Interview Elizabeth Lilly, Founder Of Crocus Hill Partners On Deep Diving Into Micro-Cap Value Stocks And Her Work As An Analyst Waren Buffett

ValueTalks interview with Elizabeth Lilly, the Founder of Crocus Hill Partners, she discusses micro-cap value.

Q3 hedge fund letters, conference, scoops etc

Elizabeth Lilly On Micro-Cap Value – full podcast for all readers and full human transcript for subscribers

Elizabeth Lilly podcast

Hello, podcast listeners, today’s a very special episode.  I have ElizabethLilly, she’s the Founder and President of Crocus Hill Partners.  Before this she was a Portfolio Manager at GAMCO Investors where she oversaw a billion dollars for the Teton Westwood Mighty Mites Fund.  She began her career at Goldman Sachs in 1985.  And before this she joined Fund American Companies in Greenwich where she was an Analyst under Bob Bruce.  She received her BA from Hobart/William Smith College.  She received her CFA in 1989.  And in today’s episode we’ll be discussing small cap stocks.  And I want to welcome everyone to the show and I want to welcome Elizabeth Lilly to the show.

Welcome to ValueTalk with Raul.

I just wanted to welcome our listeners to a very special episode, I have Elizabeth Lilly, Founder of Crocus Hill Partners.  And I want to welcome Elizabeth to the show.

Thanks, Raul, nice to be here.

Right, yeah.  So just walk me through your background and what led you to finance and investing?

So, my background is I had a real interest in investing at a young age and it came from my mother who had an investment group with a bunch of her friends.  And they would meet on a monthly basis and they benefited from a fellow named George Mairs who was a very well-known investor here in the Twin City area, he started Mairs & Power.  And so, Georgie would come to my mom’s group every couple of months and talk about stocks.  And so, I attended a few of those meetings.  And so, I just have been interested in investing since I was a teenager.  And my mother got me into it and then my grandparents gave me a couple of shares of 3M stock, which when they gave it to me wasn’t worth a lot.  And now it’s worth $70,000.  And so, I watched how, without doing a whole lot and picking good companies and holding onto them for a long time, you can do extremely well.  And so that’s really what led me into my interest in the stock market.  I had some internships during my summer high school years and then college years at various investment firms, brokerage firms doing menial tasks, but just being around the business.  And so, my interest only just grew and grew from there, so.

Very cool.  Yeah, that must have been like the best gift from the grandparents.

Yeah.  The wonderful thing is I still own my shares of 3M stock which is great, it’s really fun.  It’s really fun.  So, it’s a real lesson for my kids too.  The funny thing is, just as an aside, Raul, the funny thing is, is that here in the Twin Cities, many years ago when 3M was not doing well, and the economy was in the skids, the employees of 3M would go to local restaurants and borrowers and they would pay their bills in 3M stock.  And so, there’s millionaires on the east side of Saint Paul who benefitted from these employees who paid their bills to eat and drink with 3M stock and so it’s just really funny, so wow, it’s just a little insight, so anyway, alright, onto the more serious matters.

What a great trade.

Yeah, exactly, no kidding.

Yeah.  And, so you work with Bob Bruce and Warren Buffett as an Analyst.  Can you share some of the stories and lessons you learned from them?

Sure.  So, you know, Bob hired me, I spent a couple of years at Goldman Sachs and then like all programs in these investment banks, after a couple of years they’d basically say, “Okay, go find something else to do, go get an MBA.  And then after you’ve got more experience you can maybe come back and work for us, we’ll see.”  And so, in essence my time was up at Goldman and through great fortune, it’s just through being in the right place at the right time, I was hired by Bob Bruce at Fireman Fund.  And Fireman Fund in Greenwich, Connecticut, and would be spun out from American Express.  And Bob was hired by Jack Byrne to run the $2 billion investment portfolio.  And so, we benefitted and so Jack Byrne was the Head of Fireman Fund and he was very good friends, Jack has since passed away, but Jack was good friends with Buffett.  And so, Warren would come in and have lunch with us and talk to us about the investment business, talk to us about how the characteristics of companies that would make good investments, and so one of the…

