'Buzz' Heidtke

In some ways, Lyman Oscar Heidtke hasn't changed much since his childhood, when his mother lovingly dubbed him "Buzzie," for his hyperkinetic ways.

Today, investment manager "Buzz" Heidtke exudes much the same energy, as he presides over management and value-investment in shares of about 350 microcap companies, through 25-year-old Heidtke & Co. and his MidSouth Investment Fund, LP.

He cautiously offered a positive note about the market during an interview with VNC Dec. 8: "We've probably seen the lows" in the stock market, he said.

That notion follows the bad news by six weeks: On Oct. 27, Heidtke wrote investors in MidSouth, telling them, "During [Heidtke's] third quarter we had our worst ever performance (- 22.0%), surpassing our 16% 3rd quarter 2002 bear market decline."

Heidtke's net assets, he wrote, had dropped from about $139.6 million in January, to $89.2 million by Sept. 30. Last week, he told VNC the fund's value had melted to about $65 million, and explained, "We're having the worst year we've ever had," with his roughly 350-stock fund "down like 55 percent... It doesn't get much worse than what we're going through, now," he added.

He told VNC that, as he also said in his letter to investors, he's having sleepless nights, and he said he finds it painful to think some of his customers are having to cut back, taking children out of pricey schools and making other wrenching adjustments.

Over lunch at the City Club, where he's long been a regular, Heidtke reminded his listener that his returns over the ten years leading-up to this year's debacle have been solid and consistent, and he's regularly enjoyed high industry rankings.

Even so, he added with wry self-effacing humor, he's glad he's personally debt-free, has a good art collection and could, with his children grown, live contentedly on very little.

In his quarterly report, Heidtke told investors in his fund that performance is down primarily because individual investors who invest in the fund have been "heavy sellers, along with small-cap mutual funds who had to sell to meet redemptions."

Relatively illiquid microcap holdings have gotten even harder to exit, he told VNC last week. He said that in 2007, fully 25 of his portfolio companies had been bought-out, but only three have been bought, so far this year.

Heidtke also cited in his report his fund's "heavy concentration in China." He told investors, "A year ago the big cap China stock indexes were selling at 65 to 70 x earnings and subsequently corrected to 11." He explained that roughly 65 low-cap China stocks in his fund then followed suit. Nonetheless, he told investors, he believes "our depressed companies, that are not in exports, can double in the next 12 months and again over the following 12-month period."

As he has much of the past 40 years, 66-year-old Heidtke continues to place bets on stocks, nearly every day. In that process, he explained, there's often very little time for exhaustive analysis of stocks, because opportunities to buy have a short half-life. "It's not worthwhile knowing too much about" a given stock, because decisions often have to be made quickly, he said.

Though his company does some analysis in behalf of the "120 entities" that invest in his fund, much of the stock-picking is a result of Heidtke's personal monitoring of markets and socio-economic trends.

Heidtke said he has an extraordinary ability to "speed-read" financial reports and spot values. He's also an obsessive newswatcher, scanning seven daily newspapers each morning and subscribing to dozens of other periodicals and services. He said he believes he has attention-deficit disorder and that ADD is a source of analytical strength in his work.

Sometimes, he said, his intelligence comes from walking around. For example, he mentioned shorting Western Union, because he felt certain immigrant laborers would be sending fewer remittances home, in a down economy.

Also, he bought Healthways after hearing a speech by former Sen. Bill Frist, now with Cressey & Co. Heidtke said he shorted a national clothing chain, because he walked into one of its Nashville stores and experienced slow service. And, he bought Smith & Wesson, because he believes crime rates go up in a slump.

Since his teen years, Heidtke said he had yearned to become a stockbroker. He explained that he couldn't reach the bottom rung of local brokerages, because of what he viewed as the clubbish brokerage culture of that era, and his relative lack of personal or family connections to executives in the industry.

After his graduation in 1964 with a business degree from Tennessee Technological University at Cookeville, and with his dream of the markets still very much in mind, Heidtke took jobs as a systems analyst for National Life and as a manufacturer's rep for computer leasing.

Then, he began earning his stripes inside such firms as Spencer Trask and the New York office of Nashville-based Dominick & Dominick. At Thompson & McKinnon, he honed his analytical skills on limited partnerships in real estate. At one point, he became a placement agent for another firm's syndication of commercial real-estate deals, beginning his current career.

He's been through something like the current market, before. At one point in the 1970s, he explained, he "had about 22 [stock] winners in a row in my personal account," but then the brutal 1973-74 recession flattened him as a trader. "We were all looking for jobs, then," he said.

Coming out of that, he said, he became the value-oriented investor he is today, driven by secular and industry trends, as well as book value, sales, cash flow and other variables. Whereas ten years ago he had 35 producing brokers, today he has one each in Nashville and Chicago. ♦