FRMO Corporation ‘s transcript of the 2016 annual meeting of shareholders.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Therese Byars - Corporate Secretary

Welcome to the 2016 FRMO Annual Meeting of Shareholders. My name is Therese Byars, and I’m the corporate secretary of FRMO Corp. (the “Company”). Joining me are Murray Stahl, Chairman and Chief Executive Officer, and Steven Bregman, President and Chief Financial Officer.

Murray Stahl FRMO Corporation

Before we begin, we want to be sure that you know where the two emergency exits are located. There is the door you came in through and there is one in the corner here at the front of the room. The stairs are on either side of the elevators. We also ask that you silence all mobile devices and be advised that all audio and video recordings are prohibited.

The FRMO annual and quarterly reports can be found on our website at www.frmocorp.com. If you would like a hard copy of the 2016 annual report or the proxy statement, we have a few copies here. And you may request one at the end of the meeting. A summary transcript of today’s meeting will be posted on our website in the coming weeks.

Now I’d like to present the seven directors, all of whom are candidates for re-election. They are Murray Stahl, Steven Bregman, Peter Doyle, Lawrence J. Goldstein, Lester J. Tanner, Allan Kornfeld, and Jay P. Hirschson. Also present today is FRMO’s general counsel, Jay Kesslen and, from our auditors, Baker Tilly Virchow Krause, we have John Basile.

We now proceed to the report on the tabulation of the proxies for the two proposals. The proxy committee, appointed by the FRMO Board of Directors, is here this afternoon to represent those shareholders who gave their proxies to the committee. Notice of this meeting and proxy voting materials were sent to shareholders of record as of July 12, 2016 on or about July 25, 2016. The inspectors of election report that proxies were received from FRMO shareholders holding approximately 38.8 million shares of common stock, or 88.4% of the total common stock entitled to vote. Therefore, this meeting is properly organized with a quorum present, and we can proceed.

There are two items of business for this meeting. The first is the election of the seven directors, who were nominated in accordance with the company’s governing documents. The second item of business is the proposal to ratify the appointment of Baker Tilly Virchow Krause LLP as the independent registered public accounting firm of the Company for the fiscal year ending May 31, 2017. The board recommends a vote For on both items.

Before I report the preliminary vote count for the two proposals, I would like to offer a ballot to any shareholder present who wishes to vote in person at this meeting. If you have already submitted your proxy, you do not need to submit a ballot, unless you wish to change your vote. Does anyone need a ballot who hasn’t voted already? I see no hands, so the voting polls are now closed.

Based on the preliminary report of the inspectors of election, all seven director nominees have been elected to the board, with all nominees receiving at least 99.5% of the votes cast and 88% of the shares outstanding. The proposal to ratify the appointment of Baker Tilly Virchow Krause LLP as the independent registered public accounting firm of the Company for the fiscal year ending May 31, 2017 has been approved, with approximately 99% of the votes cast and 88.4% of the shares outstanding. This completes our formal business.

The next item on the agenda is the Chairman’s report to the shareholders. Mr. Stahl will review key points related to the 2016 financial results. When he has finished his remarks, he and Mr. Bregman will answer questions. At that time, if you have a question, please raise your hand. When you’re recognized, I will bring the microphone to you. Please clearly give your name, and to whom your question is directed. Please speak clearly so everyone can hear the question. Please limit your questions and comments to matters that are of general interest to shareholders. We can continue for a brief time after this meeting is adjourned and before the board meets in executive session.

And now, I will turn the meeting over to the Chairman of the board, Mr. Murray Stahl.

FRMO Corporation - Murray Stahl - Chairman & Chief Executive Officer

Thank you, Thérèse, and thanks to everybody for coming today. I presume you’ve seen or read the shareholder letter, so we won’t reprise the information in it. Instead, we’ll cover the same topics from an entirely different perspective, with a view to giving you more of what our intent is and, to the extent that we can, something about our plans for the future.

First, let me share a fact that has, in and of itself, nothing to do with FRMO, but that you might find intriguing. There is an institution called the Swiss National Bank, which is the central bank of Switzerland. It filed a Form 13F with the Securities and Exchange Commission (SEC), which you can see on the SEC’s website. As far as I can tell, that form discloses that the Swiss National Bank has bought about CHF150 billion (about USD150 billion) of equities. You’ll see the U.S. companies on the Form 13F.

What in the world do the Swiss National Bank equity purchases have to do with FRMO? First, a minor point about the securities list. You can imagine the size and prestige of the companies. Well, they didn’t buy any FRMO. [LAUGHTER] It might be a great thing if they did. Perhaps you might mention it to them if you work in Switzerland.

But the bank’s practice of purchasing equities has more profound implications. In the academic literature regarding investment performance, the idea of indexation, not as an investment vehicle but as a benchmark, is that while it’s possible, in principle, to manipulate a stock, it should not be possible to manipulate the whole index. Think how much money there is, all the flows in and out of the various securities; it’s not seriously possible, except for an entity that has the ability to print its own money.

I mentioned the Swiss National Bank only because it has an SEC filing and you can view that if you care to. But I could have said the Bank of Japan, which is becoming the largest shareholder in every major company in the Nikei 225. I even could have mentioned the Bank of the Czech Republic, the Bank of Israel, or the People’s Bank of China which, as far as I can tell, doesn’t want the Shanghai Stock Index to go below 3,000.

