing the index when there are more worrisome things happening in markets.

Which brings me to my next point.

Spacex IPO

“So let’s just take a company that has marvelous prospects, is paying you nothing now, and you buy it at a valuation of 500 billion. Now, if you feel that 10 percent is the appropriate rate of return, that means that if it pays you nothing this year, but starts paying next year, it has to be able to pay you 55 billion in perpetuity. But if it’s not going to pay until the third year, then it has to pay you 60.5 billion in perpetuity to justify the present price. Every year that you wait to take a bird out of the bush means that you have to take out more birds. It’s that simple. And I question whether people who pay $500 billion implicitly for a business by buying 10 shares of stock at some price, are really thinking of the mathematics implicit in what they are doing.”

- Warren Buffett, Berkshire Hathaway Annual Meeting, May 2000.

Spacex is set to go public next month.

I read the S1 and felt like I was watching “Whose Line is it Anyway?”. You know, the show where everything’s made up and the points don’t matter.

This was my favorite excerpt:

Spacex is eyeing a ~$1.8 trillion valuation, from the latest reports I’ve seen. SPCX did $18.7B of revenue and generated a net loss of $4.9B in 2025. Free cash flow was severely negative: -$15.8B (adjusting for stock-based comp).

So the business is valued at ~100x revenue, and revenue has been growing at a ~34% CAGR over the last two years. Q1 2026 revenue grew 15% yoy.

The business has never sustained profitability, as evidenced by a $41B accumulated deficit.

The term “retained earnings” does not appear in the S1.

Let’s go back to our Buffett quote at the top of this section. If you pay $1.8T for a business, and want a 10% return, you need it to send you $180B in year one. If it sends you $0 in year 1, you need it to produce $198B in year 2, and every year after that until the end of days. If year 2 also produces $0, you need year 3, and every year beyond that, to produce $218B.

I don’t think it’s likely that SPCX will reach profitability in the next couple years.

No company on planet Earth has ever generated more than $200B of profit in a single year.

Historical Precedent

I was trying to find a way to frame the insanity of the SPCX situation.

According to ChatGPT, General Motors (in the 1950’s) was the largest company in American history when measured on GAAP revenue as a percent of GDP.

This isn’t a perfect metric, but I think it helps us get a rough feel for how large a company can become as compared to the ecosystem in which it exists.

GM’s revenue was equal to ~2.3% of American GDP. This shouldn’t be surprising as GM had ~50% market share in the second most expensive asset Americans owned.

Walmart’s revenue is ~2.2% of GDP today. Standard Oil was estimated to be ~1-2% of GDP.

Now let’s take this metric and apply it to SPCX.

U.S. GDP is ~$32T today. Historically speaking, it would be difficult for a single business to earn more than $750B in annual revenue.

But SPCX will conquer the world (and Mars), so let’s assume it shatters the record. Maybe SPCX revenue can be 3% of GDP, beating out every business in history by 30%!

That would imply SPCX revenue of $960B. So what kind of profit margin can we expect for this business. Let’s take a look at the segment data to get a clue:

SPCX consolidated gross margin is 49%. Its only profitable segment carries a 48% gross margin.

We’re dealing with an asset intensive business here. Can gross margins be meaningfully greater than 50% in the long run? I am not qualified to say yes or no on that.

But let’s say SPCX is a killer business at scale and it can achieve 20% operating margins, and 15% net margins. And let’s say it takes us 10 years to work our way there.

So, at a $1.8T valuation, we need $180B of cash in our pocket this year to generate a 10% return.

If we are unable to earn an cumulative profit above $0 for the next 10 years, then year 11 (and every year after that) needs to pay us $466B!

Alright, so we need $466B of profit in year 11. At 15% net margins, that means we need $3.1T of revenue.

If nominal GDP compounds at 7% for a decade, then GDP will have grown to ~$64T. So, SPCX in year 11, will need to have grown its revenue to ~4.8% of GDP ($3.1T / $64T) - a percentage more than double any company in history.

To get to $3.1T of revenue in 10 years, SPCX will need to grow its top line at 67% annually. The past couple years have shown revenue growth in the 30’s…

Hmm, this is getting difficult.

So to recap, here’s what we need to justify today’s valuation:

1. Revenue growth rate to double.

2. Find a path to 15% net margins.

3. Find a way to swallow more of the economic pie than any company before you ever has.

4. Don’t burn too much money along the way.

Of course it’s a little more nuanced. My example shows SPCX getting to a certain profit level in year 11 and then not growing at all beyond that. If they have staying power, profits ought to grow in time.

The issue is that if you get to this massive size, you won’t be able to grow very fast. You will have consumed so much of the world’s economic resources at that point that growing at a high clip won’t be possible.

Additionally, I’m using a 10% required rate of return for my math. I’m guessing the incremental buyer on day 1 might scoff at a 10% hurdle. His required rate of return might be significantly higher. A 15% discount rate requires $1.09T of year 11 profit in my above example.

And lastly, I’m assuming you can buy at $1.8T on day one. My guess is that this thing pops like crazy when it opens. In which case buyers pay a higher price and the math becomes even harder.

