Lessons From 24 Years of Operating: Bowl America, Inc. (BWL.A)

Bowling isn’t a sexy business. In fact, it’s sort of a dying business. Drive by any bowling alley and you’ll find flickering lights and half-filled parking lots. Physical bowling has been replaced by handheld entertainment. Virtual copycat. One might reasonably assume that owning a bowling operator would make for a poor investment.

Yet, what if I told you one of the best public owner-operators ran a bowling business? And what if I told you this same owner-operator never experienced an operating loss in 55 years?

Enter, Leslie H. Goldberg.

Goldberg took over the bowling business from his father after World War II. Luckily for us, he’s left behind over 20 years of shareholder letters. I dug through each one going back to 1995.

The amount of knowledge gained from reading this “simple” bowling operator is astounding. I found gems of wisdom that echoed Buffett’s earlier writings. There are lessons on operating during a war cycle, adapting to changing consumer habits and more.

Goldberg sounds like the brain-child of Warren Buffett and Joel Greenblatt.

As the Internet overdoses on high-profile Silicon-Valley investor letters. It forgets about the little guys. The small, family-owned operators grinding it out year after year. It’s time to give owners like Goldberg their time in the sun.

We have 24 shareholder letters going back to 1995. I want to take you through each one. I’ll highlight a few key insights and apply those lessons to investing in today’s world.

Along with this breakdown, I’ll add some of my own thoughts on the practical application of some of Goldberg’s ideas. Think of it as a reverse-engineered interview. Throughout each letter, I talk to Goldberg, flesh out his concepts and wonder what he’s thinking next.

Bold quotes are my own personal emphasis.

You can find all Goldberg letters here.

Strap on your bowling shoes, it’s time to dive in!

Letters from 1995 – 1999

1995: Switching Costs & Leisure Time

1. “People adjust their recreation activities to accommodate changes in their schedules. They [consumers] do not increase their total recreation expenditures as more options become available; rather they reorder their priorities. They change their total recreation expenditures as their expectations of their earnings change, except in the case of gambling, which often diverts money from other activities.”

The meat of this quote involves the phrase “rather they reorder their priorities”. This is an important distinction. More choices aren’t correlated with increased spending on recreation. Instead, we rank which activities we actually want to do.

This reminds me of the Paradox of Choice theory coined by psychologist Barry Schwartz. The Paradox of Choice states that humans become more anxious with more options. It sounds counter-intuitive, but think about when you order at Chipotle. If Chipotle added five more meat and cheese options, would you feel more enthused? Or would you feel more stress as people behind you wait on you to make a decision?

Goldberg knew this back in 1995, almost 10 years before Schwartz released his famous book. Goldberg also knew bowling would face a tougher time with each incremental new activity.

2. “We will also face the problem that many of our customers will reorder their priorities because of actions beyond our control. In Maryland, for all practical purposes, you can no longer smoke in a bowling center. We have already seen a dramatic decline in league bowling in the centers [affected], as smokers find the restriction limits their enjoyment of the game, and there has been no increase in ‘non-smoking’ traffic.”

This quote about smoking restrictions struck me as ingenious. Marketing guru Rory Sutherland chatted about this concept in a Ted Talk.

Rory jokes (and I’m paraphrasing), “When you’re at a party and you stand off in the corner looking out of a window, alone, you’re a bit of a loser. However, put that same man in the corner, alone, looking out of a window — but this time have him hold a cigarette. Now he’s a fucking philosopher.”

Bowling (like video games and concerts) is more a platform for social interaction and community than a utility good. In other words, people don’t pay for bowling for the actual act of bowling. Rather they pay for the venue and the platform to engage in community with friends. Similar to how video games have shifted from experience to community-based interactions.

It reminds me of Alex Danco’s theory on video games.

3. “Male and female bowlers skills overlap to such an extent that leagues can be organized without regard to gender. Almost anyone can be taught to bowl. And over 95% of adults do not currently bowl in a league. That’s a great potential for a great game whose importance to the community is being recognized anew.”

Goldberg hints at the low barriers to entry for a sport like bowling. Bowling is unique in that its a sport that any able-bodied person can pick up. Most times with ease.

Another unique aspect of bowling is the lack of gender difference in skill level. Other sports (basketball and football) have clear differences in skill level between genders.

