IDEA GENERATION.
“And he puzzled and puzzled ‘til his puzzler was sore.
The Grinch thought of something he hadn’t before.”
Theodore Suess Geisel
When explaining my process, I’m often asked, ‘how do you come up with an idea?’ I usually default to the expected: ‘I read a lot,’ ‘I run screens,’ or ‘I attend investor conferences,’ but none of these strikes me as particularly unique or revelatory. Reality is far more mundane. I sift through the same raw material as everyone else, hoping to arrive at a different conclusion, or at least one that I can call my own.
While I’d love to distill my approach into a tidy package, preferably a graphic suitable for marketing, I’m convinced it would be an oversimplification. After performance charts and manager bios, the most common slide in a pitch deck is one I call ‘the funnel.’ Managers show their investible universe (usually a benchmark), how they filter the stuff they don’t like (say the unprofitable, highly levered, illiquid, or socially frowned upon) and if they’re a small cap manager like me, they still have 1,000 companies to wade through. Guardrails this wide are more decorative than deterrent. It’s like saying ‘I only buy stocks on days that end in y.’
At the root of the question is a desire for predictability and standardization, which isn’t active management’s bailiwick. While the ETF industry would have us believe that successful investment outcomes can be reduced to a few screening criteria or that returns are pre-ordained by statistical relationships (also known as factor investing), I’ve yet to see one that promotes sound judgement.
Only active management can lay claim to discernment (a weak claim given its track record, but a claim nonetheless). One thing I love about my chosen craft is its subjectivity. The right answer in one market can be precisely wrong in another. Systematic rules-based approaches can work over a cycle, but data shows they’re equally subject to periods of underperformance. I find this comforting. It means they’re served the same humble pie as the rest of us, only they get to blame the model instead of themselves.
The primary reason equities tend to outperform other assets over long periods is that they’re inherently unpredictable. You can calculate the probability of default of an investment grade bond with a fair amount of certainty but knowing whether a company will earn $4.00 or $6.00 a share five years from now is going to take some guess work. You should be skeptical of all forecasts, but especially those that feign precision. The truth is investing is a messy business, characterized by rapidly changing facts, fickle sentiment and unknowable outcomes. If the winners could be identified ahead of time, none of us would play.
The two words I use most to describe my process are idiosyncratic and opportunistic. I try to focus on special situations which is a manager’s way of saying he’d rather not to be defined. Many of the fund’s holdings lack a natural home, either their growth rates fail to impress, or they aren’t statistically ‘cheap’ enough to attract the value crowd. I deliberately look for castoffs that don’t fit others’ criteria, which is why the portfolio often resembles an Island of Misfit Toys.
The reason I like this approach is that it responds to what is, rather than what we’d like it to be. Investors who start with a preconceived notion of what they want from an investment: a deep moat, fast growth, a cheap price, low volatility, preferably all four, will try to shoehorn their expectations onto a company. Since other investors like those things too, you may find them already reflected in prices. But if you approach an idea on its own terms, paying special attention to how it got there, known as the bottom-up approach, you’ll be surprised by what the market presents.
BEST PERFORMERS SINCE INCEPTION
TICKER NAME AVG WEIGHT RETURN*
PDEX Pro-Dex Inc 2.3% 130.4%
SCHL Scholastic Corp 5.2% 121.2%
PLOW Douglas Dynamics Inc 2.0% 87.8%
CHCI Comstock Holding Companies 1.5% 84.3%
CBZ CBIZ Inc 3.3% 78.5%
AVERAGE 100.4%
*Returns are time-weighted since inception through 8/31/26.
Pro-Dex manufactures surgical hand tools and the market feared they might lose their largest customer. They didn’t, and the fund’s investors profited handsomely.
In 2025, Scholastic said on a public call they were going to explore monetizing their real estate. Nine months later, they received almost $500 million, roughly the market cap at purchase.
Douglas Dynamics makes snowplows and after two years of no snow, channel inventory finally rebalanced and people started ordering again. Earnings grew 54% in 2025.
Comstock manages real estate in Washington, DC, which faces oversupply and weak government employment. But their assets are highly desirable, leased up quickly and fee revenue grew 40%.
CBIZ is an accounting firm, struggling with integrating a merger of equals while the industry weighed the implications of AI, yet it traded for a fraction of what private equity had paid for peers. It ended up being acquired at a substantial premium less than six months after purchase.
I list these examples because I doubt a funnel or screen would identify them. Each had very specific circumstances that created the conditions necessary for opportunity. Rather than prescribe what I was looking for and insisting the market bring it to me on a salver, I kept an open mind, sought to understand the drivers of each and formed my own opinion of their worth. This approach may not lead to the most predictable outcomes, but it seems to work out okay.
Sincerely,
Dan Walker