'Little' Nudges Make A Difference

Cover Story, by Ken Kavula, Subscriber November 1st, 2010

Small companies can deliver large impact on our investing journey.

Investing together is something Ken and Natalie Kavula enjoy. This photo, taken after Ken received a lifetime achievement award for excellence in volunteerism, is from an NAIC national convention. Ken stipulates that any first person “I” in this story should really be a “we”. Natalie and Ken are partners and their family investments are jointly managed. That includes studying, buying, maintaining and selling! “We do it all together and we wouldn’t have it any other way.”

If you’ve ever wondered how the “little things” in life make a difference, we invite you to spend a few moments with career teacher and retired principal Ken Kavula and his wife Natalie. Scores of investors have been favorably affected and influenced by them. Natalie is a career teacher also. They have both served as volunteers for the national umbrella organization for investment clubs (NAIC) and have delivered a number of educational opportunities and events for investors in all parts of our community. Based on the impact, it’s clear that sometimes “little things” aren’t so little, after all. As Ken often reminds, small companies can deliver large impact on our investing journey.

I’ve been an investor since I drew my very first paycheck and was presented with the option to participate in a 403(b) retirement plan. The choices may have been limited, but the best decision I made was to listen to my new investing mentor. I had a wonderful school superintendent. On my first day of work, he insisted I sign up for the “tax-sheltered annuity plan”. He told me I would never miss my $10 per pay contribution and, when I retired, I’d be surprised at how much I had been able to accumulate. It was a “little” recommendation and $10 is/was a fairly “little” amount of money. You all know the story: fast forward 35 years and that little, but regular, contribution had grown to a significant sum. Natalie received the same advice, enabling us to retire in our early fifties. It was “passive investing” and for 20 years, the only investing we did, diligently.

I was in my forties before I was forced to consider becoming a more sophisticated investor. In October 1989, Natalie’s father passed away. Investing had been his hobby. When I would visit, I would notice Value Line reports scattered throughout the house and he was always eager to find out my thoughts about new technology I was using and new products we both were finding indispensable. When I bought my first calculator and, later on, my first computer, he was eager to know brand names as well as performance reports. Only later did I realize he was doing a little, but basic, stock research. Dr. Jones was a history professor at the small college where Natalie and I met. He didn’t think of himself as a wealthy man. He was passionate about stocks, however, and his legacy to us included small holdings in over 100 companies.

Suddenly, we were no longer passive investors. The challenge became how to manage a portfolio containing the stocks of companies that, for the most part, we knew nothing about and, to complicate matters, even before we could start the job, the stock market took a dramatic tumble. We knew what we owned and, as novice investors, had yet to discover the benefits of long-term investing. We were confused, frazzled and ready to consider turning everything into cash but we were also intrigued.

It was easy — and a little compelling - to see how basic research had yielded the names of companies with significant potential. The portfolio contained some iconic names, including Microsoft and Apple, and it was evident that an effort had been made to identify small companies with a lot of potential. The lesson was not lost on me. Slowly I started to sell some of the stocks and, occasionally, after a lot of time spent reading and studying the story behind a stock, I would make a purchase. In that first year I had two home runs and the idea that you could buy undiscovered companies and make a lot of profit became part of my investing philosophy. I still hadn’t discovered NAIC and was making way too many errors. The two home runs, Electronic Arts and Dollar General, were enough, however, to make me want to learn more.

I was inspired to form an investment club. I had heard of Michigan-based NAIC and had some very vague ideas about what it promoted. I pulled together about 20 of my colleagues and former students and the Wolves Investment Club was formed. We still meet monthly and there are four charter members still active with the club.

NAIC turned out to be exactly what I needed as an investor. It offered me a disciplined approach that I could understand and implement and it provided me with tools that I could use to continue to search for undiscovered companies. I was especially interested in the emphasis that a well-designed portfolio must contain smaller, more volatile stocks as well as medium and large size stocks in order to beat the market.

There is no better way to learn than by teaching! The more we worked with the local chapter and clubs, the more we discovered that this approach to investing worked. But we encountered a challenge. Our colleagues and students were having a difficult time discovering medium and small stocks. Many investors need a “little” help when it comes to finding and evaluating smaller stocks.

Our programs always had the names of three of four interesting companies that might be worth studying on an SSG. I tried to keep my list fresh because people really seemed to appreciate the ideas and it also gave me a steady stream of companies to evaluate for my own portfolio. I became intrigued by Mark Robertson’s work on quality in Better Investing. Many of you might even remember that his early work taught us how to do a simple quality rating using Value Line.

We invited Mark Robertson to serve as a presenter at our annual stockpickers breakfast for the chapter, a program that, by its very nature, will often lead to a new “little” company to study. Following the event, a group of volunteers was discussing the dearth of investor fairs in Michigan and Mark suggested that we reach out to 6-7 adjacent volunteer chapters to build a regional conference. As they say, our lives took an unexpected turn that day as I agreed to serve as chair of first, the regional conference and ultimately as chair for NAIC’s national convention. I currently serve as chairman of NAIC’s national board of volunteer advisors.

We have learned to keep eyes and ears open for small company ideas. I use published lists like the Forbes best 100 small companies list that was just published. Take a look at how $100 invested in some of the small company ideas has done since October 2008 at:

http://www.manifestinvesting.com/dashboard/13452

I peek over the shoulders of proficient small company fund managers, monitoring their recent decisions. I read a large number of business magazines, always looking for articles about new, revolutionary products that might change the way we interact with the world and I use screeners regularly, trying to keep current with small companies that have become affordable. Manifest Investing has moved to the core of my tools.

Up, Straight and Parallel and a Little Myth. Many investors believe that small companies necessarily must have turbulent track records with large fluctuations in result. Ken’s work with smaller companies suggests that high-quality and relatively stable candidates for study can be discovered among small companies. Michigan’s own Neogen (NEOG) is an example of consistency and results despite being a relatively small company. When mining the Forbes Best Small Companies - insist on solid characteristics and a formidable track record.

I’ve always focused more on forecasted returns. MANIFEST has solidified my belief in working through a simple business model to arrive at a potential return.

“Up, Straight and Parallel” is just not a catch-phrase to me — it’s the core of my/our investing philosophy.

The journey from novice investor to small-company guru is really a journey centered around people. A “little nudge” from Jack Haas (my first boss), to Dr. Robert L. Jones (my father-in-law) and the Mid-Michigan Chapter of NAIC has pointed me in the right direction and provided support. Our MANIFEST and NAIC/BI communities continue to be supportive of my efforts and my investing partner, my wife, Natalie, keeps me grounded and focused on what is important. Thank you all for a never-ending grand journey that proves that the “little” things in investing clearly often matter the most.

Thanks, Ken and Natalie. Ken is regarded as a small company investing champion by audiences nationwide and writes a small company column for Better Investing. The BI Great Lakes regional conference is still going strong and will be held in Ann Arbor, Michigan, on March 25-26, 2011.

Ken Kavula

Ken Kavula is a retired educator and successful long-term investor. Ken has served in a number of leadership positions for the National Association of Investors and is active in four investment clubs. Welcome to the Clubhouse. Subscribers are invited to share their favorite experiences, suggest best practices and most importantly, let us know “What’s on your mind?” What topics and questions do you have? We all get better when we do this together. Email Ken at kkavula1@comcast.net.