Bubble?

I see some variation of this statement thrown around a lot lately:

“We can’t be in a bubble if this many people are calling it a bubble.”

I believe that’s just the social media algos pushing you content that you’ll engage with.

This is the first time in our history that we’ve had such widely distributed media platforms. Fintwit wasn’t a think in 1999 or 2007.

Now more than ever, you can live in your own little echo chamber. If you believe we will colonize Mars, there’s a dozen podcasters out there that believe the same thing.

It’s clear to me that there is a lot of wacky pricing going on out there. Micron is up 10x in a year. From the outside looking in, the VC landscape appears to have abandoned any startup that isn’t AI related.

The largest, most cash generative businesses in the world have decided to invest every dollar of profit into this ecosystem.

The market is increasingly reliant upon the outcome of this one industry.

I think the S&P is overvalued.

What Do We Do?

“Price is my due diligence”

- Warren Buffett

My friend Joe Raymond wrote a case study about BBDO/Omnicom recently.

You can read it here: BBDO Case Study.

BBDO generated an 18% IRR for 57 years!

The business had a consistently high ROE. If you were a buyer in 1969, you experienced a 20% IRR for the first decade of ownership.

But if you were a buyer in 2000, you earned a 1% IRR for the first decade of ownership.

Why?

Because BBDO traded at 7.5x earnings in 1970. And in 2000 it traded for ~30x earnings.

Price matters.

Buying stocks at 30x earnings or 100x revenue doesn’t work out well, on average.

So, what do we do?

As Munger says - “Invert, always invert!”

If you buy stable business at 6x earnings, and those earnings are either returned to you or intelligently reinvested in the business, you will earn a ~17% return on your investment.

You won’t have to make heroic assumptions about the future.

Let mean reversion be a tailwind, instead of a headwind.

My Mount Rushmore of investment characteristics are as follows:

1. EV/EBIT below 5x.

2. Net cash on the balance sheet.

3. Long history of profitability (earning a profit 90%+ of the time).

4. Reasonable capital allocation.

I’ve found that investments meeting these criteria work out really well on average. There are very few companies that can meet this threshold. They’re mostly small, unknown businesses.

You won’t hear about them on CNBC. People won’t mention them at parties.

But they can create outsized returns with limited risk. And that’s the whole point of the game after all.

Yes, I do believe we’re in a bubble.

Yes, I do believe asset prices should be lower.

But I’ve felt this way for a long time, and I’ve been wrong the whole way.

I’m making a macro call - and my track record in making these kinds of statements has been horrible.

Fortunately, it doesn’t change the way I invest. I’m nowhere near intelligent enough to buy things that require conviction about future decades.

I’m more or less always fully invested. So it’s not like I’m taking my capital and running for a bunker.

I just think my life will be a lot easier if I buy underpriced assets.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

• How to buy a basket of blue chip stocks at 64% of market value.

Idea #2:

• How to buy bitcoin for $11,000.

I’m fascinated with finding an edge in public markets.

It’s amazing what kinds of mispricing exists if you’re willing to commit your professional life to sniffing them out.

Sometimes this edge comes from acting first on a press release or new piece of information. I did that a lot when I was younger, and I still do it now though it’s a bad use of my time. I like to sit there and refresh the news on OTCMarkets. At this point I know most every company worth following on the OTC.

I’ll have a suspicion that XYZ corp is going to post a blowout quarter (as many of these businesses rely on 1 or 2 trackable variables that drive profitability). I’ll watch the numbers hit, digest them within 2 minutes then run to the bid and make a few thousand bucks in a couple days.

Again, not a great way to spend my time anymore, but I can’t help myself.

It’s a lot more rewarding to find mispriced assets with more scale.

I don’t care what they are. If I can understand them, and I think they’re underpriced, I’ll buy it.

Today I want to go through a couple of real world ideas that are available to investors right now.

The first one is a basket of largely American blue chip stocks that are on sale for a 36% discount to the market.

I like this kind of thing, because it’s large enough to deploy real money and it’s a lot safer than the S&P or Nasdaq at these lofty valuations (in my opinion, not investment advice).

The second is even more extreme.

How you can buy bitcoin for $11,000.

Let’s dive in…

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Buffett is the greatest investor to ever live. Hundreds of thousands of people have tried to replicate his investing style.

But when you read about old Buffett investments you only get the mega winners.

American Express, Sanborn Map, Coca-Cola, Apple, etc.

Those were all great, but that’s not what young Buffett was doing most of the time. Sure, he would find the rare Mid-Continent Tab Card selling for 1x earnings and growing 75% per year.

Or Western Insurance - selling for less than 1x earnings.

But those are extreme outliers.

Most of the time it was basic, boring value. Companies selling for single digit multiples and less than their sum-of-the-parts.

That’s what we’ll look at today.

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East Sullivan Mines - 1962

1962 was a monumental year for the 30-year-old Warren Buffett.

It was the year he became a millionaire. A million dollars back then is more like $11 million today.

Pretty impressive.

He’d started is partnership in 1956. And he’d destroyed the market.

While the Dow was growing at a 9% rate from 1956-1962, Buffett earned 21% for his clients.

