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A View From Here June 2015

May 28, 2015 • Print This Article

"I make two guarantees to my students on the first day of class: The first guarantee is this: if they do good valuation work, I guarantee them that the market will agree with them. I just don't tell them when. The corollary to that is this and it's very powerful. I tell them in 90% of the cases for an individual stock, two or three years is enough time for the market to recognize the value they seek if they have done good work. Good work will be rewarded". - Joel Greenblatt Professor, Columbia University

The Journey between Point A and B

In the time that I have been helping clients manage their investment accounts, there have been many exciting occurrences that have affected specific investments we've held. However, most of the time it's actually boring and little happens that dramatically affects valuation. In fact, often investment positions fall to lower levels after we make our initial purchase. It is for this reason that we take a small position at the onset with an eye for making additional commitments as our conviction and/or corporate signposts dictate. Sometimes they move up dramatically, only to consolidate afterwards. It's all in the game.

As we approach the end of the first half of the year, it certainly feels like our accounts are in a place where investment positions are either treading water or consolidating at lower levels than previously achieved. While always anxious about our positions, I must rely on the value proposition of each investment and assess it’s validity on an ongoing basis. With the knowledge of (short-term) hindsight it would have been great to take advantage of a temporary increase in its share price, only to buy back in when it consolidated. But it is not what we do. For example, in retrospect it seems so easy to have sold our holdings in Leon's Furniture when it found its way to an all-time high of $19.38 per share earlier this year... especially armed with the knowledge that it fell back to the $15 level shortly afterwards. If only we could have sold it, then repurchased it back at a lower level. However, we have a much higher outlook for Leon's in the future that hopefully eclipses what proved to be a temporary move earlier this year. I take the view that it’s movement is more of a harbinger of things to come. It is for this reason the journey in any investment between point A and B is full of trials and tribulations of what we should have done. But in the end, the only thing that matters is our long-term commitment to achieving success.

There are few things more rewarding from both a financial and professional standpoint than an investment receiving recognition of our variant perception of how the market had previously viewed it. Names that come to mind over the past 12 months include Easyhome, FirstService, Domtar, Methanex and Glentel. In three of these cases we used the revaluation to exit the investment at substantial gains, all the while making and adding to new commitments that we have been sourcing. We see additional upside in the remaining investments we hold and while the markets view is always changing, we believe our success is achieved through constant review and understanding of exactly why we own an investment. As such we have been using the weakness in some of our names to make additional commitments.

I've said this before and I will continue to reiterate that our track record of success is built on a concentrated portfolio of companies that offer attractive returns. We just don't know when.

Learning from the Masters

I have attached a link to a 32-minute conversation at the Wharton School of Business between two of my investment hero's, Joel Greenblatt and Howard Marks. Both of these individuals have not only built incredible track records of success, but also spend a lot of time educating investors on their best practices. I have watched this interview at least 5 times since initially sourcing it a few weeks back. What I find amazing is that for such sophisticated individuals, they are able to articulate their viewpoint in plain English. I cannot underestimate the importance these two individuals have had on the investment acumen that we employ on your behalf.

It can be found here: https://www.youtube.com/watch?v=N-azmBU0yII

Thanks for taking a look,
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.

 

A View From Here May 2015

May 13, 2015 • Print This Article

I was born to rock the boat. Some may sink but we will float. Grab your coat - lets get out of here. You're my witness - I'm your Mutineer - Warren Zevon

Manic Depression

The first four months of 2015 has been somewhat erratic for our investment accounts. We have had decent performance aided by the strong US dollar as well as our long-standing investment in FirstService who announced their intention to split into two separate companies. Many of our other positions are currently consolidating at lower levels than previously achieved. This reminds me of why people in the money management industry are so manic-depressive. Over the past two years, we have shed many of our long-standing positions and made new commitments with the knowledge that if we are ultimately correct, it will take time for the thesis to play out and bear a cost of ever changing emotion. I believe that most successful investment returns are borne on the periphery and require time for the premise to play out. But when they achieve profit - they often do so over a relatively short period of time. Valuations of companies vary from month to month, especially when they are outside of what is currently popular in the market. It is for this reason that we take an initial position with an eye for further commitment.

I remain of the belief that each of our investments can lead to a meaningful profit... we just don't know when. Almost all of them perform apathetically until something wakes them up and then gets, dare I say - exciting. Examples that are not such distant memories of 2014 include; FirstService, Methanex, Easyhome and Glentel...all were relatively quiet until a change in view from the 'market' led to substantial increase. In three of those cases, we have taken advantage and closed out the investment...and except for Glentel; we had held these positions for over 4 years.

Having said this, it's the investment journey, not its conclusion that is hardest to bear. Often doubt creeps in and I find myself revaluing each position over and over. This serves the purpose of keeping an investment thesis in focus. Every once in a while however, I get this feeling that we are missing some underlying reality that challenges the possibilities envisioned. The result is that at least half of my time is spent looking under rocks for an epiphany. While the practice of investing is more reading comprehension than it is rocket science, it does its share of 'playing with my head' which in a strange way makes it more akin to art. Is it just the strength or weakness of the markets that has our positions where they are? What happens if it falls? Is there something I simply don't get? Why are people selling these names? It can be Manic Depressive. Experience has led me to not get too worked up about what we don't know. What we do know, is that we have a track record of success that we can draw on. Welcome to the world of investing... it's not supposed to be easy.

Sell In May and Go Away?

There is an old Wall Street adage that investors are best to sell their shares in May and come back in the fall. The reason for this is that by June, investors are turning their focus to summer vacations and thereby reducing an appetite for investing. This supposedly leads to market apathy and reduced trading volumes...so you better sell in May while the going is still good. While some years, this view coincides with soft markets; I can't see how a seasonal approach to investing makes any sense whatsoever. My view is that we always try to take advantage of the anomalies in valuation and be prepared to make additional commitments if warranted. I find it difficult to accept that there is a season for investing. Some believe that there is, I just haven't seen it work over the long-term.

The Federal Budget: Two Very Important Changes to our Benefit

In April, the finance minister announced two important changes to the Canadian federal budget that are beneficial to us. The most important is the increase in the annual Tax Free Savings Account (TFSA) limit from $5,500 to $10,000. I cannot overstate how important this account is. The TFSA allows us to invest funds into an account with all gains, including income and dividends forever free of taxation. Further, any and all funds can be withdrawn at any time without tax consequences and even replaced in the following calendar year. Many of us can attest to the resentment of having to pay thousands of dollars this past month to the government from the liquidation of successful investments. The TFSA is the one account that will soften that burden. I will be reaching out over the upcoming months to discuss further commitment to this account. It is just that good.

The second piece, which for many of us does not apply at present, is the lowering of annual minimum Registered Retirement Income Fund (RRIF) withdrawals from 7.3% to 5.93%. As a quick background, RRSP holders are required in their 71st year to convert the account into a RRIF and withdrawal funds that taxed as income. The government has reasoned that with Canadians living longer, reducing the minimum that must be taken out will extend the life of the plan. For some of our clients, this will lower the bracket from which the withdrawals are taxed. What makes it significant is that it opens the door for further withdrawal limitations in future years which I reason could be a benefit for us all.

I leave this month's note with a link to a very unique performance by one of my favourite artists at present: Jason Isbell (and Amanda Shires) who perform a Warren Zevon song on David Letterman a few weeks back. As David Letterman closes out his television career, he is bringing in some of his favourite guests. What makes this a little more poignant is that he was a big fan of Warren Zevon 's music.

https://www.youtube.com/watch?v=1urvSKb_2Ws

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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