1996: Capital Allocation & Forecasting

1. “The number of times that companies with enormous financial resources and stables of previously successful executives ‘get it wrong’ when it comes to predicting the public taste is a measure of the difficulty of the task.

Forecasting is hard with quantitative measurements. Forecasting human emotions, tastes and preferences is damn near impossible. It’s difficult to know what the consumer wants. Why? Most times the consumer herself doesn’t even know what she wants.

2. “This uncertainty about recreation spending led Bowl America to develop its approach to the allocation of our resources.”

3. “People often react to a strong balance sheet the way they do to an insurance premium for a catastrophe that didn’t happen. In our case, we paid little for our security and flexibility for expansion and modernization because of the earnings received over the years from the investment of our reserves.”

Goldberg begins fleshing out his capital allocation theories in his 1996 letter. He prefers a strong balance sheet with loads of cash and no debt. He views a cash-loaded balance sheet as an insurance vehicle.

We’ve seen this before from a man in Omaha, NE. A strong balance sheet protects a business during a major downturn in the business cycle. Yet Goldberg reminds investors that the cash generates returns. So it’s not completely idle.

4. “Our focus remains on building a profitable company from which the owners receive continuing income. We have never viewed Bowl America as a trading vehicle and those of you who have read these reports will know that we distinguish between profiting from a business and profiting from trading paper.”

If I took out the words “Bowl America”, you would think this were Joel Greenblatt. Goldberg makes it clear to investors that BWL.A is in it for the long-term. Families depend on the income from this small company.

That’s also why I love diving into small and micro-caps. These are businesses that feed families in a more direct way than larger firms.

1997: Operational Improvements & Marketing Ideas

1. “One such effort that shows promise is glow-in-the-dark bowling. We now have 12 centers in operation or scheduled for equipment. In addition to higher revenues, we’re seeing increased traffic from young adults, a group we had not been regularly reaching.”

One way to spur youth involvement is to create something new. Something like glow-in-the-dark bowling. It works because it’s a visually drastic change, but isn’t a major capital expense.

Yet it shifts how young people view the activity. It goes from being an “old person’s game” into the hip, cool thing to do on a Friday night.

Goldberg reached the younger population by offering another marketing incentive: good grade rewards.

2. “We also worked closely with local school systems to reward academic achievements. Students were offered a free bowling game at a Bowl America center for every ‘A’ on their final report cards.”

Although simple in practice, this marketing technique is genius. Incentivizing students with free bowling games does two things. First, it creates an image that Bowl America wants students to succeed. This increases people’s affinity for the company.

Second, the company knows that these students can’t drive. This means for every one free game of bowling a student receives, their parent(s) pay for an equal game. Moreover, if the student has siblings, they will most likely bring them along for a game.

This is a perfect example of Rory Sutherland’s “1+1=3”.

3. “This conversion [owning amusement games vs. third-party operators], installation of glow-in-the-dark, our expansion at Dranesville, and the closing of two unprofitable centers created extra expense in the last quarter of 1997, but has improved profitability at the start of fiscal 1998.

If there’s one sign that management’s focused on the long-term, it’s this: creating short-term expenses for longer-term increased profitability. Short-term operators wouldn’t close down stores, add glow-in-the-dark capabilities and buy-out third party concession operators. At least not all in one year.

Yet Goldberg’s able to look beyond the next quarter or next year. He’s setting his business up for success five, ten, even twenty years from now.

1998: Thinking about Revenues & Working Staff

1. “League bowlers provide the steady base to support our operations by showing up every week. The casual or non-organized bowlers provide a less predictable but increasingly important contribution to our earnings.

This is a great way to think about the bowling business. You have two customers you’re trying to reach. One is the league bowler. This is your “fanatic”. They’ll show up every week, pay their dues and bowl for hours.

The next customer is the casual fan. The one that shows up with a date or a couple buddies. They don’t normally bowl, but given the rainy weather outside, they decide to shake things up.

Goldberg knows he has to focus on the fanatic bowlers. These bowlers keep the lights on. But the real money at the end of the year comes from the casual bowlers. These, while infrequent, have the potential to increase returns ten-fold. These are your casual bowlers.

2. “But two of our best performing centers could not accommodate much of the new equipment, and still significantly improved their results, mostly by working harder at giving good service.

