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A View From Here May 2016

May 9, 2016 • Print This Article

"Life is pain, highness. Anyone who says differently is selling something" - The Dread Pirate Roberts, The Princess Bride

The Perception of Risk

Risk could be the most misunderstood component of investing. I am not referring to throwing darts at mining companies that might hit the mother-load or the pharmaceutical company that has the next great drug which can soar in value. Those are the pipe dreams that most rational people wouldn't put large sums of money in. Rather, I point to the seemingly conservative investment account that yields little or no return over the long term. To me this is the greatest risk investors take and not holding themselves accountable for satisfactory performance is costing them millions of dollars. Maybe we are too polite to ask a simple 'how is our bottom line doing?' question. Maybe they are afraid of the answer or have accepted a marginal fate after years of confusion and excuses.

There is a perception that diversifying investments among well-known companies reduces risk thereby creating a conservative structure. This practice offers growth yet at the same time, minimizes downside. It's a comfortable place to be and an easy sell to investors. Most financial advisors purchase portfolios of well-known names that are farmed out to 'structured' funds or in-house managers. This allows them to focus on servicing a client base and procuring more assets to scale their annual income. On the surface, it makes great sense and I would do the same, if it worked. But in my 28 years in this industry, I've never seen it yield a satisfactory return. Ultimately, it comes down to the long-term return which can only be achieved being somewhat adept at investing. If you look to anyone that has built wealth, I assure you it was not through a diversified portfolio or a structured product created by a financial institution.

On the surface, it stands to reason that diversifying one's investments will yield at least a 'market rate' of return over the long term. According to almost any historical metric, this number hovers around 8% compounded annually over the past 100 years. Investors are usually shown some version of that chart and then a number is plugged into a financial planning program to help determine a path to financial freedom. Yet investors never see anywhere near that kind of number and those who have bothered to check complain that they've seen little or no return whatsoever. That is why there is a collective 'angst' among investment professionals when new regulations require fee and performance numbers be forwarded to clients annually beginning in 2017.

Some investors who have already made this realization have opted to manage their own funds and save on fees by moving their assets into less expensive 'solutions' (love that term) such as Exchange Traded Funds (ETFs) or the new and unproven Robo Advisors so they can reach some version of that elusive 8%. Sadly, I have not seen this process provide better returns than what you could receive from the most conservative investment such as government bonds or GICs. If it did, I would employ the same formula. It's much easier.

I believe this fate to be the experience of most investors based on conversations with people about their investments and from the transfer in of assets from investors who had previously employed that practice. Still there are many who are so jaded after changing advisors enough times that they've thrown their hands up in the air and just opted for continued underperformance. It is part of the reason why I wrote my book, All Good Things - Building Wealth for my Clients. Since most of these accounts are represented by registered funds such as an RRSP, they hope that by the time they reach retirement, they'll deal with it and reason that if something better exists, it must be risky.

If I were to sum up the strategy most investors face it would be this:

"A frog placed in a pot of boiling water will jump out and save itself. If that same frog is placed in the pot with warm water and heat is slowly applied, it will boil itself to death" - Jason Vanclef

Ok - it's not as bad as that, but hopefully you get where I'm going.

A Different Fate for Us

Our investments have seen a much different fate that is clearly demonstrated by the long-term performance that we have been able to achieve. Why is that? Are we just lucky?

I think the answer lies in the fact that we employ a holistic approach by investing in companies where we have taken steps to understand the business and its potential rewards versus the risk we are taking. We are prepared to own them until they reach fruition and take appropriate action if something changes. I believe perhaps the largest reason for our success lies in a carefully chosen portfolio of no more than 10 - 12 disparate investments at any time and sell them when their valuation dictates.

For many investors and by extension their advisors, losing money on investments is difficult to admit and perhaps a blow to the ego, especially if they do not have a firm grasp on why they own it in the first place. In reality, it shouldn't be because in the scheme of things, it is something we must accept. We have had some clunkers along the way but growth in our bottom lines seems to always resume. We also focus on a value-based strategy of each investment. Our holdings have similar traits and among the most important is the underlying value of a company if it were dissected at any time. This could be represented by large amount of cash in the bank or real estate holdings that gives us a base value on a per-share basis. We also focus on management ownership that aligns our interests with theirs. And as you know, I hold the same investments in all my own accounts.

With that in mind, I am particularly excited right now about the potential fortunes of our holdings and continue to advise that we maintain and add to existing positions as valuations suggest. We do not create new ones all that often. There are only so many investments we can truly know well.

Meeting with Reitman's CEO - Montreal May 3, 2016

On Tuesday May 3rd, I flew to Montreal for the day to meet with Jeremy Reitman, the CEO of the company that my clients hold an investment in. While I am never quite sure what is going to come out of these meetings, I believe that the company has potentially turned a major corner and looked to gain insight to further back that thesis. I think there is deep value in that company which can yield us a handsome return with what I determine as reduced risk from their large cash position (over 50% of the share price), real estate ownership (hard to value, but worth more than the approximate 20% of share value that it is on their books for). Add to that large management ownership, an attractive dividend, the fact that investors don't particularly like it and the little cared for fact that their same-store-sales are increasing at a higher rate than almost every other North American peer and I think we might have something good. He agreed.

Thanks for taking a look and as always,

All Good Things,

Adam Hennick

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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