1. How and why did you get started investing? What is your background?
I have a background in physics (Ph.D.) and came to investing through a rather long and indirect path. When I was young, people in my rural community were seeing investing in the stock market as a dangerous gamble, where one could easily loose his shirt. My grand-parents had lived through the Great Depression and knew someone who had lost all of their money in it or had read horrible stories about it. This had scared the hell out of them and they remained convinced until the end of their life that it was better to keep your money under the mattress than putting it in the stock market.
But with time, I came to realize that the stock market was in fact a pillar of the capitalism system and started to wrestle with what one would call today "cognitive dissonances" or conflicting facts about the stock market and stocks in general. To help resolve the issue, in the late '80s, I took the course required to become a stock broker in Canada and liked it so much that I wanted to switch career. But at the time, an acquaintance who was working in finances recommended to me to stick with my current work, which I finally did.
But the fascination about stocks and markets came back haunting me in 2006 along with a strong desire to control my retirement funds myself. Internet helping and as a hobby, I returned reading about that and great investors and started investing. I have been working very hard on it since then. In 2009, I started to study the CFA curriculum, but dropped it when I realized that MPT and CAPM were at the heart of portfolio management processes. I must say however that I found a lot of good and very useful information in the CFA curriculum though.
2. Describe your investing strategy and portfolio organization. Where do you get your investing ideas from?
My investing strategy is based on value investing and my portfolio is a collection of 'value plays' and cash. It contains no derivative. I also try to minimize the correlation between the different positions.
As for most people, I get investing ideas through running filters, reading and thinking.
3. What drew you to that specific strategy?
The internal logic and simplicity of the approach. It is very elegant and powerful.
4. What books or other investors changed the way you think, inspired you, or mentored you? What is the most important lesson learned from them? What investors do you follow today?
There are many books that contributed to build my way of thinking, but one of the most important was "Value Investing: From Graham to Buffet and Beyond" by Columbia University Prof. Bruce Greenwald. This is where I really understood the links between the different parts of valuation and connected the dots regarding the relationship between these values and micro-economy. I stopped using DCFs for valuation purposes from that point.
Ex aequo with Greewald's book, I would say that "The Most Important Thing" by Howard Marks (Trades, Portfolio) (in particular Chapters 5, 6 and 7) completely changed the way I was thinking about and handling risks.
These two books contain the foundations of my current approach to investing. The overall result is very similar to underwriting insurance; there are risks in every investment that I am willing to take if I am being fairly compensated for it or in other words, the odds are in my favor.
Regarding great investors, I admire and follow many of them namely Warren Buffet, Carl Icahn (Trades, Portfolio), Sleth Klarman, Bill Ackman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), etc.
5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?
It depends on the nature of the company; for 'break-even' companies, I generally target a two to three years holding period. For a 'good company' with above average performance, I will initially also target a 2 to 3 years holding period, but will reset this holding period every year or so if it keeps performing (i.e. intrinsic value keeps increasing).
As of when I know I have been right or wrong, I would say the most important factor is when there is a significant change in the risk profile. As long as the risk profile remains the same, I can't tell. It is only when the risk profile changes that I go back and revise my expectations and then assess if it is worth keeping or if I was wrong and should exit the position. Since bad news about a company can come any time during the holding period, it is almost impossible to determine a typical time period before knowing if the investment was a mistake. It can sometimes take the whole holding period to realize that a given investment will be going nowhere (a value trap for example).
6. How has your investing approach changed over the years?
As I have indicated above, initially and like many people, I was using DCFs to value ideas. With time I have pretty much abandoned the standard DCFs calculations and I have come to incorporate risk management through identification of possible outcomes and their probability.
7. Name some of the things that you do or believe that other investors do not
I am not using standard DCFs (i.e. requiring estimates for the future cash flows or growth along with future cost of capital). I have developed a proprietary method to estimate the value with growth (without using the traditional DCF) and I am using a probabilistic approach to risk management. The margin of safety is computed by requiring a certain probability of achieving a minimum expected return.
8. What are some of your favorite companies, brands, or even CEOs? What do you think are some of the most well run companies?
Alimentation Couche-Tard (Toronto Stock Exchange: ATD.B) has been a real star over the last few years. It is one of the most well run companies that I know. It's ex-CEO, Alain Bouchard has really been doing an outstanding job.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Yes, I use a tool called "Screener.co", which offers a lot of flexibility, including the possibility to enter your own formulas in the search criteria and allows you to run your screens on many stock markets around the world.
Besides a stock screener, I think that reading, watching the news, checking over the shoulders of great investors and thinking are the other (standard) ways to find prospects to be investigated.
10. Name some of the traits that a company must have for you to invest in, such as dividends. What does a high quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.
First, I would not invest in companies that have not at least met their cost of capital over a cycle or some extended period of time. At the opposite, a high quality company would be characterized by high and likely sustainable operating margin and return on capital versus its cost of capital.
Second, comes capital allocation which I also consider to be an important factor; if the company cannot reinvest its excess cash at this high return on capital, its must return the cash to the shareholders. I would pass on companies that have a long history of assets write-offs following acquisitions. I also pay attention to the general trend in ROC in the years following an important acquisition.
