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A View From Here October 2011

October 7, 2011 • Print This Article

"Every time we have had valuations this low, the macro environment has looked terrible, and at a minimum prices reflect that people are skeptical"- Joel Greenblatt

It's That Time of the Year...

October and the stock market have had some epic clashes which leads to investor anxiety when it arrives...this year has certainly been no exception. With this in mind, it is interesting to note that according to Stock Traders Almanac - in over 100 years of stock market history (inclusive of 1929, 1987, 1989, 2002 and 2008); it is actually one of the better performing months of the year - averaging a culminated return of 1.57%. Who would have thought?

We See Tremendous Opportunity

With worldwide economic concerns plaguing markets, we have seen many media reports of what might happen going forward. We do believe that these concerns could be very well priced into valuations of the companies we follow. As such we have been taking advantage of what we know all too well...buy value - especially when nobody wants it.

We continue to see tremendous value and have been adding new investments as well as augmenting existing ones. While it remains undeniable that as markets continue their volatile ways, prices will fluctuate, so we will look to build up our investment positions by making modest commitments to new investments and augment existing ones into strength, catalyst and/or conviction.

Suffice to say, not since the period of 2002 - 2003 and 2008 - 2009, have I seen such opportunity.

Our Investments

It is in periods such as these that we must know what we are invested in and why. In each case, corporate balance sheets (debt and cash levels), as well earning's capacity (based on past and most future scenarios) shows that they are in good standing and extremely cheap on valuation. We believe that the markets have spent the last 6-months taking out any sense of optimism and pricing in a deep economic malaise into most equities. Further, the success of our portfolio of investments has been to evaluate and re-evaluate each holding one investment at a time. We envision a potential future valuation taking into account most market environments. Right now, these values are extremely compelling and we want to take advantage of this opportunity. It is hard to think that way in light of the current events, but for our long-term returns, this will add a lot of value going forward.

Conversations with Management

We spent a good part of late August and September speaking with the management of all of our investment holdings as well as polling many business people that we know to see how business was currently doing. Most (in fact - almost all) pointed to this period as good, but certainly not the best environment they have operated in. Suffice to say, that almost all are nervous about the message worldwide stock markets are telling us.

I found it interesting that high tech giant, Oracle reported growth in Europe of over 17% with demand remaining strong from of all things - the banking sector in their 2nd quarter earnings release in August.

Our Performance

Most of our accounts saw strong double-digit returns in 2009 and again in 2010, which resumed a decade long uptrend and ultimately led to all time high valuations. A lot of this return was predicated on the timely purchase of new and existing positions during a very difficult 2008 - 2009 when there was maximum pessimism.

While we are proud of our long-term returns, we know that things never go up in a straight line and as such, see periods of consolidation - like we are going through now. Thankfully we hold reasonable cash levels and have been able to take advantage of new commitments.

However, since we watch our monthly numbers - we are not so happy to see the consolidation in account values that has played out over the past 6-months. But remain encouraged by our long term performance. This is why I believe that positioning our portfolio's now can really augment future valuations for the better.

Value Investing Conference

Next week, I am very excited to attend what will undoubtedly be an informative (not to mention expensive) Value Investing Conference in New York City. It is like an amalgamation of my favorite rock stars in investing coming together for a hall of fame show. It will also present a fascinating test to our approach, which I will undoubtedly be doing over and over throughout those 4 days.

The Little Book That Beats the Market - Redux

One of our favorite investment books that we have highlighted in our monthly comments is The Little Book that Beats the Market - by Joel Greenblatt. Not only is he a speaker at the upcoming conference, but he also had an excellent interview on CNBC on September 27th that is really informative - especially to value investing. You can view the interview by clicking the link below:


Some of his comments worth noting are:

"Right now stocks are priced somewhere around the 95th percentile towards cheap. Meaning that it's one of the cheapest periods that we've seen based on trailing cash flows. Both for the market and our value portfolios that we can put together."

"A year ahead of these kinds of levels of valuations, the market could be up 15 - 20%...at least that's what happened in the past, and the value portfolios could be up in the mid 30's."

"It's a very scary time to invest and that is when you get your best bargains and stocks are reflecting a lot of skepticism right now and usually it doesn't look this good unless it looks terrible."

While we have mentioned in the past that by using Mr. Greenblatt's 'Magic Formula' and plugging into the Canadian stock exchanges, it has brought up almost all of our investment positions. His annualized return in excess of 50% between 1985 and 1994 (and then retired...I love that) suggest that he is someone worth listening to.

Go Canada!

Lastly, as you know we have always been proud buyers of Canadian equities and found this article of interest that according to Forbes Magazine, Canada is the best place for business in the World.

Here is the Link to the article: http://www.forbes.com/sites/kurtbadenhausen/2011/10/03/the-best-countries-for-business/

While we remain buyers of value, we know that we can't time the purchase prices but have used these weak markets to make changes that will enhance future value. I believe it will make a significant impact on the future valuations of our portfolio's...it has in the past.

Have a great Long Weekend and as always...

All Good Things!


P.S. - As we all know, Steve Jobs passed away on October 5th. While there has been a lot of news surrounding his death, I found this address to the graduating class of Stanford in 2005 an excellent read: Steve Jobs' Commencement Address at Stanford (2005)

"I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal."

Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example: Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life. My second story is about love and loss.

I was lucky - I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation - the Macintosh - a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me - I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life. During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle. My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything - all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you. Stay Hungry. Stay Foolish.

Thank you all very much."

- Steve Jobs - June 2005

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 épargnants.

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 Fall 2011

October 4, 2011 • Print This Article

Anxiety Reigns Supreme

August ushered in great fear of global economic decline and what comes with it...volatility in the stock markets. Each day, we saw triple digit instability, but finished the month on a stronger footing which has continued cautiously into September.

There is a rising concern that the forces of all things economically evil have joined to create the Great Depression - Mach II. How can one not believe that any of this is coming with all the bad news from every corner of the world? The stock market, which is seen as a leading indicator of future economic activity, fell almost 15% at its worst point in the month. As it began to take hold, those ‘not so' old feelings began to resurface... heightened anxiety from the past 3 years of economic fear and the perceived inevitability of another 50% drop in the valuations of our investments.

Safety, Stopwatch and awaiting a Clear Coast

Extraordinary market volatility and unprecedented uncertainty — in times like these, Warren Buffett's advice to "look at market fluctuations as your friend rather than your enemy" is right on target- Value Investor Letter - September 2011

During a market sell off, there is a natural tendency to want to close out all investment positions and buy back when the coast is clearer. Unfortunately, investing is always in the fog and the coast is never clear. Fears of double dip recessions have been matched with the possibility that we may be entering into (and perhaps never left) a deteriorating economic environment. This would be further augmented by the view that 2009-2011's stock market rally was propped up by now exhausted government spending. Once again, as in every economic sensitive moment in time, charts of economic activity are eerily laid over the period of the great depression as a prediction of what is to come.

The S&P (Standard & Poors rating Agency) downgrade of the US proved to be the catalyst that enhanced a selloff which quietly began in May and caused a lot of investors out of shares and seek safety (ironically - as a friend pointed out), into the arms of the newly downgraded debt.

Charles Ellis wrote in his investment classic - Winning the Losers Game - "Be patient and persistent. Good things come in spurts - usually when least expected - and fidgety investors fare badly."

Objects are closer than they appear...

It is important to note that markets move on surprise, not consensus. I can't think of many people in the financial services industry who were surprised to see a downgrade of US debt. However, this situation enhanced fears that the economic situation is dire. I believe that most investors are well aware of the world-wide economic situation as it has been promoted by the many news and television sources on a daily basis. Further, with the events of 2008-2009 in the rear view mirror, we can all easily recall a time that we do not want to see again.

Driving up to one of our baseball games in early August, I was struck by the absolute turmoil that was being discussed on the radio. Then in other news; it was pronounced that General Motors will build its new luxury Cadillac SUV in Oshawa. The first thought that came to my head was..."Maybe they shouldn't do that"

Our Investments

Many people look at the stock market and their investments as a whole, rather than a market of individual businesses. We have a track record of success based on the latter. It took me many years of working in this industry to understand that in order to achieve success; we must have a myopic view of each and every investment we hold, valued on its own merits, rather than the whole market. However to say that the two are not related, would be a fallacy.

Back in March and April, we noted that since our performance had been quite strong for some time, we must be open to the possibility that consolidation could occur. We certainly didn't want to recommend the sale of our investments, because we have no idea if and how a sell off would affect them. For example; in 2008-2009 we held shares of Pet Valu Inc which actually went up in price during the worst market environment our generation has ever seen. Just this past month, the same situation occurred with our Softchoice position as excellent earnings took the share price higher despite a global stock market sell off.

In The Long Run

The stock market is fascinating and can be quite deceptive in the short run. Over the very long run the market can be almost boring in its reliability and predictability. Understanding the personalities of the two very different characters is vital to a realistic understanding of the stock market and yourself as an investor. These very different characters are "Mr. Market" and "Mr. Value". Mr. Market gets all the attention because he's so interesting, while poor Mr. Value goes about his important work almost totally ignored by investors.

The concept of "Mr. Market" was first introduced in the "The Intelligent Investor" by Benjamin Graham, who also introduced professionalism to the investing. Mr. Market occasionally lets his enthusiasms or his fears run wild. Emotionally unstable, 'he' or 'she' sometimes feels euphoric and sees only the favorable factors affecting a business; at other times he feels so depressed that he can see nothing but trouble ahead. To prod us into action, he keeps changing his prices, - sometimes quite rapidly. This most accommodating fellow stands ready, day after day, to buy if we want to sell and to sell if we want to buy. Totally unreliable and quite unpredictable, "Mr. Market" tries again and again to get us to do something - anything. For him, the more activity, the better.

Mr. Market is a mischievous but captivating fellow who persistently teases investors with gimmicks and tricks such as surprising earnings reports, startling dividend announcements, sudden surges of inflation, inspiring presidential pronouncements, grim reports of commodities prices, announcements of amazing new technologies, ugly bankruptcies and even threats of war. He pulls these events from his big bag of tricks when they are least expected.

For what it's worth, I believe the markets may have discounted a lot of the potential turmoil as valuations seem incredibly low in so many areas. Further, we spent a good deal of 2011 closing out positions and are well financed to take advantage of these opportunities as they arise.

Enjoy the wonderful fall weather and as always...

All good things,


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 épargnants.

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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