In terms of Bob, he would sit down with us every Tuesday night after, you know, around 5 o’clock and we would have chapters assigned to us to read in the Intelligent Investor and he would pull out value line sheets.  And we would go through various value line sheets with various companies and various industries, learning about how to look for good companies, what types of characteristics good investments have, the importance of return on equity, things like that.  How you can look at a cyclical business versus, you know, a consumer business, you know, the high street cash flow businesses with the high valuations versus the very cyclical businesses that generate high free cash flows but in good times and then not so much in bad times and what do they do with the balance sheet.  So, we really learned how to look at companies and analyze companies.  And then the piece, that’s really what Bob taught us.  And I tape recorded all those various sessions on Tuesday nights and so I’d go back to those tape recordings every so often and refresh my memory about what it is that is so good about good investments and what are the characteristics and things like that.  The piece that came from my time with Warren, our time with Warren was the following.  He emphasized four characteristics that to this day…

Bob had emphasized the type of company that you’re looking at.  You really need to understand the business and understand what drives that business, what drives the income statement, drives cash flows, and what drives the balance sheet.  The second piece is how does management think about capital allocation?  And I say with every prospective investor as well as every prospective client, as well as every investment that I meet with and potential investment that we meet with is let’s talk about capital allocation and how you go about allocating capital.  And, you know, and how do you think about capital allocation in terms of reinvesting into the business, paying dividends, buying back stock, paying down debt.  And then the third piece is valuation, you know, in terms of the importance of learning how to value a business and then find that at a discount to what you think it’s worth and then the concept of margin of safety, you know.  We try to buy, when we look at an investment, let’s say we have identified a company we want to buy and let’s say that the company’s … we have determined that it’s worth a $100.  We try to buy it at 65% of that, so you’ve got that margin of safety but then outside potential.

And then finally, the piece is, is that you need to be extremely patient and very disciplined in all matters in terms of analyzing companies.  And being patient to really do the work, be patient with the price that you pay and then the discipline in terms of implementing that whole valuation analysis, analyzing companies, not paying too much for businesses and just being disciplined.  And then also, to the extent that you make an investment in a company and it’s at that 65% discount, as it approaches what you deem to be a fair value or private market value I like to say.  Is it still as expensive?  And if it isn’t and you can’t come up with a reason why you think it’s going to continue to appreciate, you need to start selling that holding, and that’s really hard to do.  So that discipline applies to the buying but it also applies to the selling.  So those are the key lessons that I took away from my time in working under Bob Bruce and benefitted from these lunches with Warren Buffett.

Wow.  Yeah, and that’s [inaudible]?

He really was, he was phenomenal.  He was phenomenal.

Wow.  And so how would you describe your investment philosophy?

So, we are a bottoms up fundamentally driven investment firm that is value oriented.  And I say that we do disciplined repeatable process of determine and identifying inexpensive stocks and we build the portfolio on a brick by brick basis, not to re-index.  And we seek to identify misunderstood, not, well, companies that have a catalyst present that’s going to surface the value over time.

Right.  Yeah, then you specialize in small and micro caps, how did that come about and what attracted you to small and micro caps?

It’s interesting.  I started out doing larger companies and over time evolved in following small and micro cap companies and then, you know, prior to founding Crocus Hill Partners I worked for Mario Gabelli for 15 years doing small, 100% small and micro cap and loved it.  And the reason being is that I contend and continue to contend that it’s the one part of the market that you can add alpha as an active manager.  It’s extremely inefficient because these companies are not, in essence, not covered by any Wall Street analysts.  And so that inefficiency then extends to the valuations of the company in the market.  And so, if you’re disciplined, you do your own … and you don’t mind doing your own research and doing your own uncovering and going out and meeting with management teams and building your own models, you can find some wonderful little … I like to say that they are [inaudible] danger filled type companies that are becoming Bob Hope’s over time.  You know, they don’t get any respect, they don’t get the accolades, and that over time they’ll get the respect, they’ll get the accolades, and they’ll have a much higher valuation.