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There’s a couple of investors I have in mind for the potential sequel to Market Masters. I already mentioned Francois Rochon in a past newsletter. His firm, Giverny Capital, has posted a 16.3% compound annual return since inception. Another investor I would like to interview is Andrew Brenton of Turtle Creek Asset Management. Since Turtle Creek was founded by Andrew on November 1, 1998, an investment of $1,000 has grown to over $49,7501, which equals a compound annual return of 24.1%. That demonstrates a remarkable wealth-building ability. Turtle Creek is long only, comprised of North American equities (primarily Canadian, ~ 25 holdings), with average $7 billion market capitalizations.

While I haven’t sat down with Andrew yet to document his investment strategy in detail, I’ve conducted some preliminary research. And so what I’ve posted for you below is Andrew Brenton’s approach to “Identifying the Companies We Want to Own (and Their Common Characteristics)”, sourced from his 2015 Letter to Shareholders:

“The universe of companies from which to choose is quite large – there are approximately 2,400 companies listed on North American stock exchanges with market capitalizations of between $1 billion and $25 billion. So how do we sort through them to identify the ones that deserve our attention?…

The first common characteristic is that our companies are cash flow positive andthe second, related characteristic is that they typically have strong balance sheets. Essentially, none of our companies need us – they don’t need the public markets to pursue their business strategy. That doesn’t mean they never access the capital markets by selling treasury shares; many of them have issued equity over the years, but they generally don’t ‘need’ to and tend to do so only at attractive prices… Great businesses typically generate more free cash flow than they can profitably reinvest and therefore don’t need to raise additional equity capital. More importantly, they don’t need to raise equity capital at times when prices would be dilutive to shareholder value. Our companies are good at allocating capital, including the substantial cash flow that they generate.

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In addition to deploying their cash internally on high return opportunities, many of our companies deploy capital externally on acquisitions. This is the third common characteristic. Currently, over two thirds of the portfolio, by value, is comprised of companies where growth through acquisitions is an important part of their strategy. Our background and experience allow us to select good acquirers, avoiding the multitude of companies that destroy shareholder value with acquisitions. Our companies have a variety of approaches to creating value through acquisitions but all are capable and disciplined buyers that are not willing to overpay. Our companies would rather sit on the sidelines when prices are too high.

A fourth common characteristic is returning capital to shareholders, either via dividends or repurchasing their own shares. But in the case of share buybacks, the purpose is not “interesting E.P.S. accretion” as one CEO put it; our companies decide whether or not to repurchase their stock with the same hard-nosed evaluation to which they subject potential acquisitions. Good allocators of capital understand when their shares are cheap, just as they understand when an acquisition is well priced.

The fifth and final characteristic is that our companies have big, rational ambitions. While most of our companies have global ambitions, some are content to operate only within Canada or the United States. That’s why the modifier ‘rational’ is important. It’s not enough to own companies that have big growth plans. Growth for its own sake can be a recipe for disaster. It’s important to own companies that press their advantage when it serves and know when to pull back in the face of a poor environment or irrational competitors.”

To summarize, the 5 characteristics that Andrew Benton looks for in a company are:

1) Cash flow positive
2) Strong balance sheets
3) Deploy capital externally on acquisitions
4) Return capital to shareholders, either via dividends or repurchasing their own shares
5) Big, rational ambitions

Open Text Corp. is a core holding in Turtle Creek’s Fund. I encourage you to read Andrew’s thought process on investing in Open Text. It’s a great case study framework that you can apply to your own stock selection process.

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The Outsiders Podcast

In my last newsletter, I recommended that you read The Outsiders, which is a book about 8 exceptional capital allocators. However, if you don’t intend on reading it, The Investors Podcast just released a new podcast, outlining all 8 CEOs from The Outsiders and how each ran their respective companies. Listen to the podcast here.

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Free Cash Flow is King

Will Ashworth, a journalist at Motley Fool Canada, picked up Market Masters from the library, read it from front-to-back, and then was inspired to write this article based on Barry Schwartz’s strong focus on free cash flow from my interview with him.

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Some of My Favourite Investing Blogs and Resources Right Now:

Don’t fuck with Donville
Base Hit Investing
The Lettuce Blog
Vuru
StockChase
StockCharts

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

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Warren Buffett doesn’t normally endorse books. From my understanding he’s only endorsed The Intelligent Investor, The Most Important Thing, and Common Stocks and Uncommon Profits, with the most recent being the focus for today’s discussion, The Outsiders, written by William N. Thorndike. Buffett recommended The Outsiders in Berkshire Hathaway’s Annual Shareholder Letter (2012), calling it “an outstanding book about CEOs who excelled at capital allocation”.

