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A View From Here March 2010

March 16, 2010 • Print This Article

Cowards die many times before their deaths; the valiant never taste of death but once - Shakespeare

During the first two months of 2010, we saw a lot of reports from market watchers who employ charts and historical data that the major averages have broken down and it seemed a foregone conclusion that the markets would now go into a major retreat. It's just not that easy. It is always surprise, not consensus that is going to move markets in any major direction...especially following the magnitude of 2008-2009's massive sell-off. Few if any anticipated the crash of 1987, the Russian currency crisis, the financial crisis, 9/11, the mortgage crisis, and those who did must have been swimming upstream for a great deal of time before they looked like geniuses. Investing is something that requires the lever of time and foresight to excel at. Very few if any, has ever successfully called the direction of stock market. But we all try.

That is why I believe that it is foolish to simply employ charts and graphs by themselves to make investment decisions. In fact, I don't know anyone who has a long-term track record of success applying this theory, except in selling newsletter services.

The investor I draw the greatest influence from is Michael Steinhardt, who successfully managed portfolios for clients and employed a significant amount of skill in doing so. He also, quit while he was ahead and now invests his own funds exclusively. He wrote the greatest investment book I have ever read called 'No Bull' in which points out that the most important investment tool is to have a 'Variant Perception' of each and every investment.

I have often said that the only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit.

This isn't the first time I have quoted Mr. Steinhardt and probably not the last. I truly believe that in order to be successful, it requires a great deal of constant analysis of existing investments from that perspective. I remember reading the book when my youngest daughter was struck with a very bad flu at the age of 3 and was stuck in the hospital with her for at least 48 hours. I had just begun reading the book and realized this vision with virtually all of our previous successful investment outcomes; it just hadn't been articulated yet. I refer you to my website where there are three investments highlighted (under the heading: Investment Philosophy; A Tale of Three Investments) where you can view this concept from the outset of an investment to its completion).

The Wall of Worry

As a society, we are very anxious about the future and this 'wall of worry' is what keeps the market more honest. We were surprised that mortgage loans were made with little or no credibility leading to defaults that sunk major investment institutions headed up by well educated and experienced professionals. It is this type of surprise that leads to consensus, and those who profited from its change (documented by the new book about John Paulson called "The Greatest Trade Ever") were few and far between. Mr. Paulson had a variant perspective that the credit markets would far into total disarray due to poor lending standards. It became consensus. However, this knowledge of what revealed itself in 2008-2009 and its subsequent recovery in the stock markets have done so climbing the wall of worry.

Our Positions are doing well

February was another very successful month in the performance of our investment accounts as we saw strong earnings from Sherritt, FirstService, Softchoice and a disappointing earnings release from Evertz Technologies. Another position we have quietly initiated over the past 3 months is a small Ontario based brewery called Brick Brewing.

Brick has an experienced management team with a successful track record who has substantial personal investment, over a year increasing cash flow through prudent management and is now embarking on the increase of brand awareness that should ultimately lead to increased earnings. I like the Hockey Night in Canada advertising spots which started in January and that they are expanding markets into eastern Canada. It will be productive for them to focus their skills on expanding the company's brand offerings as they did successfully did with Lakeport Brewery, which was built up and sold, for a substantial profit. It is beginning to feel like we are entering into the third inning for this investment as their efforts to expand their business begins to flow to the bottom line. I will be meeting with the company in early April.

Evertz has released a series of slightly disappointing earnings reports. While that is basis in fact, I continue to feel strongly with this investment. It is my view that weaker expectations have already been heavily discounted into the valuation, which has kept the price stoic for the past year. There is however, a lot of value, as the company has no debt over $151 million of excess cash, pays an attractive dividend and trades at a valuation that suggests that there is not a lot of optimism priced into its outlook. Further management owns almost 80% of the outstanding shares, which bodes well for us as our interests are aligned. The company makes equipment that allows broadcasters to offer their product in High Definition (HD). My view is either a broadcaster offers their product in HD or they will lose their viewers. Less than 15% of the worlds offering are still in Standard Definition and Evertz is considered to have the world class standard.

Account Values Continue to Increase

Just like our positions continue to excel, our month-end statements continue to have impressive bottom lines over the past year and many are now within 10 -15% of their all time highs. I still see this as a significant accomplishment and hope that we can continue to see growth in our account values. The month of March will be a one-year anniversary of when the market began this tremendous rally. Those of us who were fortunate enough to take advantage of it have seen the best results. Our investments have seen increases far in excess of the stock market averages, which is an accomplishment that I am very proud of.

In Memorandum

Late February, I lost my father quite suddenly. With his passing, my siblings and I have lost that last bastion of unconditional love that only parents can give their children as my mother had passed away 10 years ago. By this, I refer to that special place where we can go under any and all circumstances and find the strength and support mixed with love and reason. We had lived in that glow for so many years. Hopefully I will be able to draw on the many years under his tutelage and successfully pass it on to the next generation

Remember to enjoy every sandwich!

All Good Things

Adam

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

A View From Here February 2010

March 4, 2010 • Print This Article

"Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected." - George Soros

Surprise Not Consensus

We couldn't ask for a better start to 2010 as the markets continued their upward stance well into the new year before exhausted investors sold off positions late in the month, triggering a sharp sell off. This renders the ever so popular first month of the year into a loss for the major North American averages which historically (48 of the last 60 years) has successfully predicts the annual market performance. I find it interesting that we live in a constant state of fear of major market sell offs which is understandable given recent events. However it is surprise not consensus that moves markets. I simply do not believe that we sell investments because of fear of the unknown.

January through to the time of writing this note has provided us with strong performance as we saw increases in almost all of our core positions. In many cases we continue to see asset values increase closer to our 2007 October high water mark, which remains a remarkable feat. Furthermore, most accounts continue to hold excess cash and dramatically reduced margin levels. I think the continued to commitment through supplemental purchases of investments such as Methanex, Mosaid, FirstService, Evertz, Softchoice, and Second Cup throughout the year has provided the backbone to these events.

As we have begun to add new investments and close out old ones, I still see good value in our investments, and as the mood remains cautious and many look in the rearview mirror at the events that are not too distant a memory, I remain optimistic about our investment stance. Surprise, not consensus.

Our Positions Remain Strong

Softchoice remained under pressure since November from the sale of over 2.5 million shares in a financing. The veil was lifted on a large day of trading where investors purchased what we call the 'overhang' and the shares increased the better part of 10%. Earnings were released on February 11th and they exceeded all forecasts. While there are always areas of concern, I believe our investment thesis remains firmly in tact, and continue to recommend that we add to existing positions.

Methanex has also increased over 15% from year's year and delivered stronger than expected fourth quarter earnings and an increased outlook for the upcoming year. The company is very conservatively managed and continues to pay an attractive dividend. Although it has a history of volatility in its share price, I believe we are best to continue to hold the position and its path to least resistance is much higher.

Later this month, FirstService will report their 4th quarter and year-end numbers and earnings are expected for Evertz in early March. I continue to advocate investment stances in both companies.

RRSP Contribution Deadlines

As we enter the last weeks of February, this serves as a reminder to make contributions to your 2009 taxation year. I believe that the RRSP and the new and extremely relevant TSFA are excellent investment vehicles as the sheer long-term nature of their very existence coupled with the tax free growth gives us the lever of time to be better investors. I see my role as over-funding your retirement...mine too!

I hope that the month finds all us in good health and as always...

All Good Things,

Adam

Filed under: Uncategorized

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation ("MRCC"). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member-Canadian Investor Protection Fund / member-fonds canadien de protection des ├ępargnants.

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

 

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