We see in the 1998 letter a focus on customer service. Later he remarks, “More and more, when observing our staff solve a problem, I find myself wishing I had thought of their response.” Great leaders commend their employees.

3. “But there is little we can do about the weather. Continuing to adapt to the shift to casual bowling while not discouraging the heaviest users, our league bowlers, remains our biggest challenge. Our biggest asset in managing the process remains our capable and experienced staff.

What I like about this quote is Goldberg’s focus on what he can control, and his disregard for what he can’t control. He mentions earlier in the letter that “weather does not recognize a fiscal calendar.”

This quote doubles as the business model for Bowl America. A succinct, one sentence model.

1999: Stock Buybacks and Customer Retention

1. “When a bowling center is filled with leagues, potential open play customers become discouraged and may not even try to bowl. This provides a shrinking pool of replacement bowlers for existing leagues. It is only when league play has contracted enough that people feel they can drop into a bowling center on a weeknight and get a lane that we can begin to build back our customer base.

2. “Our challenge is to make sure that those customers enjoy themselves enough to participate regularly and to talk about the fun they had to their friends, neighbors and fellow workers.”

Repeat customers are the lifeblood of any company. The casual fan needs to enjoy herself enough to come back. Goldberg knows that if he can convince each customer to revisit the bowling center at least twice, he’s won their business.

Goldberg even mentions an analysis of a competing recreation center that went bankrupt. When reviewing the insolvent firm, the analyst noted, “[the business] needed only to get customers to come back a second time to survive.”

Goldberg trained his staff to get customers to come back 35 times a year. Talk about margin of safety.

3. “It is superior customer service that has made Bowl America the bowling centers for people who love to bowl.”

4. “Also, the greater the number of recreation events a person tries, the greater the bargain bowling seems. Therefore, we should get the advantage of better pricing to support all of our locations.”

Goldberg’s business has two things going for it:

1. excellent customer service

2. substitution effects.

Goldberg mentions many times the level of customer service. He attributes much of each center’s success to the employees that work everyday. This reminds me a lot of Jeff Bezos’ obsession with the customer.

Goldberg also benefits from substitution effects.

How does substitution effect work in Bowl America’s favor? Comparatively, bowling is a lower-cost option for fun. It’s one of the few date ideas that won’t wring you out of $50. So, with every new form of recreation a person tries, bowling will likely appear the cheapest option.

Letters from 2000 – 2004

2000: What Makes a Strong Financial Position

1. “I am enclosing the press release from our nine-month earnings report, which shows that we have completed our eleventh consecutive year-to-year quarterly profit improvement.”

2. “Bowl America has increased its dividend for 28 consecutive years and twice in the last twelve months.”

The year 2000 marked 11 straight quarterly profit improvements. The company also increased its dividend for the 28th straight year. Credit that to Goldberg’s fiscal responsibility and fortress-like balance sheet.

3. “Bowl America has no debt. In addition, we have substantial reserves to adapt to changes in public taste, both now and in the future. Casino operators (among other masters of statistics) are quick to tell you that you have to have the cash to outlast a bad run so that you can capitalize on the good run that inevitably follows.”

No debt, large cash reserves and an optimistic outlook. That seems to be the recipe for Goldberg’s financial success. During the time of this letter, many bowling operations closed shop due to debt. Goldberg’s avoidance of debt is so strong it’s as if he’s scared of it.

4. “Timing the market is beyond me. But a dividend that increases faster than prices provides real income in any market and downside protection in a poor market. It gives us a chance to share our success four times a year, something I hope we can do for many years in the future.”

Goldberg reiterates the benefits of real income BWL.A produces for its shareholders. Why do I keep going back to this saying? Because the purpose of this business is to generate income for shareholders.

Goldberg doesn’t mention capital gains or trading profits. He mentions real income. It’s this distinction that infects his letters with a sense of true ownership.

2001: Simple Business Models & Ownership in Business

1. “Bowling is easy to understand, simple to learn and allows people of various skill levels to compete with each other. Add to that Bowl America’s policies of locating sites near our customers, moderate pricing and emphasizing friendly service and you have a foundation for earnings longevity.

There’s nothing confusing about what Bowl America wants to do. They want to bring bowling to where the people are. At an affordable price. With excellent service. Prioritizing the customer.

