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A View From Here January 2015

January 13, 2015 • Print This Article

5-Year View From Here

Happy New Year!

For this month's View From Here, we take a journey and highlight our newsletters from September 2009 through to December 2014. All of our monthly comments are archived on my website (adamhennick.com) for your full review and in light of our investment success during this period, it makes for some interesting reading.

In so many ways, 2014 was our most successful year ever. Not so much in terms of absolute returns (although I'm proud of our double digit success) but for our resolve in augmenting existing positions, the exit of profitable ones and (almost as importantly) where we were not invested in.

Few have been able to achieve our double-digit compounded returns for equity-based accounts (as well has high single digit ones for fixed income based accounts). I believe this has occurred due to a holistic approach to investing in a concentrated portfolio of companies that exist on the periphery rather than the public's eye. I simply believe that knowing more about a company gives you a significant edge. I also believe a key to our continued success has been to build these investments over time using valuation and corporate developments as signposts.

I hope you enjoy reading this journey as much as I enjoyed compiling it and if you have the time, go back and read our notes. You might also want us to show you your year-end account values and how they have changed during this period. It is my belief that the increases in our bottom line occurs subtlety so it is often difficult for our clients to ascertain on a long-term basis just how powerful growth has been.

As I have said to so many of us after the Glentel takeover offer - order the large coke or better glass of wine the next time you are out for dinner. Things are good for us...Real good.

Lets take that journey.

2009 - Phoenix Rising

The financial debacle of 2007-2009 was devastating to all investors, but by late 2009 things were getting a whole lot better for us. These newsletters begin in September and with our move back to Research in the summer and is highlighted by the takeover of our most passionate investment at the time; Pet Valu. We had built a large stake in over the preceding years and were instrumental in changing the composition of its board of directors to a more shareholder friendly group. There is an interesting anecdote in the October comment about predicting the future by what's popular on the business bookshelves and November focuses on our favorite investments at the time. Its particularly note worthy to follow our comments on the positions we held in light of what 5-years brought to them. I actually tried to refrain from talking about specific investments in future newsletters because a lot of people receiving them were not clients and didn't believe it was important or fair to keep them abreast of our holdings. In December we noted that we were within 15-30% of our all time highs (adjusting for cash infusion and/or withdrawals) that was achieved in October 2007. In the end however, 2009 was a triumphant year for most of us as we spent a great deal of it committing additional capital to investments that were mispriced, enjoyed a takeover of one of our largest holdings, resulting in the increase to our bottom lines.

2010 - A Year of Great Return

2010 was a phenomenal year for our accounts I prepared a lengthy 10-year review for the January newsletter as it compiled lot information. For clients who have been with us during that period, it is an interesting read as it highlights our long-standing investment philosophy and for remembering some of our past (and current) investment holdings. In March we noted that accounts were now within 10-15% of there all time highs and how much influence Michael Steinhardt had on our investing philosophy. My father passed away in February and I still miss his steady guidance that remains with me all the time. By April we noted that our accounts are within 5% of their all time highs and our performance continues to exceed the stock indices. Despite this strong performance, the markets were very volatile mid year after posting 60% gains from the ashes of March 2009. In fact, May 2010 was the worst month on record for the Dow Jones Industrial Average since 1940.

By July we noted that we had become inactive because we had used the previous market weakness to position ourselves for the future and things were waking up. It's a term I call "taking the hit for the team" which refers to not placing further investment trades for the sake of doing so as most accounts were well invested. In September we noted that despite our accounts going nowhere, earnings and corporate developments of our companies have been very good. There is also a comment in September's note that one of our most passionate investments, Softchoice currently traded at a 50% discount to its peer group and could possibly be taken over. That would occur 2 and half years later at a much higher price.

