Murray Stahl’s comments from the 2015 FRMO Corp annual shareholder meeting.
Murray Stahl: Thank you, Therese, and thanks to everybody for coming today. Before I start, when Therese read the results that we won by 99%, I couldn’t help reflecting that it had the aura of a Joseph Stalin kind of election. [laughter] It wasn’t done intentionally. Of course, we want to win, but we do invite shareholder input. We don’t have all the ideas; we don’t have all the wisdom; we have made mistakes, and we are not immune to making them in the future. We are duly humble.
That’s why this year’s shareholder letter was designed to do two things. First of all, it’s more sober. Normally, we’re very lighthearted in the shareholder letter, but the tone of this year’s letter is more sober because, as a company, we’re growing up. The purpose of the letter was to show the range of activities that we’re involved in now, which is much greater than ever before in FRMO’s history.
I should say something about our history. When we started 14 years ago, we only had $10,000. As we accumulated capital, from the start to about 2008, if you look at our various reports, our assets were largely invested in cash. In 2008 and the first few months of 2009, you’ll see a change. We were actually very aggressive during that time period. It was a time of planting. And now, to some degree, it’s a time of harvesting, at least as to conventional equity investments. It’s also a time of seeding new activities. We have more liquidity than we ever had in the history of the company. We’re not expending it at the moment; we’re waiting for opportunities.
Our philosophy of life has not changed from what it was historically. When we see opportunities, we’re prepared to be very aggressive. When we don’t see opportunities, we’re prepared to hold cash. I think that’s nothing other than prudent. And, hopefully, we’ll always act in that manner.
Murray Stahl: Bermuda Stock Exchange investments
When you look at some of the seedlings sprout—the seedlings of the past that we intend to hold—we’re very pleased with their development. For example, when you look at our investment in the Bermuda Stock Exchange—and I encourage you to study that investment—we’re now exposed to an asset class, a real asset class, that we ordinarily wouldn’t get exposure to in the conventional asset management business. What’s that asset class? It is insurance-linked securities.
What’s an insurance-linked security? It turns out that the greatest insurance companies in the world actually issue four-year bonds with coupons ranging from 7.5% to 8%. Hence, they’re A-rated paper, with four years to go. How wonderful is that in the current interest rate environment? Of course, there’s a price to be paid, which is that there’s roughly a 3% chance that the bonds, which are tied to an insurance pool, might actually be subject to an adverse insurance event. Your bond might be wiped out. Over time, you’re going to lose 3% of your capital. You earn 7.5% to 8% minus 3%, making it very competitive with a high-yield bond.
That’s a small but very rapidly growing asset class. Its size approaches $25 billion, and the Bermuda Stock Exchange has about a 67% market share in that class. This data is available on the Bermuda Stock Exchange’s website.
So, we’re growing up as a company. That’s not something we could accomplish through the conventional asset management business. One day, we hope—we do not know, but we hope—that the insurance-linked securities business is going to be orders of magnitude larger. We don’t know that; we can’t predict it, but insurance companies like to lay off their risk, and Bermuda is the home of that kind of investment.
Similarly, let’s look at our investment in the Minneapolis Grain Exchange, or MGEX. As the name suggests, it primarily trades grain, but it recently launched another contract that I’ll talk about later. Commodities are all in a bear market, yet MGEX has had record volume for its 2015 fiscal year, which ends August 31.
MGEX also has a carbon credits business, announced some months ago. The State of California is now regulating carbon emissions, and permits are required for companies that emit CO2. Those permits are transferable, and the transfers have to be tracked. A good place to track them is an exchange, and the Minneapolis Grain Exchange is doing such tracking. That’s an interesting kind of investment.
We made an investment in an entity called OneChicago, an exchange for trading single-stock futures. Single stock futures are a way of getting leverage, essentially, apart from getting it from a prime broker. Prime brokers, because they are banks, are regulated, and are having difficulty extending the kind of credit to funds that they did historically. It can be done with a single-stock future, and it can be done a lot more safely, because the transactions clear through a clearinghouse. There shouldn’t be loan defaults.
In the history of commodity trading contracts, I believe there hasn’t been a default since 1854, because there is daily mark-to-market and daily margin variation, and one has to carry proper collateral at all times. You usually have a half-hour to get the collateral. If you can’t get it, the positions are liquidated. Consequently, we’re involved in something safer for the world, and I think we’re doing a good thing.
Our partners, by the way, at least the large ones, are Chicago Board Options Exchange, the CBOE; the CME, Chicago Mercantile Exchange; and Interactive Brokers. Those are three pretty big outfits, and then there’s us.
We’re looking for more such investments. If we can find them—I don’t guarantee we’re going to find them—but, if we can find them, we’re going to make those investments. We have lots of cash available to do it. As of quarter-end, our year-end, we had over $44 million of cash on the balance sheet, and had $102 million of shareholders’ equity. I think, as a balance sheet, we’re more conservatively positioned than at any time in our history.
Murray Stahl: Investments in Winland Electronics
Another interesting investment that we made during the year was in a small company called Winland Electronics (“Winland”). That puts us in the electronics business. Winland makes wireless transmitters that capture data pertaining to moisture, temperature, air pressure, and similar conditions. You might think that it’s just a trivial activity, and, from the point of view of the great electronics companies of the world, it is trivial. I’m sure many companies can do it, but they don’t. Thus, Winland, small though it is, has a fairly high return on capital. It generates reasonable quantities of cash. We bought it when it was quite undervalued. Companies that are not in the indices and that no one knows about, are still out there and, every now and then, you can find them.
We’re not giving up on equities, by any stretch of the imagination. We’re just going into areas where we haven’t been before. We’re doing it, I hope you agree, in a fairly conservative way. We make a very small investment—we’re not risking a lot of capital—we do our homework, and we learn more about the business. When we feel we’ve learned