His own net worth had compounded at a 35% rate over that period, as the leverage that comes from managing other peoples’ money had magnified the growth of his net worth.

At yearend 1962, the Buffett partnership was managing $9.8 million.

East Sullivan was a $106,000 position.

The Business

East Sullivan was a mining business that produced copper, gold, silver and zinc.

It was headquartered in Quebec and formed in 1944.

East Sullivan had profitable operations. In 1962, it produced millions of pounds of zinc and copper along with 4,600 ounces of gold and 168,000 ounces of silver.

In 1962 the business had 33% EBIT margins. 1961 had 20% EBIT margins.

It was a nice little business. Of course, margins would swing wildly in this kind of operation, but still, it was doing well when Buffett owned it.

Valuation

The business had cash and investments in excess of its market cap. It was profitable and paying a sizable dividend.

Family Control

East Sullivan’s investments were largely made up of ownership in affiliated companies.

Members of the Beauchamin family made up the majority of the management team and the board.

Then there were a bunch of related businesses that were also interconnected and controlled by the Beauchamin family.

For example, East Sullivan was 36% owned by Sullivan Consolidated Mines.

East Sullivan itself owned 40% of Sullico Mines.

All told, East Sullivan had ownership in six affiliated companies. Importantly, each of these businesses was profitable.

It reminds me a bit of Getty Oil, which was another Buffett investment that I wrote up recently: Getty Oil Case Study.

East Sullivan had $1.2mm of cash, $3mm of marketable securities, and $6.6mm of investments in affiliated companies at quoted market prices.

You were getting the cash and investments at a slight discount, and East Sullivan’s profitable operations for free.

Not bad.

Look Through Earnings

Let’s consider the valuation differently.

East Sullivan was doing $1.2mm of EBIT from its own operations.

Let’s assume that the $9.6mm of marketable securities and affiliated businesses could produce a 7% return. That’s probably conservative.

7% on $9.6mm is an additional $672k of look-through ebit.

The market cap was $8.9mm. EV would’ve been $7.8mm if only giving credit for East Sullivan’s cash account.

The look through EBIT is $1.9mm (1.2mm + 672k).

That’s ~4x EV/EBIT.

Any way you slice it, this business was cheap.

Capital Allocation

Buffett’s shares were marked at $2.10 at year end 1962. Shares were yielding 7% at the time.

Here’s the dividend payouts going forward:

• 1963: $0.17

• 1964: $0.32

• 1965: $0.50

• 1966: $0.55

• 1967: $0.60

An investor in 1962 would recoup his entire purchase price in dividends over the next 5 years.

How It Worked Out

We don’t know how long Buffett held. But the investment was likely a good one for him.

Shares touched $3.00 in 1963. By 1964 they were $5.70. And they peaked at $9.40 in 1965.

If Buffett had held to the top in 1965 he would’ve earned a 73% IRR.

If he held through the end of his partnership in 1969, he would’ve earned a 34% IRR.

I suspect he sold the stock sometime before 1965, but I can’t be certain.

Book value got up to ~$5.00/share in 1965. I doubt he was holding shares at 188% of NAV.

What We Can Learn

There are a handful of investment opportunities available today that rhyme with East Sullivan.

My suspicion is that if you pitch one of these ideas on Value Investors’ Club, you’ll get attacked.

Investors tend to despise controlled microcaps. They see these kinds of businesses as a value trap or a toy for management.

That’s a fair assessment in certain circumstances. But if you own the same class of security as the majority holder, and they’ve done reasonable things with the cash historically, you’re likely to do well if you can buy the business below the sum-of-the-parts valuation.

That’s another thing that is often discounted by public market investors. They don’t like to hear a SOTP pitch. But here’s Buffett owning East Sullivan.

Intrinsic value is always revealed in the fullness of time. It’s easy to look at a stock that’s been trading below its net cash, or less than 5x earnings and think things will always remain that way.

Here’s what I know:

If you buy a stable business for 5x earnings, and those earnings are not squandered, you’re going to earn an ROI near 20% over the long run.

Now that’s an obvious statement, but it’s amazing how often investors forget that in practice.

Conversely, if you pay 100x revenue for a fast growing, money losing IPO, you’d better be reasonably certain about extremely high growth rates for a very long period of time. And you’d better be extremely certain about unit economics at scale.

I’ve got the ability to handicap the odds of certain stocks when they’re selling at low multiples.

I’m skeptical that anyone has the ability to accurately underwrite hyper growth multiple decades into the future.

Life is a lot easier when you buy profitable, stable businesses with lots of net cash on the balance sheet for single digit earnings multiples.

If it’s good enough for Buffett, it’s good enough for me.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

• 4.2x EV/FCF.

• 23% Dividend Yield.

• Consistently profitable business.

• Substantial net cash.

Anytime someone pitches a stock with a 23% yield, you should be worried.

These kinds of pitches generally involve shipping, oil services or some other cyclical industry.

I don’t do that kind of thing.

The company I’m pitching today has been in business for 50+ years.

It’s earned a profit every year that it’s been publicly traded.

It’s got a loyal base of customers with sticky, high margin segments.