In October we noted that we believed we were on to something in our Methanex position that would prove to be correct by the time it was closed out in 2014 but more notably that doing nothing paid dividends as the market continued to increase. Also, FirstService, which had been a long-standing investment holding had to begun a significant increase that would remain unabated at the time of this writing. By November we commented that all accounts had now exceeded their 2007 highs and I introduced a second must read for any investor The Little Book That Beats the Market by Joel Greenblatt

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2011 - A Step Backwards

In January we comment that it took me 10 years to find the proper way to help clients build wealth and I have a 'Jerry Macquire Moment .' It is worth reading for deeper insight into our practice. We noted that by late February, North American stock markets were approaching their April 2008 highs and that performance in our investments continued to be excellent. There was a comment about the passing of the chairman of Softchoice and his replacement was the CFO of Rogers Communications who made significant share purchases in the company. We saw this as noteworthy because when somebody who was the CFO of one of Canada's largest and most recognized corporations assumed a very important role in this 'off the radar' company, then it gave us more confidence. Softchoice was our most passionate holding and represented a large component of our investment accounts.

In April we noted that most accounts were now at all-time highs and that we had decided to sell our Investcor investment at a loss. We quoted Peter Cundil, which I believe deeply in my investment soul.

To my knowledge there are no good records that have been built by institutions run by committee. In almost all cases the great records are the product of individuals, perhaps working together, but always within a clearly defined framework. Their names are on the door and they are quite visible to the investing public. In reality outstanding records are made by dictators, hopefully benevolent, but nonetheless dictators." - Peter Cundill

Of particular note should be the summer of 2011 newsletter, which highlights specific examples of how things get valued. It was then that I had read what I consider to be the bible of all investment books, The Most Important Thing by Howard Marks.

By October we were excited about the prospect of how our funds had been put to use despite seeing a consolidation in account values. We also put the 2005 commencement speech by Steve Jobs in our newsletter as I thought it displayed his unique brilliance. Of further note is the comment about how we are staying away from value traps like Research In Motion because we wanted to stay away from popular and/or top of mind investment themes. We also highlighted a conversation Joel Greenblatt had on CNBC where he said that shares were generally cheap. We are big fans of Mr Greenblatt and he turned out to be dead on.

2012 - An Amazing Year that set the Table

January's note talks of weakness in the markets and starts with 'A Frustrating Year Ends' focusing on a weakness in our accounts starting in April onwards. Most accounts saw a low double digit consolidation, aided by late in the year problems with an investment in a natural gas company called Skope Energy that had me marveling that there is always a new way for things to go wrong. As such we closed out the investment at a considerable loss. To add to that challenge, Easyhome surprised in late December by changing the composition of its board of directors and saw insiders take an additional stake, but the shares weakened as it sent jitters down the confidence spine. We used the prevailing weakness in the shares to augment our existing position reasoning that the Chairman of the Company would not commit millions of dollars if this was a bad investment. Easyhome would go on to become one of our most successful investments ever and ultimately closed out in 2014 at over 3 times our average cost for most accounts.

As frustrating as 2011 ended, we had a fantastic start in January of 2012 that would prove to be our best ever in terms of actual performance. In February and March's note, we saw that despite being early in the year, accounts were already up double-digit returns for the year. In February we were fortunate that Flint Energy Services, was taken over at a significant premium. We had previously owned Flint during 2001 - 2006 period and sold it based on what we believed was an overly optimistic valuation only to re-enter it in 2011 for the exact opposite reason. I recall that when we sold that investment, I still admired the company, its just that it was really expensive. It is interesting to read the March note as we describe the valuation differences between the two periods of investing in that company.

A prevailing fear in 2012 was the re-occurrence of the 2007-2009 economic collapse. It was our view that while that as long as the concern exists, investors should be comfortable in knowing that every time somebody purchases a share in anything that this fear is priced in to it in some way. I believe that markets still have that debacle fresh in memory and it is only when that fear abides, should we be concerned. We also talked about investment themes that we have avoided such as Apple, Blackberry, Mining and Energy.