2. “Bowl America is one of the leading companies in providing its owners with these annual [dividend] increases. At the end of 2000, according to Mergent’s Dividend Achievers, only 73 companies of the 10,000 they surveyed had longer consecutive dividend increase records.

This is an impressive feat for any company. Let alone a micro-cap stock. Once again we see a focus on ownership and being owners of BWL.A, not owners of paper.

3. “However, we were able to use the money we might have used for a new location to buy in more of our stock, increasing each shareholder’s stake in the remaining bowling centers. The combination of reduced shares outstanding, the strength of our balance sheet and the relatively higher valuation granted by the market to dividend-paying stocks combined to enable us to reach an all-time high for Bowl America stock.

Goldberg again portrays his knowledge of capital allocation philosophy. He understood that higher returns were possible if he bought back stock. This is also the first time he mentions BWL.A’s stock price. And as we’ll see he’s quick to note why he mentioned it.

4. “That [share price increase] often gives rise to a temptation to sell one’s interest in a successful company in order to find another more successful company … We prefer to continue to emphasize the benefits of ownership of a business as opposed to ownership of stock certificates.

Read that again and tell me it doesn’t sound exactly like the doctrine Joel Greenblatt preaches. Goldberg is a value investor through and through. He knows that share prices are blips on a screen and not a reflection of the true underlying value of a business.

2002: Thoughts on The Double Tax of Dividends

1. “I have always held that our objective should be to help our shareholders prosper through their ownership of Bowl America … Dividends have the benefit of being paid in cash, not accounting fantasy. The disadvantage is that they are subject to double taxation.

Double taxation.

My biggest gripe when it comes to dividends. The first tax is the tax on operating earnings of the company. Then, if a company issues a dividend, the shareholders pay income tax on that dividend. Ouch.

This is why I prefer buybacks. When companies buy back stock, they don’t inflict the double taxation rule. Yet at the same time increase the value of each shareholder’s stock.

2003: Opportunity Cost and Board Dependence

1. “The current panacea is control of companies by “independent” directors. I favor “dependent” control of boards … My preference is, however, related to the fact that the “dependent” directors will be more likely to share in any loss caused by their decision making. If a director shares with other owners the risk of loss from the collapse of the enterprise, he or she is more likely to focus on the company’s survival.

I’ve never understood “independent” board members. If you think about it, board members should have a vested interest in the future success of a company. It never made sense to have a board of directors, paid for showing up four times a year, without skin in the game.

Goldberg nails the reason why. A dependent board, one with skin in the game, must think long-term if they want to reap financial success.

2004: Longevity, Building New Stores and Short-Term Thinking

1. “For the first time in ten years, we are building a new bowling center from scratch … It will add to our standing as the best and oldest continually operating bowling company in the Richmond [VA] area.”

After failing to find bowling centers to buy, Goldberg took matters into his own hands. The company had the cash on hand to build the bowling center without debt. Even with building a new facility, the company kept its promise of dividend increases. Good for 32 consecutive years.

2. “Location in any retail business is important, but we have always felt that longevity flows from great customer service and great customer service flows from people who enjoy what they do. I have always been pleased that so many of our employees are bowling enthusiasts.”

Goldberg’s recipe is simple: Focus on the customer. Make sure they have the best experience possible. Word-of-mouth experiences are binary. You either had such a great time that you must tell others. Or you had such a bad time that you need to let others know so they avoid your experience.

3. “Another group shares the need for price increases, but has an even shorter horizon. These are the so-called money managers, whether they be mutual funds, pension funds or insurance companies that are threatened with investor defection if they didn’t ‘match market performance.’

Letters from 2005 – 2009

2005: The Changing Consumer

1. “As our business shifts from the committed week-after-week bowler to what we call the casual bowler, it will become even more important to vary our entertainment, communication and control capabilities.”

We see the beginnings of a tectonic shift in their core business model. A few letters back, Goldberg referred to his league bowlers as the earnings driver. Casual bowlers, in contrast, provided hefty (albeit lumpy) returns.

Instead of burying his head in the sand and sticking to the “old way” of doing things, Goldberg adapted.

2. “League bowling is not dead. Only this week I heard a report that sociologists have discovered that many of the declining neighborhood institutions are showing turnarounds. The reason given is the growth in the immigrant population, which is looking to community groups as a way to participate with their neighbors.

