How I Built a $300,000 Stock Portfolio Before 30 (And How You Can Too). My 8-Step Wealth Building Journey

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Welcome! If this is your first time on my blog, check out these top blog posts, too:

  1. My Interview with Francis Chou
  2. 22 Investing Lessons From Jason Donville
  3. How to Find Tenbaggers
  4. Beating the TSX (BTSX)
  5. How I Pick Winning Stocks
  6. Canadian Capital Compounders

***PLUS Email Me Now for a FREE copy of my new book – Capital Compounders***

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How I Built a $300,000 Stock Portfolio Before 30 (And How You Can Too). My 8-Step Wealth Building Journey

youtube_32 >>>You can also listen to my 8-Step Wealth Building Journey on My YouTube Channel

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”.

Today, I manage a $300,000 stock portfolio. I’m 29 (almost 30). And my stock portfolio grows by the day. My goal is $1,000,000 in stocks by the time I’m 35 years old. I’ll show you my 8-step wealth building journey and share how you can build wealth by investing in stocks too. Read on…

When I was 12 years old I made a decision. I was going to be rich

How I Became a Do-It-Yourself (DIY) Investor:

1) Study 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 important investing books for me:

  • The Intelligent Investor – It was through Benjamin Graham’s 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”.
  • Common Stocks and Uncommon Profits – 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.
  • One Up On Wall Street – 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 dog stocks in the market.
  • Market Wizards – 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).
  • Buffettology – 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.
  • The Money Masters – 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.

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.

It then all became very clear to me. I could become rich by earning money, saving the proceeds, and investing in stocks

2) Earn and Save Money When You Are Young

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) Understand How to Compound 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 investing money 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 to further compound my money.

“Compound interest is like magic”, I thought. “And the earlier I started investing money the longer my money would compound (‘work’) for me”

4) Invest in Stocks for the Long Run

I turned 18, and was ready to enter University (party time! — NOT). 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 UW 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 (’08) happened…

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)

5) Capitalize on Crises in the Market (i.e., Buy Low When You Can)

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 (crazy, right?). 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.

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

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. Why so confident? 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 in the long run 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) Manage and Refine Your Stock 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 from around the world. From that I re-structured my portfolio into one that I’ve comfortably maintained since.

Here’s how my stock portfolio breaks-down:

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

Mispriced Large Caps

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?

Speculative Takeovers

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.

Small/Mid-Cap Capital Compounders

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. You can learn more about the criteria I look for in capital compounder stocks by reading How I Pick Winning Stocks.

7) Stick to Your 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 29, I have built a $300,000 stock portfolio. 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 $330,000 next year, without adding additional capital. 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”, in my world.

$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”, in my world.

8) Always Learn and Grow as An Investor

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. Those Top Investors 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 online on Amazon.ca and Indigo.ca.

I recently met with some of Canada’s Top Investors. 28 in total. Those Top Investors told me how they invest in stocks, bonds, and options; sharing their proven investing strategies.

My 8-Step Wealth Building Journey (Re-cap):

1) Study Successful Investors

2) Earn and Save Money When You Are Young

3) Understand How to Compound Money

4) Invest in Stocks for the Long Run

5) Capitalize on Crises in the Market (i.e., Buy Low When You Can)

6) Manage and Refine Your Stock Portfolio

7) Stick to Your Investment Strategy

8) Always Learn and Grow as An Investor

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If this is your first time on my blog, check out these top blog posts, too:

  1. My Interview with Francis Chou
  2. 22 Investing Lessons From Jason Donville
  3. How to Find Tenbaggers
  4. Beating the TSX (BTSX)
  5. How I Pick Winning Stocks
  6. Canadian Capital Compounders

***PLUS Email Me Now for a FREE copy of my new book – Capital Compounders***

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MarketMasters

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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Chasing Stocks

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I gave away a bunch of copies of Market Masters in my last newsletter, but I’m still in the giving mood. Christmas is right around the corner! So, grab my latest mini-book, My 72 Rules for Investing in Stocks, for free here. Hurry, because the book will only be there until Nov 20th. (I also announced my partnership with Patreon that gives you exclusive access to my top stock performers, portfolio, watchlist and more. Learn about all the offers here.)

My 72 Rules is a really quick read (under 1 hour), revealing my thoughts on investing in the stock market for the past 12 years. It’s also being featured on the newly re-launched Stockchase.com, which boasts 150,000 visitors per month. That traffic combined with 500,000 page views / month make Stockchase one of the top Canadian personal finance sites on the internet.

