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Santa Monica Partners Letters to Partners 1982-2021: 40 Years of "Pink Sheet" Investing
Compilation of 40 years of quarterly letters to partners.
- GenresFinance
508 pages, Hardcover
Published December 5, 2022
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February 7, 2025
Who knew adventures in capitalism could be so thrilling.
November 15, 2025
Reading Santa Monica Partners Letters to Partners is not like reading a normal book. I mean it clearly isn’t. It’s a collection of letters.
However, it feels like completing a 40-year investment apprenticeship when you get to the end, having experienced the ups and downs of the market with Lawrence. What one is left with isn't a collection of stock tips, but a deep, cohesive philosophy around investing, IF you do in fact read carefully, and in between the lines of why he made certain investments,
As I see it, Lawrence Goldstein’s entire strategy stems from that one powerful concept on the title page: investing in "Stocks overlooked or ignored by otherwise intelligent investors."
That's the whole game. My central takeaway is that Goldstein's "edge" didn't come from being "smarter" than those "intelligent investors." His edge came from having a different structure and, most critically, a different time horizon, which allowed him to play in arenas they were structurally forbidden from entering.
The "three standard questions" every institutional manager has to ask are: "'How are you going to buy more?'; 'What is going to make the stock go up?'; and then 'How are you going to get out?'" (p. 293).
Goldstein’s genius, it seems to me, was simply in building his entire portfolio from the stocks that failed this test. This institutional "need to gather stock first" (p. 76) leads to volatility in the main markets. As Goldstein notes, "Institutions tend to want to buy their positions 'now' and to sell 'now,' all at once. The less visible markets we prefer to deal in continue to exhibit long cycles and low volatility" (p. 76). His "large advantage" (p. 397) was simply his willingness to "look where... those neglected areas of the market are."
The biggest "Aha!" moment for me was realizing how this "neglect" actually works. It's not just about stocks being small or illiquid, which is where many microcap-focused investors today place their investable universe. The core mechanism, as I now understand it, is what I think is best described as "Categorization Failure." Goldstein’s core thesis is right here on page 107: "What we have going for us is a growing collection of good businesses... which are neither simple nor easy to be understood or valued properly." And that can happen in the OTC markets OR the NYSE.
The market, in its quest for simplicity, slaps a label on a company and moves on. The opportunity is in finding where that label is "absolutely wrong"…
The letters are a 40-year case file of this one trick.
• The market "perceived" (p. 181) Fidelity National as a "cyclical" housing stock. Goldstein, through deeper analysis, identified its true essence as a "dominant industry participant... clearly an oligopoly."
• The market saw a "high-multiple of EPS" (p. 294) at AlarmForce and labeled it "expensive." Goldstein re-categorized it by its economic reality, noting it "trades for only a single digit estimate of free cash flow" because the accounting obscured the value.
• The market saw Bel Fuse (p. 173) as just another "Technobubble" stock to be thrown out in the "Technocrash." Goldstein saw its true essence: a company "allergic to debt and always flush with cash... one hell of a good company!"
• The market saw Westaim (p. 125) as a "chemical company." Goldstein saw it as a "texture capital company masquerading as a chemical company," a sum-of-the-parts play.
• The market saw Imperial Parking (p. 165) as just a tiny, illiquid stock. Goldstein saw it as a "quintessential example" of neglect, a company with "no debt of any kind and $16 million of cash" against an "effective market capitalization... of a mere $19 million," all while being the "largest operator" in its field.
• My favorite example remains Safeguard Scientifics (p. 101). Here, Goldstein concluded that the "sales and earnings did not matter one lick." Why? Because while the market valued it as an operating company, "in actual manner of operations they were an investment company." He then "marked the public holdings to market... and concluded that the net asset value was two and a half times the market price."
• He did the same with the "bank" JSB (p. 90), which he found was just a fortress-like cash box that "barely make[s] any loans" and was "under-loaned and overly-liquid."
This seems to be the main job: to Socratic-question the market's lazy label and find the asset's true essence.
Once I understood the philosophy (Neglect) and the mechanism (Categorization Failure), the next question was how Goldstein structured his portfolio. He explicitly defines his returns on page 92: "avoidance of losses, a goodly number of modest improvers, and a few sizable winners." This is a quasi-"Barbell Strategy" (p. 92, 328, 352), and it's basically the Rosetta Stone for the entire strategy.
It's a two-part approach.
