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A View From Here December 2017

December 14, 2017 • Print This Article

"Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market" - John Maynard Keynes

Like it's 1999...

There have been only a few times in my career where we have witnessed the speculative vacuum on a level that we are presently seeing in crypto-currencies, lithium and all things marijuana. These exciting investing mediums have captured the imagination of investors who find it hard to resist the potential for fortune. While the shares of most traditional companies are wallowing indifferently, investors have become increasingly restless with what they own and ask why they are not invested in this whole new paradigm. This speculative circumstance conjures up the dream of riches that most of us have when we can make investment bets in things we don't really understand. Some have gone so far as abandoning their traditional mode of investing and sub-planting it with this new world of exciting, albeit speculative venture investing. The last time we saw this occurrence was in 1999 as the unabated run up in technology companies created the dream of big riches. The tech rally topped out in early March of 2000 and began a precipitous drop that took a lot of investor's money with it.

The success or failure of today's exciting companies will likely elude us because this is not where we have a history of building wealth. But it does build anxiety that we are not invested in the pockets of the market where exponential wealth is being created for some investors at this time.

I recall a client calling me in early March 2000 and angrily asserting that we were missing out on significant returns because we held no technology companies. He boasted that he had made over $100,000 at the time trading technology companies on his own and questioned what value I brought to the investment process. I defended my position, but what could I say? He was earning outsized investment returns while we were going nowhere. In fact he might have 'rung' the bell at the top of the market because within a few days of that tirade, technology companies began the rapid collapse that took his returns away and replaced them with significant losses. By year's end, the companies we held in his retirement account began to increase and over the next year, three of them were taken over (Cominco, Rio Algom and Viceroy Homes). He let them turn to cash, because the elephant in the room was that fateful conversation followed by large losses and eventually he moved his account. This experience is not an isolated one. Somewhere, someone has to know exactly what and why they own something.

Just two years ago, marijuana stocks were a bit of a 'pot-astrophy' as many were on the verge of bankruptcy. And then a new speculative boom arrived that today, sit at fantastic levels. For companies working in this industry, it is like selling shovels in front of a gold mine. It's amazing to watch how these investments climb to valuations that one can only dream about, with minimal, (albeit growing) revenues and barely any free cash flow. Add this to the ascension of the US markets that are being led mostly by a few well-known companies known as the FAANGs (Facebook, Amazon, Apple, Netflix, Google), and the muted growth in the Canadian markets, we now have a climate that promotes speculation in areas that few have much knowledge.

In my opinion, the speculative fervor we are seeing at present is a good thing. Sure, the speculative bubble could burst and the valuations of these businesses would then retreat to levels that can make some feel foolish, but it is also part of innovation. I remember back in the early days of the internet, names like America Online, Global Crossing and Netscape were dominant investment vehicles despite little or no cash-flow generation. But they were laying the infrastructure of things that changed the landscape for the future of technology, especially how we use it today. Speculation in companies with little revenue and cash flow might be potentially reckless, but they often add a piece of the puzzle that helps products get better. Even if their prices go to zero and investors lose their money.

Our investments are becoming more Valuable

2017 remains a challenge for investors, particularly in Canada where there are only a few areas of the market outside of these names that have been strong and I'm thankful that we hold some of them in our portfolio. They are doing the heavy lifting for us at a time where we continue to augment the other names that remain overlooked and inexpensive. We have been active in adding to these positions in recent months as I see potential for gains in the future. Our holdings have reported strong results recently, making their valuations more attractive...even if the market doesn't see it as such. We have owned most of these businesses for a long time, and many pay dividends and/or interest and distributions providing a source of income while we wait for value to be realized. I have learned that when things are cheap and performing well on a corporate level, we will be rewarded - we just don't know when. And while speculative times in the markets create anxiety about what we are not participating in, I am also aware that this too will pass and the money looks back to the things that are a little more stable.

Let's hope we're right...let the good times roll in the speculative names. It's good for markets and innovation over the long term.

Thanks for taking a look and as always,

Adam Hennick
Mackie Research Capital
Tel: 416 860-6848 Toll Free: 1-877 860-6848
www.adamhennick.com

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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