Goldberg believes in the league bowler, but not as his main source of revenue. Yet the most important piece of this quote revolves around the community group. With each incremental advance in technology we lose that shared, human connection.

This is why companies such as Nextdoor and Discord are Silicon successes. These businesses thrive on creating a sense of community within a neighborhood. In the case of Nextdoor, a community as small as your zip code.

2006: The Pitfalls of Earnings & Not Selling Shares

1. “Also, some of our best business is done in locations that have been actively used for almost 50 years. This year, some of the oldest buildings required expensive and unpredicted repairs. These buildings, however, are well located for future growth.”

Businesses aren’t linear entities. They’re living, breathing, volatile organisms. Thus, earnings should not grow in a linear fashion over the long-term. If they do, it might be a sign of earnings manipulation. But I digress …

2. “We have long argued that shareholders are best served if they can share in their companies’ success without having to sell their stock.”

Here we see Goldberg (again) push the doctrine of thinking of stocks as pieces of businesses.

3. “Future success won’t simply flow from bricks and mortar. It will be determined by the skills of our people and customs we have developed over the years.”

Goldberg emphasizes the importance of his employees whenever he gets the chance. That’s a sign of a great leader. That’s a sign of someone you want to work with.

2007: Bowling People, Not Stock People

1. “Three hundred thousand shares of the new Bowl America stock were sold to the public at $2.00 [at founding]. In addition to the current fiscal year being a birthday for the bowling center, it will also mark the year in which the cumulative dividends on that single $2.00 share will exceed $100.00. Those original investors who were smart enough not to sell their original shares now have 11.3 shares of Bowl America stock.

This is a testament to the power of compounding. Investors received 11.3 shares for every one share owned — all through dividends. Granted that was over the course of 50 years, but that’s the point. You bought and you held it. You participated in the business rather than traded its shares.

Goldberg made no mistake about what he wanted the company to be: A conservative enterprise that generates income for shareholders.

2. “We were bowling people, not stock market people, and our objective was to create a secure, profitable bowling company to generate income for our families’ futures. We, therefore, valued survival of the company as our top priority. We proudly reported paying off each mortgage.

Now contrast this approach with today’s public companies. We live in a time where money is cheap, revenue growth is the gauge of success and fiscal responsibility is low.

How much better would public companies be, micro-caps in particular, if they ran their businesses like Goldberg? A business that focused on preservation of capital. An obsession with its employees and its customers. Would we see such pessimism permeate through the micro-cap space if that happened?

2008: Strong Balance Sheets & Business Reform Ideas

1. “As of today, we own 17 of our 19 bowling centers. None has a mortgage. In fact, we have no long-term debt. Our payrolls and trade bills are current … We, therefore, expect that we have deep protection for our ability to finance our center operations and to support possible expansion. Further, unless there is a runaway panic, we believe that our healthy balance sheet would enable us to borrow if a promising option became available.”

And so we’ve arrived. The Great Financial Crisis. Yet before reading the 2008 letter, one would assume that the company would survive — and even thrive.

Emphasizing a strong balance sheet, little to no debt and a focus on creating value pays off. It’s obvious in times like the GFC.

Businesses with great balance sheets and zero debt relish opportunities like 2008. During recessions, responsible businesses can scoop up competitors for pennies on the dollar.

Goldberg reminds shareholders of this idea, saying, “I hope you will take comfort as we work through the problems and opportunities of the near term, that we share common objectives.”

2009: Bad Politics and Long Term Capital Management

1. “I was recently asked if I could recall a scarier time for business … ‘How about December 7, 1941?’

If that doesn’t put things into perspective for shareholders I don’t know what will. Think bigger (and farther out) than the last few quarters.

Letters from 2010 – 2014

2010:  Matching Expenses and Long-Term Investing

1. “We have, therefore, devoted our efforts during the past year to bringing our expenditures as closely in line as possible to our traffic, continuing to promote the business and providing a service that, when economic conditions change, will enable us to accommodate the upswing in our business.”

2010 marked BWL.A’s first league bowling season under Virginia’s “no indoor smoking” policy. We saw the negative effects of a smoking ban in earlier letters.

Why do people have such a hard time quitting the devil stick? There’s the nicotine, yes. But is that it? I stumbled upon an article from Psychology Today (written by Romeo Vitelli, Ph.D) addressing this very issue.