First, there is the "fortress" or "asset" bell. This is the "risk-first" (p. 389) side, the "avoidance of losses." I saved this quote from page 328: "A company doesn't need to have a competitive advantage... In some cases no profit at all is needed because the assets alone are valuable." This is the "liquidity-squared" (p. 67) part of the portfolio, where his holdings were so cash-rich ("Vista Resources 48%, Adrian Steel 62%...") that the portfolio was de-facto liquid. His "key statistical measurement" (p. 361) for this side was "cash and equivalents and not having any long term debt." This is where you buy a company that's "allergic to debt and always flush with cash" (p. 173).
Second, there is the "compounder" or "sizable winner" bell. This is the Fisher-esque side. He gives us the ultimate 8-point checklist from page 490 for what makes a "great investment":
1. "Market leader in a sticky business"
2. "Loyal customers... ( low 'churn' )"
3. "Highly profitable... (little incremental cost)"
4. "Clean balance sheet (lots of cash, no debt)"
5. "Able and honest management (small salary, large equity ownership)"
6. "Cheap price"
7. "Buying back stock"
8. "Potential to gain... (free optionality...)"
....This is where he used the "Lindy Effect" (p. 505) as a "tool" to find "near-necessity businesses" (p. 163). A perfect example is American Locker (p. 142), a "niche monopoly" that was "virtually the sole supplier" of "plastic cluster mailboxes for the U.S. Postal Service," which was "engaged in a decade-long program to replace all existing iron cluster mail boxes." That's a "sizable winner" if I've ever seen one. Mailboxes! Who would have thought?
This barbell structure resolves the apparent contradiction. It's not just a "cigar-butt" strategy, and it's not just a "buy-and-hold-quality" strategy. It’s a deliberate, bifurcated approach.
That "free optionality" part is worth paying attention to. He gives it a formal name: "Dormant Assets" (p. 357). These are assets "that do not yet produce a level of profit... or that have not yet been monetized."
The most vivid example, for me, was the company that "carry land in downtown Los Angeles on the balance sheet at original cost… It was purchased 100 years ago!!" (p. 58). That is the definition of a dormant asset.
But there are other examples. There was the "pizzazz factor" (p. 68) inside Balchem: a "potentially major new product... McDonald's new low fat hamburger" that was "completely ignored by the market." Or look at the "stub" value of Cairn Energy (p. 240), where his sum-of-the-parts math showed the market was valuing its oil at "$1.08/barrel" while peers were at "$12.62-$20.57."
But you don't just sit and wait.
The letters show he was actively looking for triggers to unlock this value. I think you will end up with a whole "catalyst toolkit":
• An industry-wide consolidation wave (p. 91).
• The "transformation" (p. 75) of a company from an "asset play to an earnings situation," like when Vista used its cash board to buy an insurer.
• An "active pal" (p. 119) who gets a seat on the board to force change and "found a first class buyer."
• A major "regulatory change" (p. 214) like the repeal of PUHCA.
• My absolute favorite: "Actuarial Arbitrage" (p. 203). The founder is 77 years old and must "contemplate an exit strategy." That is brilliant.
• Or, a "failed takeover bid" (p. 374), which is just a blaring, public signal that smart insiders know the stock is worth more.
In the end, what I think you are left with is a solid appreciation for the mindset required to execute this. You can't do any of this without a specific temperament.
The "flat tire" analogy (p. 121) perfectly captures the "risk-first" philosophy. You know a crisis is inevitable. He calls it a "fruitless and utter a waste of time... to base long-term investing on forecasting the future" (p. 122).
So...the antidote is to "buy good companies at low prices based on what they are worth today" (p. 122). This all flows from his first principle on page 389: "...before assessing what we can make, we more importantly first ask ourselves and weigh what we can lose."
This probably stems from his ability to be Stoic... to ignore the "maniac... with an axe" (p. 224) of the market's daily psychology and just "focus on what is important rather than on what is superficial" (p. 224), which is the "merits of the companies." His portfolio was a "reverse indicator" (p. 43)...it went up when the Dow fell. That takes confidence.
And how did he find the merits? "Scuttlebutt" He wasn't just a quant. It's probably why he loved this fact, which he wrote in all caps: "NO COMPANY we have ever invested in has ever provided us with any earnings guidance..." (p. 470). That lack of guidance is the moat. It creates the "Neglect Effect" by forcing analysts to do real, qualitative "scuttlebutt" work.
This all requires "patient persistence" (p. 35) to "accumulate small positions" and the "discipline to hold" (p. 491) that "basket" of special stocks. Finally, his sell discipline (p. 504) is all about "Opportunity cost." It's not about price targets. It's about boiling it all down to one single, rational question: "'by owning XYZ at $100, what am I implicitly choosing not to own instead?'"
