If you read the outstanding book Buffett’s Early Investments by Brett Gardner, you’ll find all kinds of great investment lessons about what can go right (and wrong) when you invest in super cheap, small, and illiquid businesses.

I found a company just like that... it’s compounding capital at 17% a year and it’s trading for around half of book value. Those numbers imply huge returns going forward.

So why not recommend the stock? Let me explain...

In 1977, Patrick Paddon founded a high-tech equipment-financing business. And today, at 75, he still runs its successor, California First Leasing Corporation. The original business helped companies obtain high-tech equipment via lease transactions that minimized the debt on their balance sheets. By 2001, it operated as Amplicon (AMPI) – a national lessor of high-technology equipment.

This business gave Paddon key insights into the high-tech capital equipment cycle. After all, as a lessor, his company retained ownership of the equipment. Thus, to make a profit, Paddon had to become an expert at estimating residual values – what the equipment would be worth in the market after the lease period. This experience sharpened his judgment about replacement cycles, enduring usefulness, and the difference between technical obsolescence and economic obsolescence. It’s a fair bet to say there are very few people in the world who have more hands-on insight into the ongoing AI capex boom.

The other lasting trait you see in this long-term business operator is a relentless focus on keeping costs down. Amplicon’s profitability was due partly to its reliance on telemarketing. Plenty of high-tech executives would turn their noses up at building telemarketing expertise, but doing so rendered marketing costs that were approximately one-third of his competitors’ (relative to sales).

To drive down his funding costs, in 2001 Paddon bought California First National Bank. Amplicon was restructured as part of a holding company, California First National Bancorp. The bank’s deposits would help finance equipment leases and business loans. Paddon could combine the customer relationships of an established leasing company with a bank’s deposit funding.

Twenty years later, on the cusp of the largest tech capital equipment boom in history, Paddon began to liquidate. In February 2021, the company sold the bank but kept its leases and loans, eliminated the bank-holding-company structure, and adopted the California First Leasing name.

But what did Paddon do with all of the capital?

He bought a very select group of tech equipment makers: Micron Technology (MU), Applied Materials (AMAT), Marvell Technology (MRVL), Advanced Micro Devices (AMD), and Taiwan Semiconductor (TSM). He also bought some “ballast” – ExxonMobil (XOM), Comfort Systems (FIX), and Goldman Sachs (GS). He bought one, and only one, hyperscaler, Alphabet (GOOGL).