The Outsiders chronicles eight CEOs whose firms’ average returns outperformed the S&P 500 by a factor of twenty-in other words, an investment of $10,000 with each of these CEOs, on average, would have been worth over $1.5 million twenty-five years later. I really enjoyed The Outsiders because I’m a big believer in shareholder-friendly management. The most successful capital-compounder stocks in my portfolio are all run by superb CEOs. And as an investor it’s important to know how to evaluate those able managers (i.e., the metrics that determine a CEO’s success). While The Outsiders does a great job at that, as a Canadian, I was left wondering who the author would have included if he expanded his search to Canada. So, after reading the book, I emailed Mr. Thorndike and asked which Canadian CEOs in his opinion would fit into the realm of “Outsiders” – CEOs who excel at capital allocation. He replied with some possibilities: Mark Leonard (Constellation Software), Prem Watsa (Fairfax Financial), and Bruce Flatt (Brookfield Asset Management). But he did preface that list by admitting, “I have not done a thorough study of Canada”.

Below I’ve posted important excerpts from The Outsiders that I feel sum up the main message of the book. I do encourage you to pick up The Outsiders from the library if you have some free reading time over the next couple of weeks (it’s only 272 pages).

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 Excerpts from The Outsiders (2012):

“What makes a successful CEO? Most people call to mind a familiar definition: ‘a seasoned manager with deep industry expertise.’ Others might point to the qualities of today’s so-called celebrity CEOs-charisma, virtuoso communication skills, and a confident management style. But what really matters when you run an organization? What is the hallmark of exceptional CEO performance? Quite simply, it is the returns for the shareholders of that company over the long term.”

“CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations.”

“Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity. Think of these options collectively as a tool kit. Over the long term, returns for shareholders will be determined largely by the decisions a CEO makes in choosing which tools to use (and which to avoid) among these various options. Stated simply, two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders.”

“Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors. In fact, this role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation at the top business schools. As Warren Buffett has observed, very few CEOs come prepared for this critical task: The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly talented musician was not to perform at Carnegie Hall, but instead, to be named Chairman of the Federal Reserve.”

“[Henry] Singleton was a master capital allocator, and his decisions in navigating among these various allocation alternatives differed significantly from the decisions his peers were making and had an enormous positive impact on long-term returns for his shareholders. Specifically, Singleton focused Teledyne’s capital on selective acquisitions and a series of large share repurchases. He was restrained in issuing shares, made frequent use of debt, and did not pay a dividend until the late 1980s. In contrast, the other conglomerates pursued a mirror-image allocation strategy—actively issuing shares to buy companies, paying dividends, avoiding share repurchases, and generally using less debt. In short, they deployed a different set of tools with very different results.”

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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

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*** My Best 15 Ideas for 2019 are up +14.6% YTD (Jan). Learn More. ***

In 2005 I opened my first brokerage account. I was 18 and just started my studies at the University of Waterloo. I invested in 5 stocks. I didn’t really know what the heck I was doing but I knew I needed skin in the game to learn the ropes. Here’s what happened with my portfolio within the first year: three stocks traded around the same range. One stock got bought out. And the other stock was a high flyer. I got lucky that first year… The following years had their ups and downs; winners and losers. But it wasn’t until I had invested in the market for 10 years that I truly felt confident in my stock-picking abilities. Still, not every stock I pick is a winner. That’s impossible. Though what I learned was that cutting my losses and re-allocating that capital into winners made up for those losses and then some over time.

Today, I tend to invest in these three buckets:

• Mispriced Large Caps
• Speculative Takeovers
• Small/Mid-Cap Capital Compounders

For example, I started loading up on Starbucks stock in 2008 at around $15/share, at a time when Starbucks was oversaturating themselves in the market, with most “experts” doubting their strategy of selling high-priced coffee, especially with the financial crisis looming, and new entrants in the coffee business, such as McDonalds. However, when I bought Starbucks stock, after their huge decline on the market, I never witnessed a drop in traffic among the stores nearby me. Starbucks had huge competitive advantage then and now. I thought, “If Starbucks goes out of business, that’s probably when the world will end”. And, seriously, do you think business people would ever switch their coffee meetings from Starbucks to McDonalds?