However, it feels like completing a 40-year investment apprenticeship when you get to the end, having experienced the ups and downs of the market with Lawrence. What one is left with isn't a collection of stock tips, but a deep, cohesive philosophy around investing, IF you do in fact read carefully, and in between the lines of why he made certain investments,
As I see it, Lawrence Goldstein’s entire strategy stems from that one powerful concept on the title page: investing in "Stocks overlooked or ignored by otherwise intelligent investors."
That's the whole game. My central takeaway is that Goldstein's "edge" didn't come from being "smarter" than those "intelligent investors." His edge came from having a different structure and, most critically, a different time horizon, which allowed him to play in arenas they were structurally forbidden from entering.
The "three standard questions" every institutional manager has to ask are: "'How are you going to buy more?'; 'What is going to make the stock go up?'; and then 'How are you going to get out?'" (p. 293).
Goldstein’s genius, it seems to me, was simply in building his entire portfolio from the stocks that failed this test. This institutional "need to gather stock first" (p. 76) leads to volatility in the main markets. As Goldstein notes, "Institutions tend to want to buy their positions 'now' and to sell 'now,' all at once. The less visible markets we prefer to deal in continue to exhibit long cycles and low volatility" (p. 76). His "large advantage" (p. 397) was simply his willingness to "look where... those neglected areas of the market are."
The biggest "Aha!" moment for me was realizing how this "neglect" actually works. It's not just about stocks being small or illiquid, which is where many microcap-focused investors today place their investable universe. The core mechanism, as I now understand it, is what I think is best described as "Categorization Failure." Goldstein’s core thesis is right here on page 107: "What we have going for us is a growing collection of good businesses... which are neither simple nor easy to be understood or valued properly." And that can happen in the OTC markets OR the NYSE.
The market, in its quest for simplicity, slaps a label on a company and moves on. The opportunity is in finding where that label is "absolutely wrong"…
The letters are a 40-year case file of this one trick.
• The market "perceived" (p. 181) Fidelity National as a "cyclical" housing stock. Goldstein, through deeper analysis, identified its true essence as a "dominant industry participant... clearly an oligopoly."
• The market saw a "high-multiple of EPS" (p. 294) at AlarmForce and labeled it "expensive." Goldstein re-categorized it by its economic reality, noting it "trades for only a single digit estimate of free cash flow" because the accounting obscured the value.
• The market saw Bel Fuse (p. 173) as just another "Technobubble" stock to be thrown out in the "Technocrash." Goldstein saw its true essence: a company "allergic to debt and always flush with cash... one hell of a good company!"
• The market saw Westaim (p. 125) as a "chemical company." Goldstein saw it as a "texture capital company masquerading as a chemical company," a sum-of-the-parts play.
• The market saw Imperial Parking (p. 165) as just a tiny, illiquid stock. Goldstein saw it as a "quintessential example" of neglect, a company with "no debt of any kind and $16 million of cash" against an "effective market capitalization... of a mere $19 million," all while being the "largest operator" in its field.
• My favorite example remains Safeguard Scientifics (p. 101). Here, Goldstein concluded that the "sales and earnings did not matter one lick." Why? Because while the market valued it as an operating company, "in actual manner of operations they were an investment company." He then "marked the public holdings to market... and concluded that the net asset value was two and a half times the market price."
• He did the same with the "bank" JSB (p. 90), which he found was just a fortress-like cash box that "barely make[s] any loans" and was "under-loaned and overly-liquid."
This seems to be the main job: to Socratic-question the market's lazy label and find the asset's true essence.
Once I understood the philosophy (Neglect) and the mechanism (Categorization Failure), the next question was how Goldstein structured his portfolio. He explicitly defines his returns on page 92: "avoidance of losses, a goodly number of modest improvers, and a few sizable winners." This is a quasi-"Barbell Strategy" (p. 92, 328, 352), and it's basically the Rosetta Stone for the entire strategy.
It's a two-part approach.
First, there is the "fortress" or "asset" bell. This is the "risk-first" (p. 389) side, the "avoidance of losses." I saved this quote from page 328: "A company doesn't need to have a competitive advantage... In some cases no profit at all is needed because the assets alone are valuable." This is the "liquidity-squared" (p. 67) part of the portfolio, where his holdings were so cash-rich ("Vista Resources 48%, Adrian Steel 62%...") that the portfolio was de-facto liquid. His "key statistical measurement" (p. 361) for this side was "cash and equivalents and not having any long term debt." This is where you buy a company that's "allergic to debt and always flush with cash" (p. 173).
