Welcome to Episode 89 of Special Situation Investing.
“Measure twice and cut once” is a bit of elementary worldly wisdom passed down from one generation of carpenters to the next and it’s a saying I heard many times growing up. The application is obvious, namely that investing time in the low cost act of measuring a board is worth double, or even triple checking, before moving on to the high cost task of making a permanent cut. Because I do very little carpentry these days and because I spend most of my time thinking about investing, I’m most often reminded of this saying in that context, where the same wisdom is just as relevant to one field of thought as it is to the other.
In order to break down the wisdom of the old adage, it’s beneficial to separate the statement into two simple halves. The first of the two statements tells us to measure twice and the second instructs us to cut once. Measure twice is really just another way of saying, be sure of what you’re about to do, or put another way, don’t do something until you’re absolutely sure you’re right.
Mohnish Pabrai offers the same advice to investors when he admonishes them be “harsh graders.” Pabrai reminds us that the really great returns, the 100 baggers, are the result of a careful selection process that sifts through the many good ideas in search of the fantastic.
To “measure a stock twice” is to thoroughly review both its qualitative and quantitative attributes. On the qualitative side, one must grade the company’s management, its business moat, and its competitive advantage. On the quantitative side, the balance sheet, cash flow, and income statements along with the capital structure and a hundred other items have to be considered. What’s more, even after putting in the due diligence required to effectively “measure twice,” you will always make mistakes. Even the best investors are wrong a good deal of the time and the best you can hope for is to capture a few standout investments in your portfolio that, when combined with the second part of our statement, will carry you to above market returns.
“Cut once” is the second part of the statement and it reminds us of the permanence of our decisions. In carpentry this is a much simpler concept to grasp because a board, once cut, is never the same. In the area of stock selection, however, the concept is obscured. Our stock selection decisions look anything but permeant because we can buy or sell anything with the mere click of a button. A holding of twenty years can be sold on a whim and a half formed investment thesis can be invested in just as quickly.
Warren Buffett, alluded to the concept of permanence in investing using his analogy of an investing punch card. Imagine, he said, that you received a punch card at birth that allowed you to make just 20 investing decisions in your lifetime. Imagine how carefully you would make those investment decisions because of the 20 punch limitation. If the “cut once” part of the statement equates to a decision to invest then we should consider those investment decisions to be just as permeant as an actual cut through a physical board.
In my own portfolio, my best performing investments have combined the two factors already discussed.
First, I spent a great deal of time verifying, red-teaming, and questioning my own ideas before investing and second, I held on for a long time. In a way, heeding the “measure twice” bit of advice is what allows you to follow the “cut once” portion. In other words, when a company you invested in runs into trouble the fact that you’ve already worked through the scenario in your mind is what gives you the confidence to sit on your hands and weather the storm.
The importance of holding on through the storms is difficult to overstated, as a cursory glance through any 100x returning stocks price history will attest to. In order to capture the outsized performance of a Monster Energy or Berkshire Hathaway an investor has to watch their holding do nothing or even decline for extended periods of time without getting discouraged or selling. Even if the stock were to go up and to the right forever, as we all hope our investments will, how many of us would still sell a 100 bagger prematurely because we thought the investment was “overvalued” only to then watch it continue compounding on for decades without us?
Our own commitment to the “measure twice cut once” philosophy was tested several times recently by Mesabi Trust and Texas Pacific Land. In the case of Mesabi Trust, an iron ore royalty company, the mine operator took the trust through arbitration based on a disagreement over the royalty rates it was paying to the trust. Cleveland Cliffs, the mine operator, doubled down on its objections to the royalty structure by idling the Mesabi Trust properties from the spring of 2022 through the spring of 2023.
For more information on the dispute check out Episode 43 of the show where we concluded that the future of Mesabi Trust remained bright despite the near term headwind. This positive outlook was made possible by the “measure twice, cut once” philosophy. Because we’d done our homework before building up a position, we could be confident in the company’s investment merits despite the drop in revenue and the near universal sell recommendations that followed the drop.
A similar situation took place in the early 1980s when Mesabi Trust’s, then operator, idled the mine and eventually ceased operations all together. It took several years before a new operating company took over and again produced revenue for the trust but the investors who held on throughout the companies history were rewarded handsomely. In fact, Mesabi trust outperformed the S&P 500 by a factor of seven between 1995 and 2022 turning $10,000 invested into $774,000 versus just $106,000 for the S&P 500, with dividends reinvested.
In Cleveland Cliffs Q1 2023 conference call, they announced a partial reopening of Mesabi Trust’s Northshore facility. For reasons detailed in previous discussions of the trust that range from the ore’s quality, to its strategic location, to the cost of reopening the mine after prolonged inactivity, we believe the mine will eventually be fully brought back online. Again, we can hold this view with confidence because we did our due diligence on the front end of the investment process.
Texas Pacific land, also fell on hard times last year when the company sued two of its own board members and its largest shareholder group. In a bizarre display of corporate infighting the management team took a company so simple that, a ham sandwich could run it, and drove the stock price down by over 40% in a matter of months. Directing tens of millions that could have gone into share repurchases and dividends into a pointless legal battle left even die-hard TPL fans searching for the exits.
Here again, however, the “measure twice, cut once” mantra served us well. It allowed us to look through the near-term noise to the underlying signal below. Despite the management mess, TPL was still a fully owned, 800k plus acre piece of land, with no debt, atop one of the worlds best located petroleum reserves. For more background on the TPL legal battle visit Episode 69 of the show where we conducted a deep dive into the topic.
Without going into too much detail here the situation can be summed up by saying that we held on through the pain knowing that we’d measured several times before making the decision to cut, and that “cutting once” would be well rewarded in the future. Holding on turned out to be the correct decision, when it was announced this week that the board of directors would be “refreshed” with two new members. The board refreshment and the clarity that came with it enticed nervous investors back in and saw the stock rise by double digits in the ensuing days.
The lesson in both of these examples stems from that little bit of elementary worldly wisdom which reminds us to think twice before doing something permeant and to fully commit once we’ve decided to move ahead. Countless investors have bemoaned the 100 bagger they once owned but sold prematurely because they failed to heed this simple advice, they failed to hold on.
Taking the correct action in investing is, as often as not, a matter of doing nothing at all rather than doing something. Spend 99% of your time evaluating your next decision and only 1% actually clicking the buy or sell button. The money, as Jesse Livermore said, “is made by sitting, not trading.”
With that we wrap up another episode of the show. We can’t thank you enough for your support, your comments, and your questions. Your boosts on the fountain app are also a huge encouragement and we’re excited to continue bringing you more new content each week.
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A Portfolio Update (MSB) & (TPL)