I also highlighted another one of my favorite books called the Zurich Axioms by Max G├╝nter, which I believe is a must read for any student of investing. I found October's note of interest as we discuss Louis Rukeyser and his long standing PBS program called Wall Street Week In Review, but it might have been the picture of my father (perhaps his biggest fan) that I want to highlight. In November we noted that another one of our positions had made a transformative acquisition; Leons Furniture's purchase of their larger rival The Brick. It's interesting to note that Leons was so financially strong that they were able to use their large cash and real estate position to finance the purchase. It is very rare but it is a testament to their financial strength. I still believe this investment position has the potential to ultimately be one of our best. I particularly like the December note as it highlights long-term returns from the stock markets, a new car and my son's bar mitzvah...but saying goodbye to my Audi was more emotional that it should have been and the picture included was taken when my children were much younger and I just purchased it. Time moves quickly indeed.

2013 - A Most Excellent Year

January starts my 25th year working in the investment business noting the change in trading volumes and market indices from that time to where they are now. There is also a comment that 2012 was a great Year for us despite the worst downturn in the financial services industry that we have ever witnessed. By March we commented that we are seeing further gains and that accounts had increased well over 50% since we re-emerged at Mackie Research in September of 2009. I also highlighted my daughter's synchronized skating team, which had won Silver at Canadian Nationals in Calgary. I still think about that time (which doesn't seem like 3 years ago) and am amazed that she continues to pursue this unique corner of competitive skating. In fact, in March of 2015, the Olympic Committee is set to announce if it will be made an official winter selection for the next Olympics.

In April I highlighted a unique quote from one of my favorite offbeat films of the 1980's and wondered if the markets had just busted out to a whole new level. There is also a comment that I have highlighted before in A View From Here that business books are a great indicator of what not to do. A career highlight comes in April of 2013 when we said goodbye to Softchoice. We had begun to purchase a position in the company in 2005, only to sell half in 2007 due to valuation and then re-enter with passion from 2009 onwards into our largest holding.

I also highlight a quote from Neil Peart, the drummer in Rush about being a proud Canadian inducted into the Rock and Roll Hall of Fame. As I have gotten older, I cannot believe how much more a fan I am of that band...they have certainly stood the test of time in creating their own unique brand of musicianship mixed with excellent deep thinking song themes. I end that month with, "There is no question that these are terrific times for our investments and know that you will enjoy opening your May statements when they arrive shortly." We would again enjoy that sight in November of 2014.

In June there is a comment about the 'art' in managing investments and that the hardest decision we make is when to sell. Ultimately we believe that corporate developments and valuation will lead us to make a decision. I finish our thoughts with this quote: "We are in an enviable place right now, which is not lost on us. We remain low-key on our outperformance because nobody would believe us if we told them...just like many don't believe the sustainability of the strength in the market."

By the fall, we had begun to 'Replant our Investment Seeds' commenting that the year had been incredible for us, and weused it to close out positions in technology companies that had been previously over-looked but extremely cheap on valuation. Companies such as Absolute Software, Softchoice, Microsoft and Enghouse were sold leaving us with significant cash positions.

We highlight what I believe in my investment soul, that when we build new positions we do so slowly, by adding to them as corporate developments confirm our thesis. We also begin to talk about one of our largest holdings, Domtar. Of particular note is the November 2013 View which not only quotes Tommy Shaw of Styx, but talks about Crystal Ball investing and references the closing out an investment in Redline Communications as the shares fell, due to corporate developments that broke our investment thesis. We wrote; "Theoretically, it stands to reason that not all investments will be successful, but hope, fear or ego that it will pan out after its sold, keeps many engaged."

In December's note, we highlight a quote from Lou Reed who had recently passed away and I remember looking hard for the right lyric to add. We also attached a link to the stunning eulogy by his wife. I particularly enjoyed re-reading the thoughts under 'Its All Lies and that's the Truth.' "Excellent investments exist on the periphery rather than the headlines" and "Most often a great investment entails a less than popular company that has been overlooked by the investment public. But with most forces working against this practice, you almost have to tune out he news (or lack thereof) and allow the time it takes for the investment to produce its possible return." I believe this to my investment soul. We commented, "November has been another excellent month as we continue to experience growth in the bottom lines. People who do not hold investment accounts with us remark to me that they have been underperforming for years. I find it funny (for lack of a better term) that if I told them how well our accounts have performed this year and over the long-term that they my think its "All Lies and that's the truth."