The article reveals that, “Not only did study participants describe themselves as being friendlier, more extroverted, and less socially anxious after ingesting nicotine, but nicotine use helped improve awareness of social and facial cues compared to participants who had abstained from nicotine use for 24 hours or longer.”

Now it’s clear why a smoking ban hits bowling sales. Bowling was the outlet, the catalyst for social smoking.

2. “Perhaps someday people will view stock purchases as an opportunity to own part of a business and not simply a piece of paper. We will continue to run this company as though we represent people who prefer the former.”

I love this. There’s nothing to add.

2011: Skin in The Game & Operating Leverage

1. “As you may have noted over the years our Board shares the risks and rewards of ownership of Bowl America with all of you. Our ladder has been designed to protect as well as possible every owner of the Company.”

Goldberg’s 2011 letter brings back the notion that Board members should have skin in the game. That they should own a part of the business they’re running. While such a common sense idea, it amazes me how few boards install this philosophy.

2. “Debt can create the risk of bankruptcy. We have no debt. It has been over 20 years since we paid off our last mortgage. Rent in a troubled economy can be as dangerous as debt.

Many investors underestimate the cost of obligations. We see this especially in retail businesses. Why is that? Under GAAP accounting, operating leases count as an operating expense. This makes sense at first glance. You need the building/space to do normal business activities.

Yet valuation guru Aswath Damodaran disagrees. He suggests, in his 2009 whitepaper, that operating leases should count as a financing expense. According to Damodaran, leaving leases as an operating expense, “results in a skewed estimate of profitability, leverage and value.”

What does he mean by that?

Damodaran argues that operating leases look, smell and feel like regular debt. The type of debt you would see on a balance sheet. It makes sense. Leases meet all the requirements of debt:

    • length agreements
    • contract terms
    • specified payments
    • use of building as collateral if payment is not received.

Yet for some reason, these payments don’t receive capital expense status.

This designation results in higher than actual operating income, returns on equity and lower debt to equity ratios. All these things matter when valuing a business.

Goldberg drives this point home later in the letter, saying, “We own the land and buildings at 17 of our 19 bowling centers. In addition to the security that provides, the cost savings when compared with rent are significant.”

2012: Hoarding Cash & Staying Profitable

1. “We are not pleased with our results but we are pleased that we have done better than many companies in keeping the doors open and employment levels high and in operating profitability during every year of this downturn.

Staying profitable during the Great Financial Crisis is applause-worthy on its own. Doing so in a recreation dominant business? Even more impressive.

Bowling, like most recreational activities, isn’t an inelastic good. We engage in recreation in tandem to our level of leisure time and discretionary income.

There wasn’t much of either between 2007-2009.

2. “We are probably the oldest firm in the bowling business which has the operation of bowling centers as its primary activity. Over the years our interaction with you, with our customers, and with our employees has convinced us that all prefer a more predictable outcome to an adventure.

Goldberg wants to be the tortoise, not the hare. In a business where the board, the employees and the CEO owns most of the company’s stock, this makes sense.

There’s a skewed preference among value investors around distribution of returns. Most value investors prefer a lumpy, but excess return. Meanwhile, Goldberg prefers a steady, predictable income stream. After all, this business feeds his family, and his employees’ families.

2013: Employee Ownership & Inflation Benefits

1. “Survival of the employer is the cornerstone of employee security. But benefits must be personal for employees to commit to a career. Our full-time employees, without cost to them, participate in our stock ownership plan which now owns 7% of Bowl America stock.”

Employee stock ownership makes sense. You want your employees to care about the long-term future of the business. What better way to inject that sense of long-term thinking than via direct ownership?

Investors relish large, C-suite level ownership. But it’s employee ownership that matters more. The reason for this hypothesis lies in scuttle-butt research. When managers engage in scuttle-but, where do they find the most valuable information?

It lies inside the trenches.

Erik Forsblom and Ludwig Smedberg dove deeper in their whitepaper, Stock-based Compensation and Shareholder Value. Their results were, well, predictable.

Companies with more generous (or presence of) employee stock ownership programs generated almost double the return over the five-year period. The study also found that the use of warrants resulted in even higher shareholder return.

This isn’t to say that employee stock programs were the sole reason for excess return. The companies that offered such programs could be better companies in general. But it is something to think about.