I started visiting Stockchase in 2005, at the beginning of my investing journey. The site gave me access to other investors, and their opinions on stocks. For example, Hedge Fund Manger, Jason Donville, and his top pick in 2010: Constellation Software. You can see on Stockchase.com that Donville recommended Constellation Software (TSE:CSU) at $39.75/share on 2010-02-24. Today, CSU is $738/share. You’d have done pretty well by investing in Constellation Software back in 2010…

Jason Donville [on Constellation Software, 2010-02-24]:
“Big company without a huge profile. 30-40 companies under it to do all kinds of things in Canada and the US. Able to buy companies at a very good valuation. Single digit P/E. Thinks stock is worth double.”

Btw, Jason Donville, and 27 other Top Investors are also featured in my National Bestselling Book, Market Masters, which contains exclusive interviews on stock-picking strategies.

Anyway, the history of Stockchase is interesting. Founder Bill Bruner had a habit of watching stock opinion shows [notably BNN] and taking notes about everything that was said. His son, Chris, had the idea of publishing his father’s notes online. The Bruner family ran the site for almost 17 years (2000-2017). That’s a pretty incredible thing for a part time family business. You can learn more about the new ownership of Stockchase here.

Ok, so I made the announcement last week but I’d like to mention again that I’ve recently partnered with this cool, new platform called Patreon to offer some of you exclusive content. Many of you know that I provide quarterly updates on My Top 10 Stock Performers through this newsletter. However, I don’t ever reveal my full stock portfolio, or watchlist, and only provide updates every three months – never on a monthly basis. Well, with Patreon, that’s all going to change. I’ll still release quarterly updates (i.e., My Top 10 Stocks) through this email-newsletter, but if you want more, you need to visit, and become a member on my Patreon page.

Here’s what I’m offering exclusively on Patreon:

  • My Top 10 Stock Performers (Monthly)
  • My Portfolio Snapshot + Watchlist (Monthly)
  • Investment Coaching + Portfolio Review (Anytime)
  • VIP Package (All + Market Masters Book, Signed by Me)

Learn More Here. (I’m releasing my first exclusive content in December)

My Big Error of Omission

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I’m starting to feel that Christmas spirit. Malls are getting busier. Amazon is getting more clicks. Office productivity is dropping to seasonal lows. My waistline is getting bigger. And I think it might even start snowing soon here in Toronto where I live.

Around this time of the year I also start to reflect… Yesterday I was thinking about my old job at Best Buy, and how I committed one of the biggest errors of omission in my investment career. The year was 2005, and I had just finished my exams (1st Year, University of Waterloo). I moved back to Mississauga with my parents for the Christmas holiday break, and resumed a part-time job at the Best Buy in Oakville, that spanned a couple of weeks. I worked in the camera department lol (who buys cameras anymore!?). Anyways, I’d also walk the floor at Best Buy to help other customers, and noticed that the new Apple iPods always sold out soon after the store received a new shipment. The product was hot, hot, hot. I was 18 at the time, and if you’ve read about my investing journey, you will know that I only held 5 stocks in my portfolio at that time. But while I was always seeking and researching new stock ideas, I didn’t invest in Apple. The opportunity was literally right there in front of me. Doh! Big error of omission.

In hindsight, investing in Apple (AAPL) was a no-brainer, but looking back at it logically, Apple still hadn’t released its uber-product – the iPhone – which catapulted the company into the big leagues. I invested in Apple years later, but obviously didn’t capture a big chunk of its price appreciation. I missed a couple of ‘baggers’ there. You live n’ learn. Now, I like to plant seeds in stocks if I have a strong gut-feeling. But then if things don’t work out with the company, the inner-debate becomes, “What’s worse; errors of omission (i.e., I failed to pull the trigger on an eventual winner) or errors of commission(i.e., I pulled the trigger but then lost money on a loser)”?

I certainly didn’t commit an error of omission on Canopy Growth Corp (formerly “Tweed”). If you’ve read my book, Market Masters, you might remember that I wrote in 2015 about first buying into Tweed while it was trading around $1/share. Now Canopy Growth Corp (TSE: WEED) is trading around $20/share. It might soon become my first 20-Bagger (up 20x). We’ll see.

Ok – now I’d like to make an announcement. I’ve recently partnered with this cool, new platform called Patreon to offer some of you exclusive content. Many of you know that I provide quarterly updates on My Top 10 Stock Performers through this newsletter. However, I don’t ever reveal my full stock portfolio, or watchlist, and only provide updates every three months – never on a monthly basis. Well, with Patreon, that’s all going to change. I’ll still release quarterly updates (i.e., my top 10 stocks) through this email-newsletter, but if you want more, you need to visit, and become a member on my Patreon page now. Who knows; maybe I’ll find another 20-bagger early just like Canopy Growth Corp (TSE:WEED). But mostly you’ll get to see ALL of my well-researched small/mid-cap Capital Compounders for the first time.