This has never ceased. So many people who ask about our performance look away awkwardly when I reply. So much so, that I actually refrain from discussing it and look away awkwardly when asked.

2014 - In So Many Ways - Our Most Successful Year

January highlights my investment thoughts on the industry and our portfolio's, commenting on why I believe we have had success while others have not. I wrote: "I think that a large part of our success has been a holistic and concentrated approach; procure and construct a relatively small amount of excellent investments over time and 'pay as you go (a fee per transaction) as opposed to a flat fee." We also commented that we hold a great deal of cash and activity has been restrained as we augment current investment holdings and look for new ones. They will come shortly. I particularly love the Yogi Berra quote, "In theory there is no difference between theory and practice. In practice there is."

In March we note our thoughts on Financial Planning and highlight that registered accounts such as RRSP's, RESP's and TFSA's are your life insurance...that is money you will use in your life (as opposed to death and disability insurance that we purchase). We also talk about the importance of growth of our investments to fund our future needs and we conclude that we found that most if not all of our retired clients are doing just fine, so don't worry too much about the future. Another music quote highlights April's note by Mike Scott of the Waterboys as part of our theme of a Paradox. We talk about closing out two of our long-term investments in Methanex and Easyhome due to change in investment views that have become overly optimistic in our view. This harkens back to what Michael Steinhardt once said; "When our view becomes consensus, it leads to meaningful profit." We also highlight that we have started to take a new position that was Glentel where I wrote, "it is imperative that we are paying a reduced price for a business based on its potential as I believe it removes a considerable amount of risk. I have learned that there is no perfect information for an investment and that opportunity exists out of a disparate stance of a prevailing investment view. In other words, consensus in often shortsighted."

Specifically about this investment we would further say; "We have recently taken a new position in an investment where we see great potential. Not everything has gone to plan in management's execution of growth, but its not all that bad either. Stuff happens and investors demand some version of perfection. We might be better served to take advantage of this because it can present us with an excellent entry point". Boy would that come true for this investment on November 28th. We end on this note: "One of the paradoxes of investing is what is defined as low risk. More often than not, we accept that if a business is successful now, then it makes a great investment, but that isn't necessarily the case."

In June's View from Here, I wrote that we are in a period of transition, noting that helping clients manage money comes with a degree of manic depression. But our portfolios were suffering from a consolidation as we transition into new investments and continue to build our holdings after exiting most of our Methanex and Easyhome.

There's been a lot of investors who are looking for higher yields from their fixed income portfolio which I believe could be a huge mistake. We end with this quote: "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."

This past summer's note was titled 'A View from 35,000 Feet' commenting that our accounts have been consolidating since March's highs and the challenges for us as a result. I wrote : "I believe in our process as it has a long-term track record of success. The challenge is that the share price is pegged on a daily basis so from the ground you can only see so far. However, if viewed from 35,000 feet, which is what I believe is required these are hopefully shortsighted views. That does not make this any less trying when a complete other set of companies are performing well and we are holding investments that continue to consolidate." And give examples of how this works. We end with this line: "Ultimately, the message is... stay with us folks...we have a long-term track record of success and as you know, I hold the same investments myself and for my family. This period will too pass reminding me that when you're going through a challenging time... Keep Going!" Boy would that work out for us by year-end!

Of particular note is October's View from Here as it really goes a long way to explaining our investment philosophy and is definitely worth a re-read. November's note talks of Conviction for our investments and highlights what we try not to speak of...our current investments, in particular Domtar, Leon's and Glentel, which would surprise us by month's end. We finish with this line: "As you can see, I feel a wave of deep optimism for the actions we have been taking over the past 18 months...and I hope to be right because as you know - I own the very same investments for myself and my family." December's note is entitled; "A November to Remember...A Happy Farwell to Glentel."

Conclusion

I don't believe our success has been the result of luck, however one never fully knows. I remain optimistic in the companies that we currently invested in and given our large cash position built up from the closing out of previous investments, it looks like we have our work cut out for us to find new ones.

I can only hope that the next 5-years continues our track record of success that few, if any have been able to achieve.

Thanks for your continued confidence and 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 ├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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