One Man's Trash...

Years ago I had a job in a demo garage where we'd scour the neighborhood for junk cars sitting in the yard and we'd offer to take the vehicle off the owners hands…sometimes for a small fee, sometimes we'd pay them, all depends on them, mind you. Then we'd haul it back to the garage and split it out for parts.

Now, here's the thing, this vehicle has zero resale value. ZERO. But the frame could probably get $100 at the junk yard so there is that. The tires were always stripped bare, of course, but rims aren't free so we’d grab those as well for resale. $50/rim was the going rate at the time. You can strip out some copper wiring, the radiator is gonna be aluminum or copper, and if you're lucky there could be some gold on circuit boards and multiple catalytic converters! ( Catalytic converters typically have platinum ;)

So there's another $100-$200 in precious metals there.

Now the really interesting part here is most of the time when a vehicle craps out it's not due to engine or transmission failure. In older vehicles especially these two major components are built to LAST. So if you have the tools, know how and wanna do some dirty work you can pull both of those as well. We found the going rate for selling these pieces as is was about $300 for a transmission and $500 for an engine. We always listed them with the clause: “Buyer may return for money back, no questions asked.” I think that happened once or twice in a matter of years.

So let's add all this up on the conservative end.

Frame $100

Rims $200

Precious Metals $100

Transmission $300

Engine $500

TOTAL $1200

Crazy right? People were just giving this stuff away most of the time and we were more than happy to make a treasure out of one man's trash.

The lesson to this story here is actually applicable across all areas of life, but since this newsletter is primarily about stocks I'm going to relate it back to stocks. You see, when I look at securities I’m looking for that piece of junk sitting on someone's emotional lawn, just waiting for someone to come and haul it away. And I'm often happy to oblige, because the world of securities often works the same way.

Let's look at a hypothetical example of how this works in the world of securities. This is a fictitious example that's highly similar to multiple real scenarios I've had.

There's a dinky little company on the OTC that makes plastic bags to supply to local vendors who don't want to be stuck in an unfavorable contract with a major player who has all the power. So Plastic Bag Maker Incorporated steps in to do the job, but they can't really charge a premium, because the vendors, technically, could just go back to the major suppliers if they're dissatisfied. Also the pool of vendors who really care about shunning the major players that are within the reach of Plastic Bag Maker Incorporated ( we’ll call them PBMI ) are few and far between. So PBMI is a low margin, low revenue, profitless company barely squeaking by. Oh, also, everyone hates plastic, so no one wants to invest in this. The company is on the market for about 5 million dollar market cap ( let's say a million shares at $5 each ) and they only do a few million in revenue per year, but it all goes back into the business plus. But they do have 7 million in cash on the books, waiting to be deployed at the right moment ( Did I mention that the founder died years back and his successor is inadequate and so has done nothing with this cash for several years? Because that's probably the case )

Also there's another 3 million in accounts receivables.

Oh, and let's not forget 2 million dollars of inventory that should probably sell over the next year or two.

So a 5 million dollar market cap is sitting on 12 million dollars of liquid assets…and that's not counting the tooling and machinery used for making the plastic bags or even the factory and land that is wholly owned by the company but listed for next to nothing on the books.

All this company needs is a shake up, I don't know what that shake up will be: A massive new order, a new survey of the real estate and updated book value listing, a new C.E.O…who knows, but at some point, something is likely to happen. And this piece of trash…which is worth a lot more when you add up the pieces, can, and often will, price correct…VIOLENTLY. Of course there are always risks here, we know that, we've all heard of melting ice cubes and such. But should you find a dozen of these the statistical history and law of averages states that about 2/3 of these companies will survive. Of those 2/3 you will get one or two that eventually turns into good businesses that you may decide to keep. But more often than not they'll simply part out the business for profit or, most frequently, there will be a quick 50%-100% pop and you pocket the money and move on.

These opportunities DO exist. I churn them constantly. Is it niche? Yes. Is the upside limited? Mostly yes. But is it fun? HECK, yeah! And I can't think of an easier, less time consuming way to make money in the market. If you're ready to take the plunge and turn one man's trash into your own treasure you could do a whole lot worse than searching for cheap garbage like the example given above. And all you need is a little patience, a brokerage that trades OTC and a basic understanding of financial statements. Statistics say it's one of the most profitable ways to invest, but, better yet, I guarantee you…it's the most enjoyable way to invest. Happy hunting!