1. How and why did you get started investing? What is your background?
I started my first business in high school when I was 15, sold it at 17. A wise man told me when I was 18 that if I wanted to start investing, I should "look at what Warren [Buffett] does and do my best to take it from there."
I did not have a clue who this Buffett fellow was (was he, in any way, related to Jimmy Buffett?) or what he did at the time, but I took a trip to my local library and looked him up. Through unearthing and reading the Buffett Partnership letters I came across another generic sounding name - Benjamin Graham.
It was shortly after opening the ultra-intimidating tome known otherwise as "Security Analysis" that I heeded Herbert Spencer's prescription that "the great aim of education is not knowledge, but action" and began (trying) to put into practice as best I could what I was learning. Turns out, my odd self finds little else as stimulating or fascinating as learning about the underlying economics of a particular industry or business or the people who founded that business or operate it.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
After much trial and error, I now prescribe to a very old method (going back at least to the 14th century, as far as I know) of capital allocation. Whereby one-third is kept in cash or equivalents, one-third is available to be invested in operating businesses, and the final third is allocated to physical assets.
3. What drew you to that specific strategy? If you only had 3 valuation metrics what would they be?
It is very simple, I adhere as closely as possible to the KISS principle (Keep It Simple Stupid) since I am not that intelligent and definitely not very experienced (been investing for just under a decade now).
Three valuation methods I consistently put to use that have served me well over the years are liquidation value (what a business is worth under the most dire of circumstances), reproduction value (what it would take to reproduce or replicate the business) and comparative value (what are businesses of similar size and underlying economics presently being valued at in transactions).
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?
Some accounting books definitely opened my eyes. "Unaccountable Accounting" by Abraham Briloff, "Quality of Earnings" by Thornton O'Glove and a few others. I found out about some of the nuances of smoothing earnings for reporting purposes, revenue and income stuffing a particular quarter and that there are actually two sets of books - one prepared for investors and owners and another one for tax authorities - what?!
I had a chance to speak with Stephen Jarislowsky this past summer. Even though he is retired now from active money management, he is still very active on the board at 91. Can only admire his and Jarislowsky Fraser's longevity.
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?
I make decisions quickly but change them very slowly, if at all. So, I will only sell under a few circumstances: if underlying economics change for the worse, if valuation is far removed from same underlying economics or if a far more attractive opportunity presents itself.
In my personal experience, this can take anywhere from a few days to several years.
6. How has your investing approach changed over the years?
Well, I went from buying what most people buy into (my first equity purchase was U.S. Steel Co. - what the hell was I thinking), to what very, very few buy into (what today are categorized as nano or micro-caps), to what nobody buys into (debt and equity in privately owned businesses).
7. Name some of the things that you do or believe that other investors do not.
I strive to be just as aware of what I do not know as what I do know (the former will always outweigh the latter, but such is life). Although this will be sacrosanct to many reading this, I do not attempt to “model,” forecast or project. I have found this to be about as effective as red lights in Grand Theft Auto.
8. What are some of your favorite companies, brands, or even CEO's? What do you think are some of the most well run companies? How do you judge the quality of the management?
Above all else, culture I think is the most important thing in any organization. If an organization treats its people well, they will in turn treat its clients well, which then will ensure its continuation over the long term.
Carlyle said, "A great man shows his greatness by how he treats lesser men." Now, I do not believe anyone is "lesser" than anyone else, but the point is if the entry level individual in an organization can attest to its culture and environment as being a positive one, that is a well-run entity.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
For me, investing is a journey, not a destination. I genuinely enjoy the process of sifting through lists, reading up on small, relatively unknown yet wonderful businesses. In this sense, I do not look to bypass or shorten the process in any way as that would only be cheating myself.
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, it has to be something relatively simple so even I can understand it. Second, it must be founded or operated by a team whom treats others the way they would like to be treated in kind and who intimately understand that culture is the most important aspect of their business. Third, it has a streamlined capital structure (single class of common shares). Fourth, it is available at a fair price.