I also dabble in speculative takeovers. When Lowe’s first bid for Rona fell through, I bought a stake in Rona, and just sat on the position. I speculated that Lowe’s, or another company (maybe Home Depot), would eventually scoop up Rona, with the Quebec Government’s approval of course. When Lowe’s came back years later, bid on Rona a second time, and won approval to buy them out, my Rona shares shot up ~100% in one day. Well worth the wait.

But the most successful ‘bucket’ in my portfolio is the Small/Mid-Cap Capital Compounders. Why? I find that as long as the intrinsic value of these businesses grow every year, so does the price of the stock. I’m actually upset when one of my ‘capital compounder’ stocks get bought out, because most of the time there’s so much more potential for growth. It forces me to go out hunting for an equally remarkable capital compounder to replace the buy-outs.

Here’s the characteristics, in my opinion, of these ‘capital compounder’ stocks:

• Growth in Revenue
• High Return on Equity (ROE) / Return on Capital (ROIC)
  • I like to see >= 20% ROE and >= 10% ROIC
• Growth in Free Cash Flow Per Share
• Growth in Book Value Per Share
• Growth in Earnings Per Share

I analyze these characteristics in a company over a period of time – at least 5 years – as some companies can post great records only to then fizzle out. That’s why competitive advantage is so important. My favourite sector by the way: consumer franchises.

Take a look at the screenshots below for an example of a company that exhibits these ‘capital compounder’ characteristics:

The successful ‘capital compounders’ that I invest in use their free cash flow to grow their businesses, both organically and through accretive acquisitions that fit well into their business model. I want to stress, though, that picking stocks is not easy. There’s always inherent risk.

I interviewed top investors in my book, Market Masters. Some invested primarily in strong capital compounder companies. However, there’s a gentleman named François Rochon of Giverny Capital, located in Quebec, who doesn’t appear in my book (maybe the sequel…) but has been very successful investing in these types of companies through many business cycles. I want to bring him to your attention now. Since inception, Mr. Rochon’s “Rochon Global Portfolio” has delivered a 16.3% compound annual return. You can dig into his returns here and learn more about his investment strategy here.

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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

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When I attended the Toronto Money Show in 2014, this session caught my eye: “Beating The TSX – It Works!”. I was skeptical but decided to check it out anyway. The auditorium was packed with investors. And at the front stood David Stanley – the originator of the ‘Beat the TSX’ system. Mr. Stanley, a retired University Professor, gave his audience the necessary backround before revealing how ‘Beat the TSX’ (BTSX) worked and its strong performance (12.47% compound annual return):

“After I took early retirement I looked at the stock price and total return data for the TSE35 bluechip index (predecessor to the TSX60). I was struck by how much the total return index with its reinvested dividends had outperformed share price appreciation. [Then I read] Michael O’Higgins book called “Beating The Dow” (BTD). His ‘Dogs Of The Dow’ uses an emotion-free method to select high-dividend stocks. From 1974 till 2012 (38 years) BTD has averaged 11.7% vs. 9.1% for the S&P 500 index, a difference of 29%. O’Higgins’ book became an instant investment classic and served to get me interested in dividend investing. I adapted the structured decision-making process of BTD to the TSE and wrote my first ‘Beating The TSE’ (BTSX) column in 1996.”

How BTSX Works:

David Stanley explained that “the list of S&P/TSX 60 stocks is ordered from high to low by dividend yield. The top 10 [highest yielding] stocks are purchased in equal dollar amounts and held for 1 year. Investors build up a portfolio of high quality stocks purchased at a reasonable cost. No secret sauce, hocus pocus, animal spirits, etc.” But he added that “former income trusts are not included in the list from which I select the portfolio. Why not? For BTSX, BTD, or any similar method to work, the index must be composed of only ‘blue-chip’ stocks”.

BTSX Performance:

Over a 27 year period (1987-2013), BTSX deliverd a 12.47% compound annual return vs. the TSX Index’s 9.89% return. That means $1,000 invested in 1987, using the BTSX system, turned into $16,915. The TSX would have only turned that initial $1,000 sum into $9,607. But please note: history does not guarantee the same future performance.

If you’re interested you can take a look at David Stanley’s Toronto Show Money Show ‘Beating the TSX’ presentation here.