2014: Digging Out From Recession & Social Capital

1. “Our results continue to disappoint despite the fact that this was the 51st consecutive year of profitable operations … You have perhaps noticed in the news the pattern is the same for golf rounds played, movie attendance and even some football stadiums. People simply have more choice for recreation and for shrinking budgets.”

We first saw this instance of Paradox of Choice in Goldberg’s 1995 letter. A decade later, it resurfaces. It shows how challenging it was for businesses to get back to Square 1 after the GFC.

BWL.A’s stock recovered in swift motion — less than three years — but the underlying business failed to grow. Imagine how difficult things would’ve been if they had excessive leverage.

Goldberg ends the 2014 letter giving his elevator pitch for bowling:

2. “Bowling is the most gender-neutral major popular pastime. Bowling is safer and more age inclusive than almost any sport. Our game is economical (the price of a game actually declined in the last year). Bowling is an important contributor to social capital.

Social capital. The term first coined by Robert Putnam in his book Bowling Alone (imagine that). In Putnam’s words, social capital “refers to features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit.”

Goldberg runs with the idea. Each Bowl America building is the hub for social capital. People come in, bowl, and grow their social capital. That social capital then spreads throughout their community. The community grows closer together, prompting more group-level engagement. These groups then choose to bowl together … And the beat goes on.

Letters from 2015 – 2018

2015: Light at The End of The Tunnel

1. “If you acquired one of the original shares at $2.00 and still held today, you would have 11.4 shares and would have received dividends of $164. The market value of those 11-plus shares roughly equals the dividends received, suggesting a balanced return as rewards of our ownership.

Ben Graham liked to say that in the short-term, markets are voting machines. It doesn’t matter the fundamentals of a business or strong financial position. In the short-term, anything’s possible.

That’s the beauty of an auction-driven market. We can take advantage of these mechanisms.

Yet in the long-run, Graham believed markets become weighing machines. In contrast to voting machines, weighing machines balance price and value. In this time-frame, fundamentals do matter. Strong balance sheets matter. Exceptional (and aligned) management matters. Over time, the market will get it right.

But not on your time.

2. “Overbuilding in the industry in the early ‘60s required the founders to guarantee additional borrowing to save the company. From that experience the directors decided that it would be wise to own property rather than lease locations so that if business turned down again it would not be faced with closing good locations or paying inflated rents.”

The rise of Amazon reveals a crucial error in most brick-and-mortar business models. Death via operating lease. We discussed operating leases a few pages back, but it’s worth bringing up again. Why? Because operating leases are value destructive in times of slow-down.

A lease is a fixed cost. Whether a company generates ample or pitiful sales, the lease must get paid. Goldberg mentions one way to ease the lease overhead: buy the building.

But what if you can’t do that? How can brick-and-mortar operators protect their solvency when forced to lease? Here’s two ideas:

Idea #1: Figure out a “worst-case” scenario for profitability, earnings and revenues. If you can still make your lease payment in a worst-case scenario, sign the agreement.

Idea #2: Downsize, downsize, downsize.

In this scenario, less is more. Everybody wants the larger house. Yet nobody wants the added responsibility of owning a larger house.

Therein lies the key: unit margins. The higher the margin, the more sensible it is to expand. The lower the margin, the riskier it is to expand.

2016: Nothing New Under The Sun (and Profitability Factors)

1. “It would seem that the old pattern of consumer preferences changing is in fact accelerating … However the particular impact of in-home entertainment is not new. Our predecessor company went into business two months before World War II. We were exposed to behavioral changes brought about by new TV technology. VCRs, DVDs, high definition, cable, 3-D and, of course, streaming TV. Each of these events had an impact that was noticeable on the bowling business and from each of them Bowl America recovered.

Ecclesiastes recognized this thousands of years ago. There is nothing new under the sun. The reason for this is simple, yet important. Technology changes and improves quicker than ever before. Meanwhile, our human brain — evolutionarily speaking — remain in the hunter-gatherer stage of development.

There’s an element of genius in Goldberg’s decision not to change bowling as quickly as technology. Throughout each technological change, Goldberg’s business remained profitable. In fact, 2016 marked the 53rd consecutive year of profitability. Wars, recessions, massive inflation, you name it. The company adapted.