Anyways, check it out. If 100 members sign up before Christmas, I’ll donate another $500 CAD to the SickKids Foundation. I’ve already donated $1,000+ to-date through the release of Market Masters.

Giving is a wonderful thing 🙂

Robin Speziale

Access My Exclusive Content – Top Stock Performers, Portfolio, Watchlist, and More by Becoming a Patron on Patreon.com

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Hi DIY Investors & Readers!

If you don’t already know me, I’m Robin Speziale, the National Bestselling Author of Market Masters, featuring exclusive conversations with Canada’s Top Investors, as well as Capital Compounders, and Lessons From the Successful Investor. I love the stock market. I’ve been saving, investing, and building my stock portfolio since 18. I built a $300,000+ Stock Portfolio Before 30 (and would love to show you how you can too!) I live in Toronto, and am a Proud Canadian 🙂 Don’t forget to Subscribe to my Investment Newsletter (it’s free!).

The VIP Experience – Patreon! 

I created a Patreon account to give DIY Investors & My Readers the VIP Experience. Please have a look at all the ‘Rewards’ that you can pick n’ choose from to unlock exclusive content on my Top Stock Performers, Portfolio Snapshot, Stock Watchlist, and More that I hope can add value to your own stock portfolio and boost investment returns. Plus, Subscribe to my Investment Newsletter (it’s free!)

My Offers to You (pick n’ choose):

$1 Support Me + Free Book (Capital Compounders)
$5 My Top 10 Stock Performers (Monthly) <— MOST POPULAR
$10 My Portfolio Snapshot + Watchlist (Monthly)
$15 Investment Coaching + Portfolio Review (Anytime)
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Cheers, and Happy Investing,
Robin R. Speziale

Peter Lynch’s Investing Mistakes; “Cutting the Flowers and Watering the Weeds”

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I didn’t know about this Lynch/Buffett story. It’s in the latest Forbes 100th Anniversary Edition. Can you guys relate to Peter Lynch’s regret(s) selling great stocks too early? (e.g. Home Depot, Dunkin’ Donuts). I do… Stupid me sold out of SXC Health Solutions , before it became Catamaran Corporation. BIG winner, but I missed its significant later gains. DOH!

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My Bad Quarter; Portfolio Update – Q3, 2017

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Things don’t always work out in life. It’s no different in the stock market. The bad news is that the indexes (S&P 500 and DJIA) beat me this recent 3rd Quarter (July – September). But the good news is that I’m still beating the indexes (TSX; +2.94%, S&P 500; +13.08%, and DJIA; +14.48%) Year-to-Date (January – September) with a 17.42% YTD return. I attribute my bad quarter to weakness in the small/mid-cap segments (or maybe I’m just losing my touch? :P). Many of you know that a large portion of my portfolio is concentrated in small-cap and mid-cap stocks, and more recently, micro-caps (read more about my “MicroCap Experiment” here).

Others have written about this general weakness herehere, and here. However, things might be looking up. Gerry Wimmer, who I’ve featured in this newsletter in the past, concluded, “today many of the small cap stocks that were priced for perfection just six months ago have seen their share value decline significantly. On a valuation basis now may be the perfect time to buy them!”. Note: I should add that the summer months tend to see lower activity across the market (…”Sell in May and Go Away”, as they say).

Ok, let’s get to My Top 10 Performers for Q3 – 2017 (see table below). Two (2) takeover announcements were made in my portfolio in the 3rd quarter – Pacific Insight Electronics (+89.3%), and Jean Coutu (+22.1%). If you’ve followed me since the beginning of this newsletter, you’ll know that I allocate money to what I call “speculative takeovers”. You can read about my Rona case study here (another speculative takeover), where you’ll also learn about all the ways in which I pick winners based on my three portfolio ‘buckets’.

Canopy Growth (+34.5%), which I initially started buying at around $1/share, has been rebounding after some weakness. I still hold the thesis that Canopy Growth (aka Tweed) will be a leader in Consumer Weed products.

I initiated two new positions at the beginning of Q3 that appear in the top 10 – Match Group (+33.4%) and Tencent (+22.1%). Match Group is a consolidator, and operator of popular dating apps; POF, OkCupid, Tinder, and more. Their financials, and growth numbers are pretty good, and let’s face the facts – online dating is now the norm. I was recently talking with my cousin about this shift. I remember when in 2005, maybe 20% of girls were on online dating sites and apps. Now 10+ years later, I’d say 80%+ of girls are on dating apps, especially Tinder. Guys just go to where the girls are; that’s how it works… In 2005, most girls would say, “dating sites are for losers, and creepers”. But now, it’s “fun”! I will say, though, that even with this ‘shift’, I’m still always told, “Sorry, I have a boyfriend”, when I approach girls in bars. Some things never change lol.