Read More About BTSX:

I was obviously impressed by ‘Beat the TSX’. So I interviewed Ross Grant, David Stanley’s successor, for my book, Market Masters. While it’s the last chapter of my book I probably get the most email comments about the system. For years, Ross Grant invested in TSX60 stocks based on ‘Beat the TSX’ and was able to retire at age 43. He beat the daily grind! (but that’s no guarantee you can realize the same exact outcome). If you’re interested in learning even more about the BTSX system, and Ross Grant’s path to financial freedom, you can read his book, Destination: Early Financial Independence.

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

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I love re-reading the investment classics. One Up On Wall Street, by Peter Lynch, is one of them. On the back cover of the book, it reads: “…You can discover potentially successful companies before professional analysts do. This jump on the experts is what produces ‘tenbaggers’, the stocks that appreciate tenfold or more and turn an average stock portfolio into a star performer.”

And who doesn’t want to find tenbaggers? A couple of tenbaggers in your portfolio can help you beat the market year over year. I’ve been fortunate to invest in stocks that have appreciated tenfold (i.e., $1,000 turns into $10,000), but I’m always looking for more. When I interviewed Canada’s Top Growth Investors (Jason Donville, Martin Braun, Peter Hodson, Martin Ferguson, and Ryaz Shariff) for my book, Market Masters, I learned from them how they went about discovering tenbaggers. The common lessons were: small/mid-cap stocks, low prices, low/ or no dividend, knowledge-based industries (e.g. technology), new products/services, intelligent capital allocators, high rate of growth in book value per share, earnings, and cash flow, etc. As an example, Jason Donville’s investment in Constellation Software is a 30-bagger! (i.e., $1,000 turns into $30,000). There’s more examples in my book.

But back to Peter Lynch – he ran the Magellan fund at Fidelity from 1977 until 1990. And his compounded annual return during those 13 years was 29.2%. Remarkably, during his tenure at Fidelity, Lynch bought more than a hundred “tenbagger” stocks, including Fannie Mae, Ford Motor, Philip Morris International, Taco Bell, Dunkin’ Donuts, L’Eggs, and General Electric. But just how did Peter Lynch find those tenbaggers? He offers some hints in his book, One Up On Wall Street:

“These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers…. A fast-growing company doesn’t necessarily have to belong to a fast-growing industry. All it needs is the room to expand within a slow growing industry.” (p.108)

“The best place to begin looking for the [fast grower] is close to home — if not in the backyard, then down at the shopping mall and, especially, wherever you happen to work.” (p.83)

“There’s plenty of risk in fast growers, especially in the younger companies that tend to be overzealous and under financed. When an under financed company has headaches, it usually ends up in Chapter 11…. I look for the ones that have good balance sheets and are making substantial profits.” (p.109)

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“There are three phases to a growth company’s life: the start-up phase, during which it works out the kinks in the basic business; the rapid expansion phase, during which it moves into new markets; and the mature phase, also known as the saturation phase, when it begins to prepare for the fact that there’s no easy way to continue to expand. Each of these phases may last several years. The first phase is the riskiest for the investor, because the success of the enterprise isn’t yet established. The second phase [i.e., rapid expansion phase] is the safest, and also where the most money is made, because the company is growing simply by duplicating its successful formula. The third phase is the most problematic, because the company runs into its limitations. Other ways must be found to increase earnings. As you periodically recheck the stock, you’ll want to determine whether the company seems to be moving from one phase into another.” (p.223-4)

“Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.” (p.293)

“Wall Street does not look kindly on fast growers that run out of stamina and turn into slow growers, and when that happens, the stocks are beaten down accordingly…. The trick is figuring out when they’ll stop growing, and how much to pay for the growth.” (p. 109)

That last point, “how much to pay for the growth“, is an important one. Peter Lynch suggested a method to judge the price for growth: Price/Earnings to Growth Ratio (PEG). Lynch said: “the P/E ratio of any company that’s fairly priced will equal its growth rate”.

Here’s how to calculate the PEG Ratio:

Acorrding to Lynch, a lower PEG ratio is “better” (cheaper) and a higher ratio is “worse” (expensive). And a fairly valued company would have a PEG equal to 1.

While Lynch popularized ‘tenbaggers’, publicly explaining his methods to find them, there’s two other notable investors who shared their insights: Philip Fisher and William O’Neil. I’ve included their ‘growth investing criteria’ below:

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Philip Fisher: The 15 Points to Look for in a Common Stock

1) Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

2) Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines have largely been exploited?