11. What kind of checklist do you use when investing? Do you have a specific approach, structure, process that you use?
I do not use a formal checklist per say. If a company seems worth further investigation, I will first estimate its intrinsic value in what I call a "risk neutral" situation. Then I try to identify the main risks the company might encounter and estimate the value of the company if each of them (taken in isolation and combined) would materialize. I assign each of them a probability of occurrence. This process leads to an (risk weighted) expected value and an expected return and a variance. From these results, I compute a margin of safety and then a buy trigger price. If the current price falls at or below the trigger price I buy, if not I pass (wait).
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
I go through the usual material that is the 10-Ks, Annual Reports, company's presentations, press releases and news etc. covering a number of years. I also like reading on the industry and about specific company's products. I do not talk to management.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock?
As I mentioned above, I use an approach based on Bruce Greenwald's book which means that I compute different levels of value such as liquidation value, assets at reproduction costs, earning power value and when applicable, value with growth. Finally, I consider the impacts that risks might have on these values. I basically use the same approach for all stocks (including financials).
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
I do not find many bargains in the current market (Canada and US). In general, I like industrials and software companies and I try to avoid industries that have a direct dependency on a commodity.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
From an historical perspective, the current market is somewhere between fairly to overvalued. From the perspective of sustained low interest rates, the market seems fairly valued to me. My main concern is a sudden and significant rise in interest rates.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I recently read "Stalking the Black Swan" by Kenneth A. Postner and "Concentrated Investing" by Allen C. Benello, Michael van Biema and Tobias E. Carlisle. I would say the most profound lesson I have learned in books is about what is sometimes called "grey thinking". When we deal with the unknown, like the future, we should think of it in terms of a range of possible outcomes with each outcome having its own probability of occurrence.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
Advice: get good mastery of basic stuff like accounting and valuation techniques. Before making an investment, think about what could go wrong with it and try your best to estimate the impacts if it occurred.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
For me, books and great investors' writing are the best resources. I look over the shoulders of great investors to see what they are interested in but I do not piggyback any of them.
19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments? What did you learn and how do you avoid those mistakes today?
There is plenty of material here.
(1) One of my very worse investments was in Apollo Education Group (Nasada APOL). I bought it on a price drop many years ago and happily paid around $49/share for it. Subsequently, I made two major mistakes:
(i) I relied too much on valuation in a "risk neutral" environment, ignoring the crackdown the US federal government intended on for-profit schools (i.e. not considering it as a major risk).
(ii) I held too long on the investment. I should have exited (at a loss) when it became clear the government would not let it go any time soon.
The company was sold last winter to a consortium for $10.00/share!!
Lessons learned here are kind of obvious: (a) if the federal government decides to crackdown on a company or an industry, better to stay clear and (b) when a company turnaround keeps being postponed year after year, look for a decent point to exit.
(2) The second one was buying IEC Electronics (Nasdaq IEC) several years ago on growth perspective. Then the unexpected occurred: the company announced they had to restate their financial statements for the last couple of years back. Earnings had been overestimated due to some errors in the inventories of a recently acquired subsidiary. Write-offs were looming and nobody knew then how much equity would be wiped out. The price eventually got cut by half and the stock languished for years. Lesson learned: never pay for growth anymore. That will minimize the loss if something like a restatement occurs.
(3) The third bad investment I have made was to buy Avigilon Corp (Toronto SP TSX-300 AVO) when it was growing fast and was very profitable. At some point the price dropped and I thought it was a decent entry level. This time, I didn't pay for growth but soon after, the CEO started restructuring the business, laying off a bunch of senior managers for various reasons, the main one being that he wanted the staff to more or less report directly to him. His ambition took over and reaching an arbitrary sales target became for him the ultimate measure of performance of the company. He has been throwing off lots of capital in in order to meet his target in total disregard of a steadily declining profitability. The result is that while sales have been increasing, operating margin has gone from 16% in Dec 2013 to 10% in Dec2015 and the company even reported a loss at the end of the last quarter. Meanwhile, gross profit margin has been north of 55%. Analysts and shareholders now have a rather negative view of the company and its management and the price dropped from roughly $32/share at the end of 2013 to $9.20 as of Sept 23 2016. Lessons learned: CEO's capital allocation skills matters and goes hand in hand with him (and the board) being shareholders oriented. When you sense that management is focused on increasing market share at the expense of profitability, it might be wise to exit the position.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?
This is where the valuation and risks assessment framework are of great help. In general, I ignore fluctuations. In the case of larger amplitude market moves, I revisit each position in the portfolio and on my watch list to see if the thesis and in particular the risks have changed, update them if it is the case and recompute the probability of making a pre-determined return given the current price for the stock. From this calculation and the actual position size in the portfolio, I make a decision: do nothing, sell it or initiate (or increase) it. In other words, having a quantitative process, as imperfect as it can be, helps a lot in removing the emotional biases that inevitably pop up when markets become a bit irrational.
21. If you'd like to share, how have the last five to ten years been for you investing wise
All I would say is that I have seen step improvements in the performance of my portfolio as my approach has evolved. Going from usual DCF calculation to Bruce Greenwald's method have resulted in an a much improved ratio of winners vs losers in investments selection. This ratio still got improved after I discovered how to value growth based on Greenwald's approach. The last step which was to incorporate a quantitative risk assessment in the process resulted in making much less frequent but much more profitable transactions.