The market has thrown it away.

I think the market is wrong.

Today’s stock is…

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Five years later, you could buy a piece of his oil company for 63 cents on the dollar.

Warren Buffett took notice.

It was 1962. And Buffett was hard at work managing his investment partnership.

His net worth would cross $1 million that year.

Buffett spent his days in Omaha flipping through the Moody’s manuals. That may be how he found Getty in the first place.

Getty wasn’t huge. Its inflation adjusted market cap was only $3 billion.

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The Story

Buffett’s Getty shares were marked at $18 at year end. Here’s a full list of Buffett’s partnership holdings in 1962:

Here’s a look at the valuation:

On the surface Getty didn’t look especially cheap. Sure, it traded at a large discount to book, but the ROE was low and the stock was selling for 17x earnings.

But there was a larger issue at play.

Getty owned large stakes in three publicly traded, related party companies: Mission Corporation, Mission Development Corp., and Tidewater.

Without going into too much detail, the nature of these businesses was to produce, refine and market oil and manage other assets of the “Getty Empire”.

Here’s how Getty’s stake of each security was valued in 1962:

Getty’s market cap was only $287mm.

Getty’s share of these three assets alone was $259mm.

Buyers at $18 were paying almost nothing for Getty Oil.

And it’s not like Getty had a bad business. It was earning $14mm of net income and had a pristine balance sheet. This excludes its share of income from Mission, Mission Development and Tidewater.

Getty had $398mm of total assets and only $50mm of total liabilities.

If we adjust the enterprise value for Getty’s minority stock ownership listed above we get the following:

Buffett was actually paying 1.7x earnings and 30% of book for Getty.

On a look through earnings basis (Getty earnings plus share of minority-owned earnings), Buffett paid ~7.5x for his Getty investment. It was cheap any way you slice it.

Getty had a steady history of growth. Here’s how book value per share grew over time:

1951: $8.91
1952: $10.00
1953: $11.40
1954: $12.75
1955: $14.38
1956: $16.22
1957: $18.19
1958: $20.57
1959: $21.92
1960: $23.95
1962: $28.46

That’s an 11% CAGR over 11 years in BVPS.

Companies compounding book value at double digits should not trade at a discount to book.

Upside Optionality

In 1949, J. Paul Getty ignored his advisors and bought a barren strip of desert in Saudi Arabia.

That piece of land produced 15,000 barrels per day in 1956.

By 1962 it was up to 100,000 barrels per day.

Getty’s agreement with Saudi Arabia called for a fixed royalty structure, allowing Getty to capture the vast majority of the field’s value.

In 1962, Getty produced 10x the oil volume of a decade prior. It was incredible.

Through related party subsidiaries Getty shareholders had exposure to all kinds of different enterprises. Hotels, aircraft manufacturers, mobile home developers, cafeterias, insurance companies and more.

Buffett surely dug into each subsidiary and its constituent parts.

And he liked what he saw.

Betting With the Family

I’ve made this point many times. If you are buying the same security as the controlling family, and you are getting it at a big discount, you’ll likely do well over time.

J. Paul Getty controlled Getty Oil. He owned 79% of the stock.

While Getty had an inflation adjusted market cap of $3 billion, it traded more like a small cap with $600mm of float.

Getty had 50 years of experience in the oil industry by the time Buffett purchased his shares. Getty was also one of the richest men in the world and a self made mogul.

Imagine getting shares in Meta or Tesla at 60% of book or $0 EV.

That may be a stretch, but it’s not much of one.

How It Ended

I don’t know how long Buffett held his shares, but he probably made money.

Shares traded up to $27.50 in 1963 and $32 in 1964.

Getty Oil was bought by Texaco in 1984 for $10.1 billion.

Adjusting for splits, the shares Buffett owned at $18 in 1962, would have grown to $625 in 1984.

Excluding dividends, the stock compounded at 17.5% for 22 years.

His $171,000 investment would be worth $5.8MM.

I doubt Buffett held through all that time, though. His partnership shut down in the late 60’s.

And funny enough, Buffett was best off not to hold his Getty shares.

In 1962, Buffett was worth $1mm. His net worth had grown to ~$600mm by 1984.

While Getty shares went up 34x, Buffett’s net worth increased 600x.

Final Thoughts

You may think these kinds of opportunities are gone.

But they aren’t.

Two weeks ago, I discussed a company had a very similar set up to Getty Oil.

Except the business I talked about was trading at 69% of its cash and marketable securities, while having a consistently profitable operating business AND buying back stock consistently. You can read it here:

Modern Day Getty Oil Write Up

I don’t think it took any stroke of genius to identify Getty Oil as a mispriced stock in 1962.

In fact, most of the young Buffett investments didn’t require genius. They just sort of hit you between the eyes.

Once you see it, you can’t unsee it.

Bet with the family, buy consistently profitable businesses with strong balance sheets and get them at a cheap price.

If you do that, you’ll be just fine.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

I’ve been writing for a couple years on this platform.

Some of these securities are still materially mispriced.

So, I’m going to cover them again with updated analysis.

Plus, an intro on a new idea.

