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A View From Here June 2014

June 9, 2014 • Print This Article

"If I had an hour to solve a problem and my life depended on it, I would use the first 55 minutes determining the proper question to ask, for once I knew the proper question, I could solve the problem in less than five minutes." - Albert Einstein

A Period of Transition

Helping clients manage money comes with a degree of manic depression. When a position we own increases, I feel the tinge of "why didn't we own more." And when the opposite occurs, there's "I should have waited". But that isn't really how it works. This is a marathon, not a race. While enthusiastic about our investments, I know that it takes time for an investment thesis to manifest. That is why we take partial positions at the onset and look for additional entry points based on catalyst and/or opportunity. The good news is that time moves quickly.

The investment climate feels like an acute tug of war right now with many companies reporting increased earnings. I believe it will take continued prosperity for them to find the next level. Our focus is to pursue areas that are out of favour because expectations are not rampant and value is backed by a combination of strong balance sheets and potential. Our desire is to build these positions into a more prosperous earnings period that should lead to meaningful profit for us.

Many investment professionals are anticipating the next bubble to burst and there is no shortage of potential catalysts (central banks, China, Europe, Russia). Could these bring back the circumstances befallen of 2000-2003 or 2007-2009? I believe that whatever bubble is out there (if there is one at all), is not widely known and as a result, not valued in. For example, during the past decade housing was strong, maybe even too strong. However, while it was documented in the news, I didn't know anyone who foresaw and invested for what ultimately played out. The value of some financial institutions was well into the tens of billions before they went abruptly bankrupt. The few who anticipated that tragedy were well documented in Michael Lewis's excellent book – The Big Short and to say they were few and far between is an understatement. In fact, many of their investors were frustrated as it took years to play out and their investments were pretty far underwater… until it worked. So whatever bubble is brewing, those who are trying to play it out are being chastised as we speak - until they are proven right, or if they have any investors left willing to hear it.

The stock market as a whole is valued on what is generally expected and by extension, so are the share prices of companies within its confine. However, the market does not anticipate significant revision. That is why when a game-changing event occurs, there is an immediate reaction that reflects this new and unforeseen circumstance.

It appears to me that the largest dilemma for our times is that the monetary authorities have kept interest rates low, making the successful pursuit of low-risk investing difficult. This has effectively forced many investors to take on more risk than they might otherwise choose to get a return. The risk I see here is based on supply and demand and as such, products are developed to meet those needs. However, any financial environment requires a first principle perspective - which is to say, what do we want to achieve with our investments in the first place? I believe that for us, trying to 'beat the market' is entirely the wrong objective. Prudent investors look for attractive valuations along roads less travelled by the hordes that ultimately fall exactly in line with the desire for what is popular here and now.

That road less travelled always has some interesting scenery as we transition from our outgoing profitable investments to the ones that may prove to be profitable for us in the future. We need the time for our thesis to manifest and while it does, we will look to augment existing positions and find new ones that meet our criteria.

Thanks for taking a look,

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.

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