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A View From Here March 2015

March 3, 2015 • Print This Article

A View From Here

"Start by doing what's necessary; then do what's possible; and suddenly you are doing the impossible." - Francis of Assisi

The Subject of Risk

Most great investments begin in discomfort. The things people feel good about - ventures where the underlying premise is widely accepted, the recent performance has been positive and outlook is rosy - are unlikely to be available at attractive valuations. Opportunity is most often found among things that are controversial, pessimistic or at the very least, apathetic and have been performing badly of late. If you look back on our success, almost all of the investments were born out of general malaise. But contrary to popular belief it is on that periphery where risk is generally the lowest. Having a concentrated group of unrelated holdings that we know well and have little or no popular theme attached to its thesis takes most of the potential for over-valuation out of the equation, thereby (in my opinion) reducing a very real risk.

It's Ok to Be Wrong

The strategy we employ is not always failsafe and we need to recognize that sometimes things just don't work out. It's ok to be wrong as long as it's not all the time. We have been closing out an investment whose business execution remains suspect at a time where things should be getting better. Reviewing its history, I would probably make that mistake again. Inexpensive valuation, a compelling cash position, real estate holdings and significant share ownership of its management had great potential if the business could generate improving cash flow. But it didn't and revenue continued to decline, losses mounted, and the cash position eradicated. As such we close it out as we have done with others in the past, taking cold comfort that we did not add to the investment because there were not sufficient signs that business was improving.

I believe that we build investments by first taking a small position and let the corporate events guide us to continued commitment. In this case, we took only our initial position, not adding more because we did not see any sign posts of an improving situation. As Max Gunther states in one of my favorite investment books, The Zurich Axioms, "Accept small losses cheerfully as a fact of life." And "When the ship starts to sink, don't pray, Jump."

We are not afraid to take losses, and our experience teaches us to accept that we can be wrong. Nobody pretends it is easy to carry out the admission of being wrong because of obstacles such as the fear of regret and difficulty admitting a mistake. Somehow or other, we have to overcome them and what makes it more palatable is that our investment accounts have been performing so well that we don't even really notice the change in our bottom lines.

Death by Diversification

I have recently had the chance to read the new Tony Robbins book called Mastering the Money Game. I didn't like it very much as it reminded me of the sales seminars I attended early in my career where the lecturer promised another strategy that would double income if we stayed past the coffee break. It never did. This book promises a whole lot by dropping names and anecdotes, but when we got to the meat of it, created the familiar landscape pontificated by most financial planning books...a diversified portfolio. It felt almost as if, Mr. Robbins was paid by the two institutions he points you in the direction of.

Nobody built wealth on a diversified portfolio. Or at least - I don't know anyone. If we could, I would be advocating that we do so because it is so easy. In fact, we are lucky because we have a track record of success predicated on the exact opposite. In a large diversified portfolio, most investors see little or no growth and their account values go nowhere at best. Why is that? Diversification has two major flaws: (1) by diversifying, a situation is created which gains and losses are likely to cancel each other out, and (2) by diversifying too many investments are involved to closely track, therefore it is difficult to assess the risks and rewards of each.

As used in the investment community, it means spreading your money around and creates the perception of safety. If 15 of your investments get nowhere, maybe six others will get somewhere. If everything collapses, maybe your bonds, at least, will increase in value and keep you afloat. That is the rationale. In the litany of conventional investment advice, having a "diversified portfolio" is among the most revered of all financial goals. Or so they like to tell you. The reality I have seen, particularly from accounts transferred to us is that diversification, while appearing to limit risk, reduces by the same degree any hope you may have of getting a suitable return. It is my opinion that in this scenario one would be better off simply purchasing a 5-year latter of GIC's or government bonds.

But it makes little sense to diversify just for the sake of diversity. You then become like a contestant in a supermarket-shopping contest, in which the object is to fill your basket fast. You go home with a lot of expensive junk you don't really want. Investing should put your money into ventures that genuinely attract you, and only those. Andrew Carnegie (the founder of US Steel) was quoted to say on this matter; "There seems to be a lot of belief that one should diversify their investments. I don't believe in that. Put all your eggs in one basket, and then watch the basket."

Warren Buffett is considered the world's greatest investor. He has been refining his investment strategy since he bought his first shares in 1941. His strategy is to take investment positions in a small number of companies that he makes it his business to know back-to-front and inside out. I often think of this quote from the August 1996 issue of Outstanding Investor Digest when he said:

"We like to put a lot of money in things we feel strongly about. And that gets back to diversification. We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing...If you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably - because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money in #30 or #35 on your list of attractiveness just strikes...me as madness."

It has worked well for us to concentrate our investments, particularly in inefficiently priced companies. While it takes time for investments to reach fruition, I have found that time moves quickly and the results speak for themselves.

Thanks for taking a look,

And,

All Good Things,

Filed under: UncategorizedUncategorized

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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