Second, there is the "compounder" or "sizable winner" bell. This is the Fisher-esque side. He gives us the ultimate 8-point checklist from page 490 for what makes a "great investment":
1. "Market leader in a sticky business"
2. "Loyal customers... ( low 'churn' )"
3. "Highly profitable... (little incremental cost)"
4. "Clean balance sheet (lots of cash, no debt)"
5. "Able and honest management (small salary, large equity ownership)"
6. "Cheap price"
7. "Buying back stock"
8. "Potential to gain... (free optionality...)"
....This is where he used the "Lindy Effect" (p. 505) as a "tool" to find "near-necessity businesses" (p. 163). A perfect example is American Locker (p. 142), a "niche monopoly" that was "virtually the sole supplier" of "plastic cluster mailboxes for the U.S. Postal Service," which was "engaged in a decade-long program to replace all existing iron cluster mail boxes." That's a "sizable winner" if I've ever seen one. Mailboxes! Who would have thought?
This barbell structure resolves the apparent contradiction. It's not just a "cigar-butt" strategy, and it's not just a "buy-and-hold-quality" strategy. It’s a deliberate, bifurcated approach.
That "free optionality" part is worth paying attention to. He gives it a formal name: "Dormant Assets" (p. 357). These are assets "that do not yet produce a level of profit... or that have not yet been monetized."
The most vivid example, for me, was the company that "carry land in downtown Los Angeles on the balance sheet at original cost… It was purchased 100 years ago!!" (p. 58). That is the definition of a dormant asset.
But there are other examples. There was the "pizzazz factor" (p. 68) inside Balchem: a "potentially major new product... McDonald's new low fat hamburger" that was "completely ignored by the market." Or look at the "stub" value of Cairn Energy (p. 240), where his sum-of-the-parts math showed the market was valuing its oil at "$1.08/barrel" while peers were at "$12.62-$20.57."
But you don't just sit and wait.
The letters show he was actively looking for triggers to unlock this value. I think you will end up with a whole "catalyst toolkit":
• An industry-wide consolidation wave (p. 91).
• The "transformation" (p. 75) of a company from an "asset play to an earnings situation," like when Vista used its cash board to buy an insurer.
• An "active pal" (p. 119) who gets a seat on the board to force change and "found a first class buyer."
• A major "regulatory change" (p. 214) like the repeal of PUHCA.
• My absolute favorite: "Actuarial Arbitrage" (p. 203). The founder is 77 years old and must "contemplate an exit strategy." That is brilliant.
• Or, a "failed takeover bid" (p. 374), which is just a blaring, public signal that smart insiders know the stock is worth more.
In the end, what I think you are left with is a solid appreciation for the mindset required to execute this. You can't do any of this without a specific temperament.
The "flat tire" analogy (p. 121) perfectly captures the "risk-first" philosophy. You know a crisis is inevitable. He calls it a "fruitless and utter a waste of time... to base long-term investing on forecasting the future" (p. 122).
So...the antidote is to "buy good companies at low prices based on what they are worth today" (p. 122). This all flows from his first principle on page 389: "...before assessing what we can make, we more importantly first ask ourselves and weigh what we can lose."
This probably stems from his ability to be Stoic... to ignore the "maniac... with an axe" (p. 224) of the market's daily psychology and just "focus on what is important rather than on what is superficial" (p. 224), which is the "merits of the companies." His portfolio was a "reverse indicator" (p. 43)...it went up when the Dow fell. That takes confidence.
And how did he find the merits? "Scuttlebutt" He wasn't just a quant. It's probably why he loved this fact, which he wrote in all caps: "NO COMPANY we have ever invested in has ever provided us with any earnings guidance..." (p. 470). That lack of guidance is the moat. It creates the "Neglect Effect" by forcing analysts to do real, qualitative "scuttlebutt" work.
This all requires "patient persistence" (p. 35) to "accumulate small positions" and the "discipline to hold" (p. 491) that "basket" of special stocks. Finally, his sell discipline (p. 504) is all about "Opportunity cost." It's not about price targets. It's about boiling it all down to one single, rational question: "'by owning XYZ at $100, what am I implicitly choosing not to own instead?'"
December 19, 2024
Goldmine. Thank you to Larry and Joe for compiling this and sharing it with the world for us to learn.
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