Stock #1:

• 4.7x EV/EBIT.

• Dividends + Buybacks.

• Sold bad segments.

Stock #2:

• Negative EV.

• Single digit multiple; continuously profitable business.

• Large and ongoing buybacks.

BONUS PITCH: 5x EV/FCF, Rapid growth, High margin business.

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My greatest investments came from having a piece of publicly available information that seemingly nobody else had.

Sometimes that means hassling management for financials. Sometimes it means understanding weird accounting or . Sometimes it comes from being the only guy at an annual meeting.

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Here’s how I found a business trading for 3x earnings and 20% of net cash.

It’s only ever happened in businesses with market caps below $100MM. Above that, there are too many guys sniffing around. Or I’m too dumb. Or both.

How do you know it’s a legit scoop? Pattern recognition and thousands of reps.

It’s like Potter Steward said, “I know it when I see it”.

When you’ve got a scoop, you’d better bet big.

2) 50 Stocks a Day, Everyday

I download a list of every security on an exchange.

Then I go through each name one by one. I look at 50 per day. This only takes about an hour.

Most ideas get killed in 10 seconds. They’re unprofitable, or too hard to understand, or have too much debt, or priced at more than 5x earnings.

Once a year I’ll find something selling for ~2x earnings and half of net cash. I’ll spend the next 6 months trying to buy as much of that stock as possible. I generally find you can get ~$100k in these companies before the world wakes up to it.

This was the second tweet I ever posted:

That stock was discovered from going A-Z.

I screen too, don’t get me wrong. But the best ideas are the ones that don’t screen.

You quickly grow out of the screaming bargains, but the process is still worth your time.

It’s how you develop your skillset. You’ll learn all sorts of things. Just trust me. It’s like lifting weights. You won’t be stronger after day 1. But a year from now you’ll look a lot different.

If you’ve got less than $5MM, you will find material, actionable things to do.

3) You Can Keep Nevada

There are more pump jobs and idiot horseshit businesses incorporated in Nevada than anywhere else.

Nevada has some unique state laws that make it enticing for bad actors.

If you’re looking into a business and it has a weird smell, go look up where it’s incorporated.

If the answer is “Nevada”, just pack your stuff and get out of there.

Want to take a guess where “Lingerie Fighting Championships, Inc.” is incorporated?

To be clear - I’m not accusing the BOTYD folks of anything. I know nothing about the business or management team. You just tend to find this sort of thing in Nevada.

Florida and Texas aren’t much better, but Nevada is a cesspool.

Delaware is the opposite of Nevada.

4) You Can Keep NVIDIA

I won’t buy any business trading at more than 10x revenue.

I picked that idea up from Geoff Gannon several years back.

It’s served me well.

I don’t care what business you’re in. The level of certainty you’d need about the world’s future to buy a business at 10x+ revenue is not something I possess.

Of course, this means I’ve never owned any of the sexy stocks that dominate the headlines. And every time I write something like this there is a guy who’s owned NVDA for 25 years that laughs at me from his yacht.

5) Bet With the Family

I’ve had a lot of success investing in businesses run by a controlling shareholder.

These are normally sleepy companies in sleepy industries trading at low valuations.

These businesses tend to have clean balance sheets and low debt.

They also tend to trade at a discount to peers because the market thinks the business is too boring or value trappy.

The grandson of the founder will do a better job running the business than some outsider. He won’t need to take wild swings or moonshots trying to push his comp up. He’s got downside. This is his inheritance on the line.

If the family has done right by their shareholders, you’ll do quite well over the long run.

I wrote up Ingles in April 2025. The stock is up 40% since then. I did Moro Corp. in June 2025. It got bought out at a 115% premium 7 months later.

It doesn’t always go with this way, but those were both low downside stocks that ended up outperforming… by a lot.

And I simply put my money up next to the controlling family when the price got right.

6) Ignore The Price History

Companies with double digit ROE’s shouldn’t trade below book value. I wrote about one last week.

If you’ve got reasonable management at the helm, and they don’t burn up the profits, the business should be valued at or above book.

In the long run, the stock performance will mirror the company’s return on capital. If ROIC is 10%+ over the long run, the stock will return 10%.

If ROE is 12%, and the business is priced substantially below book value, well… you’ve got a compelling idea.

7) Stick With It

Dan Schum recently wrote a post about his mentor.

It was a beautiful tribute to his friend that he calls “M”.

You can read it here.

M must’ve amassed a fortune from his 40+ years of investing.

He did it in a way that would defy all conventional investing logic. He bought true penny stocks. It seems he rarely paid over $1/share. And he owned hundreds of different stocks.

The guy knew everything about everything small. He spent 40+ years honing his craft and never stopped.

He made $19MM upon the sale of Hemacare, alone. He owned countless other multibaggers. He made 160x on ADDC.

He made himself rich, and he made his clients rich.

Everyone should read the story. I can’t imagine investing like he did, but he destroyed the market.

The point is - there are a hundred different ways to skin the cat.

I think any investing strategy rooted in sound first principles can be successful.

You’ve just got to put in the work.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS MAY BE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

I don’t have any formal investment training.

