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A View From Here October 2016

October 11, 2016 • Print This Article

"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffett

Familiar Patterns

To date, 2016 has defied the seasonal archetypes many investors believe in and September was no exception as it has traditionally been the weakest month of the year. There has been unparalleled strength in the positions we have been focused on building over the past year leading to all-time high valuations for most portfolios. Looking back it is amazing how far our accounts have come. I often say that if you told anyone how successful the long-term performance has been, they simply wouldn't believe you. Maybe it's best kept as our little secret.

There is a familiar pattern in owning the type of deep-value investments we tend to commit to. Each new position is introduced with the knowledge that the period to fruition will likely exceed three years. For some, this may seem too long but time moves faster than most think and it takes most of that term to build the investment position to a proper allocation in accounts. As such, we take a modest initial position with an eye for adding more as corporate developments and valuation dictate. I have found that when something is very cheap, underfollowed and unloved - it trades in apathy. As such, we end up adding shares at lower prices as we look for corporate developments to substantiate our investment thesis. To further our view we work with like-minded investors, industry participants and analysts to affirm (or in some cases oppose) our view. This process, as well as the allocation of the dollar amount that each account should hold is at least half of my working day.

In some instances, we do not see the light we've been expecting so we don't add to them and in some cases - liquidate at a loss. It should be noted that recognizing a loss is in my opinion, essential to the long-term success of a portfolio. Many choose to hold investments on the basis of hope instead of redeploying capital to better use. Usually a position is sold at a loss because the value identified did not materialize and the case for continued commitment had deteriorated. A stellar example of that circumstance was our small investment in Danier Leather . We made an initial commitment but did not see improvement in the business, so we did not add more investment funds. When it was reasoned that improvement was not obtainable, it was sold at a loss a few years later, but it was never a key component of the portfolio. That is the main purpose for taking a modest initial position. If corporate developments do not signal continued improvement then we don't add to it, recognizing that not everything works out as expected.

Sometimes, there could be improvements in a key element of the business such as revenue, but specific circumstances have held back cash flow (to me the most important measurement of a business). This situation is often a 'black cloud' following it around...something that is usually temporary and a good time to meet with management face-to-face and discuss the possibilities of being on the other side of that circumstance. We have had success in making that determination. A key investment for us in this instance was Methanex , who had suffered temporary situations that held back its cash flow. When viewed in context, these circumstances seemed tolerable and when the clouds lifted, the company reported significant improvement in cash flow that ultimately led to a substantial increase in valuation. Knowing the company well helps us make better decisions during that period. I believe that we are starting to see the clouds lift in our investment in Reitmans.

When an overlooked investment gets recognized, the position starts to increase dramatically and it usually does in a relatively short period of time. This often brings on thoughts of some pending corporate development that has yet to be announced. Most often, it's just the value being recognized. We are seeing this circumstance currently in three of our long-term positions in recent months that have added to our recent success.

Looking back on our most successful investment outcomes, I see a familiar pattern from the time we make our initial investment, to when we close it out. In most cases, the share prices weakened despite positive corporate developments, so we added more, even in the face of weaker markets or opinions that we didn't agree with. This process is a real test to our conviction, patience, and resolve. Then a catalyst event begins to occur within the industry, or more specifically to the company and the share price starts to increase over a relatively short period of time. Our successful outcomes in Easyhome, Methanex, Enghouse, Softchoice and Glentel are examples of this occurrence, in that they 'woke up' after a long malaise and are exceeding at least two times the average cost for most accounts.

As September ends and moves into the fourth quarter of 2016, I continue to have tremendous faith in our portfolios as there has been a lot of activity to re-adjust in recent months. While I see some good values in potential new names we might look to add, I feel quite strong about what we have committed to at present as having the legs to hopefully take us to a whole new plateau.

I believe you will be happy when you see these results reflected in the month-end statements that will arrive shortly.

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.

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