3) How effective are the company’s research and development efforts in relation to its size?

4) Does the company have an above-average sales organization?

5) Does the company have a worthwhile profit margin?

6) What is the company doing to maintain or improve profit margins?

7) Does the company have outstanding labor and personnel relations?

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8) Does the company have outstanding executive relations?

9) Does the company have depth to its management?

10) How good are the company’s cost analysis and accounting controls?

11) Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how the company will be in relation to its competition?

12) Does the company have a short-range or long-range outlook in regard to profits?

13) In the foreseeable future, will the growth of the company require sufficient financing so that the large number of shares then outstanding will largely cancel existing shareholders’ benefit from this anticipated growth?

14) Does the management talk freely to investors about its affairs when things are going well and “clam up” when troubles or disappointments occur?

15) Does the company have a management of unquestioned integrity?

Source: Common Stocks and Uncommon Profits. Philip Fisher.

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William O’Neil: CAN SLIM® System
“C stands for Current earnings. Per share, current earnings should be up to 25%. Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.

A stands for Annual earnings, which should be up 25% or more in each of the last three years. Annual returns on equity should be 17% or more.

N stands for New product or service, which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic. This product is what allows the stock to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high for pricing. A notable example of this is Apple Computer’s iPod.

S stands for Supply and demand. An index of a stock’s demand can be seen by the trading volume of the stock, particularly during price increases.

L stands for Leader. O’Neil suggests buying “the leading stock in a leading industry”. This somewhat qualitative measurement can be more objectively measured by the Relative Price Strength Rating (RPSR) of the stock, an index designed to measure the price of stock over the past 12 months in comparison to the rest of the market based on the S&P 500 or the TSX 300 over a set period of time.

I stands for Institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters. A quantitative measure here is the Accumulation/Distribution Rating, which is a gauge of mutual fund activity in a particular stock.

M stands for Market Direction, which is categorized into three – Market in Confirmed Uptrend, Market Uptrend Under Pressure, and Market in Correction. The S&P 500 and NASDAQ are studied to determine the market direction. During the time of investment, O’Neil prefers investing during times of definite uptrends of these indexes, as three out of four stocks tend to follow the general market pattern.”

Source: https://en.wikipedia.org/wiki/CAN_SLIM#cite_note-IBD-1

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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

On January 20, 2016, Maclean’s published their feature article:

Assume the crash position: How far will the stock market fall?
Canada’s stock market has suffered through a lost decade of returns.
Why the bad times for Canadian investors could continue.

This is what Maclean’s had to say:

“… the glory days for Canada’s stock market—when the S&P/TSX could be relied upon to outperform the U.S. S&P 500, as it did immediately following the financial crisis—are as good as dead. With global markets now faltering, too, Canadian investors are left wondering just how bad things will get… the outlook appears to be getting worse, not better.”

Just weeks later, Canada’s stock markets – TSX and Venture Exchange – started to rocket upwards, surpassing other markets around the world. This reversal reminded me of what Bob Dylan said in his song, The Times They Are A-Changin: “For the loser now, will be later to win“. And of course, the adage we all know very well, that is to be: “Fearful when others are greedy and greedy when others are fearful“.

Take a look at these market returns since Maclean’s ‘Death of Canadian Equities’ article was written (Jan 20):

TSX: + 18.80%
TSX Venture: + 56.57%
Dow Jones Industrial Average: + 13.30%
S&P 500: + 13.21%
Nasdaq: + 10.72%

Canada, so far this year, is the clear winner; delivering exceptional returns for its investors. But that goes without saying, time will tell whether Canada’s remarkable stock market rally will continue.

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

 

I’ve read 100+ books on investing; countless hours of reading and educating myself on key investing principles. But I came to realize that while there are hordes of books that will endeavor to teach you how to invest in stocks, only a handful of classics matter; the books that will transform you. The list I’m sharing with you is what I believe to be the only books you need to read to establish a foundation for “Do-it-yourself” (DIY) investing. And even if you consider yourself an advanced investor; it never hurts to revisit the sound investing principles found in these tomes.

These are the Top 10 Most Important Investing Books:

1. The Intelligent Investor, Benjamin Graham

It was through The Intelligent Investor that I was introduced to value investing, and the important concepts of Margin of Safety, Mr. Market, and Intrinsic Value. Warren Buffett called it “the best book on investing ever written”.