I didn’t take algebra until I went to college.

I’ve never built a DCF.

I’m a simple guy, and I live by simple rules.

Here’s one of those rules:

Companies that compound equity at high rates for decades on end should not trade at a discount to book value.

It’s pretty simple.

Imagine the house across the street comes up for sale. It’s been rented out by high quality tenants for 50+ years.

After all your expenses the property would clear $12,000 per year in profit. I think we can agree that buying this home for $100,000 would be good deal for you.

But you’re greedy. You don’t want a good deal. You want a great deal.

So you offer $70,000. And magically… the seller accepts.

The stock I’m discussing today has just that kind of set up.

I know what you’re thinking…

• Management must be eating all the cake? Nope.

• Well they must be running a cash box, then. Our capital is locked up. Wrong.

• Well then the assets must have been good historically, but they are weak now. Wrong again.

We have a management team that’s paid fairly. They’ve done an excellent job returning capital to shareholders via dividends and buybacks.

In fact, another large special dividend is coming next month.

And the assets are far from weak. The majority of assets are liquid, publicly traded securities.

Today’s stock:

• Trades for 70% of NAV.

• 7% dividend yield.

• Has compounded book value at 12% for 50+ years.

• Ramped up capital returns in recent years.

Let’s take a look…

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Those IRRs are generally reserved for the fellas with the cartoon monkey profile pictures. Or the arcade currency, laser-eye crowd.

I guess nowadays it’s reserved for the AI investors.

But don’t you worry.

Dirt has yet to succumb to the pressure. I would’ve made a lot more money if I had. So I don’t know why I’m making fun of these folks.

I guess I’m just jealous.

I’m not smart enough to understand why a money-incinerating, large language model should trade at 40x revenue. I guess investors see premium value in a product that can make a picture of their dog dance. Maybe they like the LLM’s ability to fuck up basic math 8 ways to Sunday.

I don’t know.

I’m gonna make my returns the old fashioned way.

Buying cheap, durable businesses with strong balance sheets that are run by halfway reasonable people… and waiting.

Today I want to walk through a recent investment that encapsulates my investing style.

Here we go…

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On June 12, 2025, I wrote about a little company called Moro Corporation. Here’s the write up with the paywall removed. You should read it for a full understanding of the situation:

Moro Corp. Write Up

Moro was in the HVAC and electrical business. There were three different business lines but I believe the residential HVAC business was the real money maker.

Here’s how the numbers looked when I wrote about the company:

As you can see, Moro was a small, cash-rich business selling for a low single digit multiple.

This is right in my wheelhouse. I generally like to pay under 5x EV/FCF. I’ve found that’s the sweet spot for “too cheap”.

If you have a real business run by real people, it shouldn’t be trading below 5x. By “real business” I mean one that can continually earn a net profit. By “real people” I mean people that don’t squander the profits. My bar is pretty low. I let the valuation do the heavy lifting.

Fortunately, Moro was run by very capable folks. Moro’s founder passed away in 2019. In 2020, his stepson, Neil Kessler, took the lead role.

Kessler and his extended family had effective control of the business through their large ownership stake.

Kessler took an axe to the unprofitable segments. Moro sold off or shut down multiple underperforming business lines.

Cash was taken from operations/divestitures and used to pay down debt.

Prior to Kessler taking the CEO job Moro had $4.7MM of net debt. By the time I wrote about the stock in summer 2025 the company was sitting on $7.1MM of net cash.

Capital Allocation

Oddly enough, the most common pushback I got from the Moro write up was from readers that were worried about capital allocation.

Yes, the stock was cheap. There wasn’t anyone arguing that point.

But investors saw the cash piling up and got worried that Moro was a value trap. They thought the cash would just sit on the balance sheet indefinitely.

Personally, I thought this was an absurd stance. In a period of ~5 years, Kessler had shed the bad segments and paid off all debt. That’s great capital allocation.

Public market investors are a tough bunch to please, though. Their holding periods are remarkably short.

As it turns out, Kessler and the rest of the management team had been internally discussing a sale of the business since early 2024.

I’m not surprised this was going on in the background. Management teams that do a handful of consistently smart moves (sell bad segments, reduce debt) generally have more smart behavior up their sleeve.

Anyway, on December 29, 2025 it was announced that Moro was sold for $5.59/share.

This represents a 115% premium over the stock price when I discussed it in June 2025.

Since that appreciation was achieved in a ~6 months, the IRR is much better.

Sometimes you get lucky. I’ll be the first to admit it - the timing was extremely lucky.

Takeaways

It’s hard to argue that Moro stock was priced fairly in June 2025. In the original article I said the following:

“I like the fact that this is a business with highly desirable qualities for a buyout. I’d imagine Kessler and the gang get weekly inbound calls from hopeful buyers. I wouldn’t be surprised if the business fetched $5/share in a takeout.”

It’s funny, there are all kinds of small, public businesses that are priced below private market value. I’ve talked about several on the blog.

These things catch a lot of heat. People get tired of owning them because it’s a boring ride.

But let’s just say you owned 10 stocks that were all like Moro. Run be decent people. Trading for low single digit multiples. Plenty of cash/asset value to support the business if it ever got into trouble. Far below private market value.