This observation requires everybody’s attention because, for the market to function, there has to be genuine price discovery. Without it, the market does not function properly. If the market is not functioning, then what do the prices really mean? As an investor, you need to contend with a number of things, not the least of which is the question of to what degree the central banks will continue this practice? And how will we know when they cease, if at all? If they do cease, what will be the consequences?

In the FRMO shareholder letter, we discussed how we work to move away from the indexes in various ways. You might think of headings in that letter as divisions or business lines, but a better way to look at them is that they are doors that we can open or close when the opportunity set behind a particular door is rich. If it fails to be rich, we’ll close the door and do something else for a while.

When we studied businesses, it always astonished us when we would see an industry that would become so competitive that margins decline, and more competition would arise. For example, if the way an insurance company could sell its products resulted in profit declines—sometimes precipitously—we have been amazed that businesses just kept producing until the marginal profit was negative.

When Steve and I conceived of the idea of FRMO while we were sitting in a Burger King back in 1994, we wanted to design a company as a series of doors through which we could look for rich opportunity sets, and that’s where we would place our capital. As you’ve observed over the years, we’re finding more and more of those opportunities. Some of them are very far removed from asset management, which is where we started. There are still opportunities in asset management, some of which we’ll discuss today. In any event, that’s the basic idea behind FRMO.

There are opportunities in the world of asset management, but they’re not to be found in the holdings of leading indices; they’re in other areas. They might be, for example, in alternative asset classes, which is one of the reasons why we have spent so much time studying exchanges. What is an exchange? An exchange is a business that we call a croupier. It has the right to charge a fee for a service or services.

Right now, there’s a problem with the equity exchange market structure. If you read the annual reports of many exchanges, you’ll see that participants are actually paid for volume. And there’s an issue of access not being equal to all market participants. Some traders can co-locate their computers in the exchange itself and others cannot. Those who can co-locate have an informational advantage vis-à-vis those who cannot.

There are other problems, including the issue of regulation and governance. I believe there are roughly 40 alternative trading systems—the so-called dark pools. How are the regulators supposed to police the various segments of the exchange when many of the transactions are indeed invisible? The world needs answers to that.

There are changes happening in the various exchanges that lead us to believe that the era of the dark pools is behind us. We think there will be much more consolidation among exchanges. We don’t think it will ever move back to there being a monopolistic set of exchanges, but there are opportunities for these entities. By the way, there are not just opportunities in the equity market structure, but also in entirely new asset classes that didn’t exist before, and not just entirely new asset classes, but also types of equities that really are out of favor and have no venue in which to trade.

In the shareholder letter, we talk about the Canadian Securities Exchange, which we sometimes refer to as the CNSX. If you read the letter, you’ll see that its volume growth is vigorous. Natural resources are clearly very important to that Canadian exchange. Yet, since many of these companies are actually very small, they don’t qualify for index inclusion. How are they supposed to get capital? The natural resources business is inherently capital intensive. Bank capital, which is debt capital, has to be repaid, and that places heavy burdens upon business plans, especially if they can’t be executed within the time constraints set by the debt instrumentality.

Obviously, in these situations, there’s a need for equity. Historically, there was always a place for equity. Now, ironically, in a place like Canada, as dependent as the economy is on natural resources, you’ll see all these small, emerging natural resources companies having difficulty getting listings and even greater difficulty attracting equity capital. The CNSX offers a venue for these companies and, as far as we can tell, its growth is fairly robust. One day, the natural resources industry will come back and, with it, opportunities. We hope to complete a few more exchange transactions before year-end, providing exposure to asset classes not commonly available.

For exchanges, because only a certain amount of revenue is needed to cover their fixed costs, once those are covered, the margin expansion possibilities are enormous. But it requires patience, which brings us back to the way FRMO was structured. It was structured to be patient capital with which we are able to take the long view. It was to be permanent capital, so that we didn’t need to worry how the investments were marked to market month-to-month. That’s the story of exchanges from our perspective.

You’ll see the same patient approach in our almost insignificant exposure to what’s called crypto-currencies or digital currencies. What is a crypto-currency? Crypto comes from the idea of coding. These digital currencies are expected to be quicker and subject to less fraud. Bitcoin is an example, as is ethereum. Another is known as monero. It is my understanding that monero is favored by the criminal element because it’s apparently harder to trace than bitcoin.

At the 2015 FRMO annual meeting, bitcoin wasn’t even on my mind. It was just on my to-do list of something to look at. For various reasons, I just didn’t have the time to study it. Therefore, I first wrote about bitcoin in November of 2015. We don’t look at this investment as a new modality in which to transact. As a matter of fact, when you look at the bitcoin transaction volume since I first wrote about it, it’s almost a reverse of the exchanges. For us, bitcoin is the idea of a non-fiat currency, which is currency that a government declares to be legal tender, but that is not backed by a physical commodity. The yen, the euro, the Swiss franc, the U.S. dollar, the Canadian dollar, and others, are established as legal tender under each nation’s laws.

See the full PDF below.