2. Common Stocks and Uncommon Profits, Philip Fisher

Philip Fisher opened up my world to growth stocks. It was after I read Common Stocks and Uncommon Profits that I started paying more for stakes in higher quality, and faster growing businesses.

3. One Up On Wall Street, Peter Lynch

 There are so many easy-to-implement lessons shared in One Up On Wall Street. But what really stuck with me was Peter Lynch’s focus on ‘buying what you know’. That has saved me from many disasters in the market.

4. Market Wizards, Jack D. Schwager

Jack D. Schwager introduced me to some of America’s top traders in Market Wizards. But instead of telling us their favourite stock picks (what they buy) he explained their investment frameworks (why/how they buy).

5. Buffettology, Mary Buffett and David Clark

There are many books that endeavor to explain how Warren Buffett invests in stocks but most come up short. Buffettology is the book that gets it right.

6. The Money Masters, John Train

A classic that is fun to read. The Money Masters shares winning strategies from some of the world’s best investors who ever lived. It’s a book that I’ll read every couple of years to brush up on investing essentials.

7. The Essays of Warren Buffett, Lawrence A. Cunningham

Lawrence A. Cunningham saves us the time of sifting through Warren Buffett’s priceless teachings from his annual reports in this comprehensive compilation; The Essays of Warren Buffett.

8. A Random Walk Down Wall Street, Burton G. Malkiel

 If you’re a DIY Investor you likely believe that the market is not efficient. But Burton Malkiel argues otherwise in A Random Walk Down Wall Street. Even if you don’t agree with the Efficient Market Theory it’s important to understand both sides.

9. Poor Charlie’s Almanack, Peter D Kaufman

Warren Buffett’s partner, Charlie Munger, influenced him to invest in companies with strong competitive advantages, albeit at higher prices. Although somewhat scattered and non-linear, Poor Charlies Almanack is chock full of good advice on investing, and life in general.

10. The Snowball, Alice Shroeder

Alice Shroeder chronicles the most important capitalist of our time in ‘The Snowball’. It goes without saying that Warren Buffett is the reason many people, including myself, are inspired to invest in stocks. He’s a role model. What’s also great about the book are the never-before-seen photos that add to Buffett’s story.

 

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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.

 

When I was 12 years old I made a decision. I was going to be rich. I looked up to successful people and wanted what they had: financial freedom. They seemed to be happier than everyone else. But who was I kidding? Becoming rich would be an uphill battle. I was from a middle-class family of humble means. There was no trust fund. And my parents didn’t have work connections to land me my first job. The odds were stacked against me. But I still made the decision to be rich and started on my wealth-building journey. And the path I chose to get me there: do-it-yourself investing “DIY Investing”.

How I became a DIY Investor:

1. Emulating Successful Investors

I realized that if I wanted to make money by investing in stocks I had to study successful stock investors. Common sense, right? Isaac Newton said it best:

“If I have seen further than others, it is by standing upon the shoulders of giants.”

So, from age 12 to 18, I read around 50 books on the topic.

These were the six most formative investing books for me:

• The Intelligent Investor
• Common Stocks and Uncommon Profits
• One Up On Wall Street
• Market Wizards
• Buffettology
• The Money Masters

I would also study Forbes’ list of the 500 Richest People in the World and Canadian Business’ Richest Canadians. It then all became very clear to me. I could become rich by earning money, saving the proceeds, and investing in stocks as other rich people, such as Warren Buffett had done before me.

2. Earning and Saving

I had opened my first bank account when I was about 8 years old. As you can imagine there wasn’t much there; cash from birthdays, Christmas, and some chores. Maybe $500 in total from what I can remember. I had to earn/save more money fast! So I did what Warren Buffett had done at my age – delivered newspapers. At 12, I joined PennySaver and became a paperboy for three neighborhoods in my hometown of Mississauga. I deposited each paycheque, along with any other money, straight into my savings account.

3. Compounding Money

Once I turned 14, and just started high school, my savings account had grown to about $5,000. At that point, I wanted to invest in stocks. But because of my age I wasn’t eligible to open a brokerage account. So I started with bonds. After returning home from the bank, I placed those newly purchased Canadian Savings Bonds into a small but sturdy wooden box, hiding it safely under my bed. I was so proud. I knew that my bonds would generate interest for me on the principal amount ($5,000). “Compound interest is like magic”, I thought. “And the earlier I started the longer my money would compound (‘work’) for me”. Throughout high school, I would work several odd-jobs (mechanic shop janitor, meat department clerk, and Best Buy associate), all the while saving money from each paycheque, and then buying more bonds.