So you own these 10 stocks and most years they just kind of limp along. You don’t have many losers. Maybe you clip 3.5% from a dividend yield. Maybe 9 of the 10 stocks compound at a 6% CAGR (dividend plus price appreciation) on average.

But each year one of your little businesses is bought out, or otherwise discovered by the outside investing world. And that stock trades up 115%. Just like Moro.

So what’s your CAGR if that process repeats annually?

Somewhere in the neighborhood of 17%!

Of course it’ll be more sporadic. Some years you won’t have any takeouts. Some years you’ll have a couple.

When the market hits a rough patch and trades down 25%, you likely won’t trade down nearly as far. You kept your cool when the market got overpriced. You stayed disciplined and bought the Moro’s of the world.

It’s a winning strategy.

Ben Graham did it first. Then thousands of folks followed his lead over the next 100 years.

All you need is a small capital base, an even temperment and the willingness to ignore the crowd.

It worked for Graham.

It worked for Schloss.

It works today.

DISCLAIMER: THIS IS NOT INVESTMENT ADVICE. I MAY OWN SECURITIES MENTIONED IN THIS ARTICLE. THIS IS NOT A RECOMENDATION TO BUY THIS STOCK OR ANY OTHER STOCK. I MAY BUY OR SELL ANY SECURITY AT ANY TIME. I MAY NOT TELL YOU IF AND WHEN I BUY OR SELL. THESE STOCKS ARE ILLIQUID AND YOU SHOULD UNDERSTAND THE IMPLICATIONS OF THAT IF YOU BUY THEM. THIS IS NOT TAX, LEGAL OR FINANCIAL ADVICE. I AM NOT YOUR FIDUCIARY. THIS IS THE INTERNET AND YOU’RE LISTENING TO A GUY NAMED DIRT.

• 4x cash flow.

• 37% of book value.

• Double digit BVPS CAGR for 35+ years.

• Dividend payer.

• Buying back stock.

You want my secret?

It’s pretty simple.

Here’s the checklist:

1. Focus on profitable companies.

2. Make sure they’re run be reasonable people.

3. Buy shares when they are priced well below intrinsic value.

Step 1 is simple - does the business create a steady profit?

Step 2 isn’t much more difficult - does management have a history of preserving/compounding the business value?

Do they squander money on bad acquisitions? Do they dilute the stock to hell? Do they drive the business into idiotic, low margin lines of business? If the answer to these questions is “no”, then we’ve got step 2 covered.

We don’t need Warren Buffett or Mark Leonard running our business. If we have them, that’s fantastic. But they’re not required.

Step 3 can be a bit trickier. I don’t know the intrinsic value of most businesses. But if you gave me a handful of consistently profitable businesses in slow-changing industries, I could probably name a price that I’d be reasonably certain the shares should trade above.

Costco has ~$11 billion of net cash and earned $8 billion of profit last year. The business has grown steadily for a long time. I am nearly certain it’s worth more than $60 billion.

Of course, that doesn’t do me much good. Because the current market cap is $390 billion.

Oh well, on to the next.

But today, I think I’ve got a simple business run by reasonable people selling for less than private market value.

Let’s take a look…

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I’m extremely protective of this audience.

I’m consistently amazed at the caliber of person who reads this newsletter. We’ve got broke college students and billionaire hedge fund managers all in the same place.

There have been several opportunities to share this audience with others, but I’ve turned almost all of them down. No ads. No sponsors. No cross-promote.

Until now.

Joe Raymond has the best case studies on obscure old businesses. He’s got an unbelievable network of people that supply him with these stories.

He’s truly one of one as a writer.

But he’s criminally underfollowed.

So today I’m having Joe write a guest post for me. I’ve never done this before and my bar for allowing this kind of arrangement is insanely high.

I’m not doing this because Joe is my friend.

I’m doing it because reading his work will make your life better.

Please, subscribe to Joe’s writing at the following link:

Joe Raymond Blog

100% IRR in Ice Cream

Imagine finding a 70-year-old ice cream company with a teens ROE trading for less than net cash and only 4x earnings.

Talk about mouthwatering!

That’s exactly the position Jim Mitchell found himself in in 1990.

Here’s the little-known story.

Mitchell Partners

For those who traffic in obscure stocks, Jim Mitchell and his partnership Mitchell Partners (MP) are household names.

Here’s a brief background.

Jim was a private-practice attorney when one of his clients hired him to draft the formation documents for Century 21 Real Estate Corporation. He later joined the company full-time as general counsel.

When Century 21 was sold in 1979, Jim used his proceeds to form Mitchell Partners. Over time, family and friends invested in MP alongside him.

Jim noticed that his illiquid pink sheet stocks performed better than liquid, listed ones. So, he wrote down the names and addresses of every stock with a 10% or greater spread between the bid and the offer and mailed thousands of letters requesting annual reports.

About a third responded, and that became his investment universe.

Eskimo Pie Corporation

One such illiquid gem was Eskimo Pie Corporation (EPIE), a neat company with an interesting history.