Goldberg offers two reasons for the company’s enduring success:

    • Incentivized and aligned employees
    • No mortgages

Goldberg reminds shareholders of these two factors. His letters sound like a broken record. But then again, so does 53 consecutive years of profitability.

2. “We think two factors have helped us. Most important is our view that an enlightened policy towards our employees has produced an experienced staff able to deal with the changing bowling customer … Over 700 Bowl America employees are owners of the stock … [Bowl America] has no mortgages. This stability is a key to the development of long-term employment opportunities.

2017: Buying Assets For Pennies on The Dollar

54 consecutive years of profitability. I’m beginning to wonder if they even have red pens in their corporate office. In this letter, Goldberg looks back on what he thinks the most pivotal year in the company’s history: 1974.

During that year, the company won a lawsuit, received a hefty cash payment and invested in a new center. This center, located in Richmond, VA remains one of their best-performing assets. It also marked the shift from leasing to owning property.

Meanwhile, the bowling business in Japan crumbled …

1. “Many high-quality bowling lanes and pin setting equipment were for sale [in Japan]. We began to buy and store [the equipment] for future use. Our skilled employees handled much of the installation and maintenance of this equipment themselves, developing skills which continue to benefit us.”

Goldberg is, in fact, a deep value investor. He bought good quality Japanese bowling equipment for pennies on the dollar. And he bought from forced sellers.

2. “Once our original investment in the new centers was paid off, we had a cost basis that could not be duplicated. In addition, when we made a mistake we were able to sell the resulting real estate at a profit.

Two things jumped out at me:

    • Bowl America’s competitive advantage — its moat — comes from buying great equipment at cheap prices.
    • Goldberg builds in a margin of safety into each new center.

One decision changed BWL.A’s trajectory forever. Those Japanese assets provided the company a low cost-basis. So low, in fact, competitors couldn’t achieve similar margins and remain profitable. In turn, the low cost-basis offers a low hurdle should Goldberg sell the bowling center.

Heads I win, tails I don’t lose much.

2018: Have Your Cake & Eat It Too

Here we are, Goldberg’s most recent letter. We’ve journeyed over two decades to this point. We’ve seen the dot-com bubble, the Great Financial Crisis and advancing technology.

Yet despite the above factors, one thing remains unchanged: profitability. 2018 marked the 55th consecutive year of profitability. An incredible feat of any company, let alone a consumer behavior-driven, micro-cap business.

Goldberg book-ends these 24 years the same way he started them. By focusing on employees, customers and no debt. He’s owned BWL.A stock for 60 years and hasn’t sold a share. He’s got skin in the game and longevity.

1. “Every full time employee of Bowl America has a piece of the same cake. The Company’s non-contributory stock ownership plan holds 391,000 shares, with employees fully vested after 6 years of plan service.”

Many BWL.A directors sport 30, 40 even 50 year tenures with the company. The most common cause of employee turnover seems to be death. Goldberg hints at why that’s the case, saying, “We are of the opinion that this plan has contributed to the feeling of security held by our employees.”

Skin in the game throughout all levels of employment.

2. “Ours is a service business and attitude is important in providing service. In addition, the experience of our staff guarantees competence to our customers who are rarely faced with ‘that’s not my job’ when asking for assistance.”

Bowl America is the Chick-Fil-A of bowling centers. Excellent customer service is a large competitive advantage. It’s also one of the hardest to achieve. Top-notch customer service requires employees to buy-in to the company’s long-term vision.

Not only that, employees must enjoy working for the company. Reward your employees and they’ll reward the business.

Concluding Thoughts

Leslie Goldberg is an incredible operator. Unfortunately he passed away on October 14th, 2019. Yet he left behind an incredible legacy. 55 consecutive years of profitability is a feat few business owners can tout.

I hope these letters and Goldberg’s thoughts  inspire you to think about durability in business. About investing through economic cycles and the power of long-term ownership.

We now live in a world where it costs nothing to buy or sell securities. The barrier to entry for short-term minded traders has never been lower.

Where will the advantage be over the next 24 years? It will rest in the hands of those willing to look beyond the next quarter or year. The advantage goes to the one with a long-term mindset. The mind-set of an owner. One that views stocks as ownership in actual businesses. Not pieces of paper or blips on a Bloomberg screen.

Think like an owner. Think like Leslie.

“Good service, happy customers and a fun game is the way to bake a great cake.” – Leslie H. Goldberg

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.