4. Investing in Stocks (the inflection point)

I turned 18, and was ready to enter University (party time!). In September, 2005, I moved into my “cozy” on-campus dorm room at the University of Waterloo. But even more exciting was that I finally opened my first brokerage account. By investing in stocks I could compound returns through both capital appreciation (i.e., stock price goes up) and dividend income (i.e., quarterly dividends from companies). I had already cashed out of my bonds; $10,000. So I invested that money evenly into 5 stocks, owning a $2,000 stake in each company. I felt like a true capitalist. This is how my idols, Benjamin Graham, Philip Fisher, Peter Lynch, and Warren Buffett, got rich; by investing in stocks. As I earned money though co-op job placements (which I recommend to every young person!), and bought more stocks, my portfolio grew, and grew, and grew. I was on top of the world. And then the financial crisis happened.

5. Capitalizing on Crises

I was 21 years old when the entire world ended in 2008 (or so most people thought at the time). The financial crisis thrust economies around the world into recession. Stock markets collapsed. And my stock portfolio imploded. I suffered around a 50% decline from peak to trough. The financial press was all doom and gloom. “Sell! Sell! Sell!” Most people were scared and converted their stocks to cash. So I invested all of my savings into my existing stock holdings. When I pulled the trigger I was scared stiff. But I’m glad I made that move as my stocks would soon rebound, pushing above pre-financial crisis highs into the years to come. I bought quality stocks on sale. 50% off! Was I a young genius; able to time the market? Nope. I simply learned from Benjamin Graham, the father of value investing, that economies and markets operate in cycles. Therefore, an investor could capitalize on manic markets, rather than become fearful and flee. Indeed, 2009 was a great year to be a value investor. I would make a similar move in February, 2016 to capitalize on a bear market in Canadian stocks where the TSX declined close to -25% from its high in September, 2014. Now I know that the average bear market (on the TSX) has declined -28%, lasting 9 months, while the average bull market has advanced +124%, lasting 50 months. Based on this historical evidence then since 1956, I should eventually be rewarded when I take on “risk” (i.e., investing in cheaper stocks) during bear markets. As Warren Buffett said:

“Be fearful when others are greedy and greedy when others are fearful.”

6. Refining My Portfolio

In 2010, upon graduating from the University of Waterloo, I had about $50,000 in my stock portfolio. More money than any of my friends. This was certainly an inflection point for me as the magic of compounding started to take real effect and I was just about to enter a full time career and earn a much bigger paycheque (plus bonus), which meant more money for stocks. By 2013, three years into my first full time job, my portfolio had grown to about $125,000. However, I realized that I could build wealth faster if I compounded returns at a greater rate. So, at 25, I made it my mission to build a portfolio that actually beat the market. I started watching BNN Market Call, re-reading the best investing books, and magazines (Money Sense, Canadian MoneySaver, and Canadian Business) and following the top investors around the world. From that I re-structured my portfolio into one that I’ve comfortably maintained since.

7. Sticking to My Investment Strategy

From my ‘quarter life crisis’ (age 25) and onwards, I continue to earn, save, and invest in stocks using the same strategy. Now, at age 28, I have built a quarter of a million dollar stock portfolio ($250,000). With a bigger capital base, it’s amazing how much more rapidly my portfolio can compound. For example, a 10% return will thrust my portfolio to $275,000. I say “10%” because over the long run (since 1934), the TSX has delivered a 9.8% annual compound return, despite recessions, bear markets, and world crises. But there’s no guarantee. Nevertheless, $1,000 invested in the Canadian index in 1934 would have grown to $1,595,965 by 2014 with 9.8% compound returns. That’s “magic”.

8. Always Learning and Growing

My DIY investing journey has been fulfilling so far. But I also know that I can further improve my odds of success by continuously learning, and improving my investing craft. This is why I recently met with some of Canada’s top investors. 28 in total. They told me how they invest in stocks, bonds, and options; sharing their proven investing strategies. It was enlightening. So I decided to put all of their investment advice into a book – Market Masters. You can now purchase Market Masters in Chapters, Indigo, and Coles stores across Canada as well as on Amazon.ca.

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Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.