As the story goes, Christian Nelson was running a small candy store in Onawa, Iowa in the early 1920s. One day, a boy walked into his store and showed notable indecision. He started to buy an ice cream, then changed his mind and bought a chocolate bar. Nelson inquired as to his thought process.

“I want ‘em both, but I only got a nickel,” the boy responded.

Thus, the idea to marry ice cream and the chocolate bar was born.

Nelson played around with different formulas with varying degrees of success. Eventually, he found that adding cocoa butter was the best way to stick melting chocolate to ice cream. He produced a 500-treat trial batch that quickly sold out at the local town picnic.

Armed with the proper formula and proof of demand, Nelson started searching for partners to manufacture his new product.

He joined forces with a little-known chocolate maker at the time. A man named Russell Stover, who came up with the name “Eskimo Pie.” The two planned to produce the treats and also franchise the product, allowing other ice cream manufacturers to make Eskimo Pies.

Thus, Eskimo Pie Corporation was founded in 1921 by Nelson and Stover to produce America’s first chocolate-covered ice cream bar.

Patent Problems

Unfortunately, they filed a patent that ended up being a little too flimsy.

It aimed to protect the general concept of chocolate-covered ice cream (rather than the specific ingredients and manufacturing process).

The product gained quick traction, but Nelson and Stover were spending thousands of dollars per day (big money in the ‘20s) and countless hours defending their patent from copycats.

Stover pulled out in 1923 to start his own candy company (which still bears his name today). Nelson decided to sell the business in 1924 to the company that made its wrapper, the U.S. Foil Corporation (later named Reynolds Metals).

The Investment

When Jim Mitchell started buying EPIE in 1990, Reynolds Metals owned 88% of the outstanding shares. The other 12% traded OTC.

Thus, Eskimo Pie was controlled, illiquid, non-reporting, and unlisted.

Music to Mitchell’s ears!

The business itself was perfectly satisfactory. Here’s a 10-year operating history leading up to his purchase:

Average annual operating profit was $1.6 million and ROE was in the low-teens. Aside from a blip in 1986 and ‘87, EPIE earned a healthy profit every year. By the end of 1990, the company had a cash reserve of $12 million.

Here’s the valuation Mitchell Partners was paying in 1990:

I can’t think of a single case where buying a decent, stable business with a multi-decade history of profitability at a negative EV, single digit earnings multiple, and huge discount to book value hasn’t resulted in a home run return.

And Eskimo Pie certainly classifies as a home run.

Reynolds Metals decided to spin off EPIE and complete an IPO in 1992, less than two years after Jim started buying the stock.

Returns are typically favorable when you can buy a non-marketed minority interest on the pink sheets and later sell that same asset once it’s listed after a promoted IPO.

Mitchell Partners made 6.6x on Eskimo Pie in 19 months.

Here’s a snippet from an old LA Times article discussing some of Jim’s investments:

EPIE paid a special dividend of more than $4 per share as part of the IPO. They then levered up in 1994 to acquire Sugar Creek Foods, a frozen yogurt company.

Profitability worsened in the late ‘90s, and the balance sheet didn’t look great due largely to acquisitions. To make matters worse, the stock was no longer cheap trading around 20x earnings.

After treading water for a few years, the company ended up selling to CoolBrands International in 2000 for $10.25 per share in cash.

CoolBrands sold Eskimo Pie to the Dreyer’s division of Nestle in 2007, and in 2021 Nestle rebranded the product as “Edy’s Pie.”

Recognizing Patterns

The Eskimo Pie story reminds me in some ways of International Speedway, which was a wonderful investment while it traded OTC and became a poor investment after its IPO and exchange listing (for similar reasons to EPIE).

The best investment opportunities I can find in today’s market (and in most markets) are things that are discounted due to neglect. This often happens because of some combination of illiquidity, lack of marketability, or control shareholders.

Not every neglected stock is a good one, of course.

But you improve your odds of finding something interesting when searching amongst the overlooked and ignored.

Jim Mitchell produced a healthy double-digit annual return net of fees (taking what I believe to be very little risk) for more than 40 years investing in these sorts of stocks.

Low risk, solid return, long duration.

A fun, reliable, and sustainable way to turn a small pile into a big one.

Postscript

Sadly, Jim Mitchell passed away last year. Below are some of my favorite resources that talk about him and his investment approach.

LA Times article 1995

Forbes article 2003

Podcast interview 2016

Barron’s article 2019

Disclaimer

This post was written by Joe Raymond, an investment advisor representative and agent of Caldwell Sutter Capital, Inc. (CSC). These contents reflect the opinions of Joe Raymond and not CSC. Mitchell Partners is a brokerage client of CSC. This content is for informational and entertainment purposes only. Nothing herein constitutes financial, investment, legal, or tax advice, nor should it be construed as a recommendation to buy, sell, or hold any securities or assets. Investing involves risk, including the loss of principal, and past performance does not guarantee future results. The information provided is based on publicly available data and personal opinions, which may not be complete, accurate, or up to date. Any investment decisions you make should be based on your own research and consultation with a qualified financial professional. The author(s) and publisher assume no responsibility or liability for any actions taken based on the content provided.