11. 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 try to learn as much about a business initially as I can – who, where, when and why. Look to disconfirm an idea just as soon as I get it by actively seeking out information that would disqualify a business from consideration.
This can take the form of a complex, obfuscated capital structure, an egregious compensation/incentive structure and so on. I have learned the hard way when making sizable investments (“sizable” will be different for everybody) that talking to competitors and employees yields far more valuable information than what most managements are willing and inclined to provide.
12. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap?
This really does depend upon the business itself. For example, I will look at far different key metrics for a chartered financial institution than I will for a REIT, than I will in turn for a consumer services-based business.
Cheap may not be cheap at all when certain underlying economics are not fully understood or not completely disclosed.
13. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
There is still value to be found at the lower-end of the market (nano and micro-caps), where the most inefficiencies, in general, now reside.
As an independent thinker and individual, I avoid conventional wisdom (I have found that it is rather long on convention and short on actual wisdom) and naturally shy away from doing what everyone else is doing (owning indexes or the equivalent, funds, sovereign debt).
14. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
Currently, at the time of my reply to this question, public equities are set to return approx. -0.7% per annum including dividends. As with everything else, there will always be exceptions to the rule. But sadly, straight up bargains are very few and far between.
Speaking frankly, long term I am concerned about the purchasing power of fiat dollars globally.
15. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I actually recently purchased an original edition copy of "How to Win Friends & Influence People" by Dale Carnegie for my birthday a few weeks back. Unlike others, I am a really slow reader and what I mean by that is I only read one book at time, highlight passages, quotes, log notes, reread certain parts, take the book on the road with me and reference certain points I want to apply to whatever I am doing at the time, etc.
Most important lesson learned from "Think & Grow Rich" is just that, the title itself says it all (as you think, so shall you be). I am big on PMA (Positive Mental Attitude) in case it is not blatantly obvious.
16. Any advice to a new value investor? What should they know and what habits should they develop before they start?
By far my favorite question. Start from wherever you are with whatever you've got. If you have already allocated sufficient (only you will know what this entails) funds to cash and savings, get started putting capital to work no matter the amount. The proverbial journey of a thousand miles starts with a single step.
It also helps to have a definite major goal in mind, a definite plan for its achievement and know who you are as an individual since a ship without a compass seldom reaches its intended destination.
17. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
I think the net-net screener by Jae Jun on his Old School Value site is pretty cool.
18. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?
I actually do this in my annual letters every year – see Good, Bad & Ugly section. Am a bit of a masochist in this regard.
I have only ever lost anywhere near all of the capital invested on two separate occasions. How can this be avoided? Treat every investment like its going to be your last (including special situations and arbitrages) and do not talk to management.
19. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
Given that I am a fiercely independent individual and thinker, I have always, for the most part, done the exact opposite of what most tend to do (purchase indexes, funds, sovereign debt).
20. How does one avoid blowups in value investing?
Just as surely as the Dallas Cowboys will not win the Super Bowl this year (running inside joke with some friends), so too are mistakes an inevitability. The more you make, the wiser you will become, so get out there and [mess] up already!
21. If you are willing to share, what companies do you currently own and why? How have the last five to 10 years been for you investing wise compared to the indexes?
I have never owned more than nine to 10 positions at any given time, the present is no exception. Most everything is represented: cash, a business presently valued well below its approximate liquidation value (Hammond Manufacturing Co. (TSX:HMM.A, Financial)), special situation (voluntary liquidation of a now de-listed NYSE REIT), physical assets (commodities, gold) and a few inverse positions on the Canadian and Chinese economies as a whole.
I have been fortunate to be able to compound capital by approximately 30.2% per annum (before taxes and other expenses) over the past eight years. This year it is looking like it will come in slightly below this average, but not too far below.
22. Here is a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
I believe that if Ben Graham were around today (What Would Ben Graham Do is definitely a thing), he would likely take a sizable ownership stake in a future insurance, financial industry leading company.
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