No surprises with National Beverage (+32.6%) and Spin Master (+24.5%) – both stocks have performed very well for me over a long period, and so I hope they remain exceptional “capital compounders“. And now that Alibaba (+22.6%) and Amazon have similar market caps, $459 vs. $463 billion respectively, it’ll be fun to see which company reaches the $1 trillion mark first! (my money is on Alibaba). In my Q2 Portfolio Update, I listed some stocks on my watchlist. However, since then, I’ve only initiated a position in one stock from that list – Fairfax India (TSE:FIH.U).

My Top 10 Performers – Q3, 2017:

Top 10 Performers Ticker Q3 Returns
PACIFIC INSIGHT ELEC TSE:PIH 89.3%
POLLARD BANKNOTE TSE:PBL 44.1%
CANOPY GROWTH TSE:WEED 34.5%
MATCH GROUP NASDAQ:MTCH 33.4%
NATIONAL BEVERAGE NASDAQ:FIZZ 32.6%
SHOPIFY TSE:SHOP 28.9%
SPIN MASTER TSE:TOY 24.5%
ALIBABA NYSE:BABA 22.6%
TENCENT OTC:TCEHY 22.1%
JEAN COUTU TSE:PJC.A 22.1%

The last couple of weeks have been pretty busy for me. I’ve given speeches at Queen’s Masters Finance Program, Brock’s Goodman Business Student Association, and coming up – UofT’s Institution of Management and Innovation Finance Competition.

And I’m sure you were all busy too during the summer months. Lots to do! Please check out my newsletter archive in case you missed any issues during the summer.

If you want to grab a coffee and talk stocks – pick a Starbucks downtown, and email me – r.speziale@gmail.com.

Pub Night #1 in Toronto: Capital Compounders Club

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Here’s a photo from the 1st Pub Night last Thurs (Sept 14, 2017) at Duke of York in Toronto. Thanks for coming out everyone!! I’m planning on Pub Night #2 in November.

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After a couple of beers that night, we thought it would be interesting to start a mock portfolio – the “Duke Fund” – which we’ll track indefinitely through our meetups. Here are the holdings (each of us picked one stock):

Ultra Clean Holdings Inc (NASDAQ:UCTT)
Square Inc (NYSE:SQ)
Canopy Growth Corp (TSE:WEED)
Greenspace Brands Inc (CVE:JTR)
MedReleaf Corp (TSE:LEAF)
Mercadolibre Inc (NASDAQ:MELI)
RediShred Capital Corp. (CVE:KUT)
Medicure Inc (CVE:MPH)
Photon Control Inc (CVE:PHO)

Toronto Money Show 2017

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As some of you know, I was at the Toronto Money Show this year (2017). Pretty good. But not the high turnout I’ve seen in the past.

The highlight for me, to my surprise, was Gordon Pape’s presentation. Pape’s an old guy; 81. But one his of Best Ideas was Shopify, SHOP.to. Why was I so intrigued? Well, Pape’s invested through tons of market cycles, ups / downs, since 1957 (~60 years) , and most importantly through the tech bust in 2000. So, he’s seen speculative dog-sh*t tech stocks (e.g. TheGlobe.com, eToys.com, Pets.com, and Webvan, to name a few). And yet, he likes Shopify (which I also own), even though it isn’t currently generating a profit.

Pape originally reccomended SHOP.to in Feb, 2016 @ $28/share, and now it’s $147/share. Shopify’s a multi-bagger, and he’s still reccomending the stock. I love it.

Who else owns SHOP.to? I know Jonathan Kennedy does (from the Capital Compounders Club on Facebook), and he orginally got me interested in the company, and it’s huge addressable market + long runway to grow.

Conversely, who thinks Shopify is purely speculative, with too high a valuation, and should be avoided? And/or do you think the entire tech sector is currently overvalued?

I also attended three other presentations, with Derek Foster, Keith Richards, and Ryan Modesto.

Cheers, Robin

Warren Buffett, Benjamin Graham, and GEICO; Growth Story

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One of Warren Buffett’s, and Benjamin Graham’s best investments, GEICO, was a growth stock! How ironic that two “value investors” invested in a growth company. The blog, Base Hit Investing, explained that “Graham invested nearly 25% of his partner’s capital into GEICO in 1948, acquiring 50% of the growing enterprise for the small sum of just $712,000. This would eventually grow to over $400 million 25 years later!! … a 500-bagger”. Warren would increasingly evolve away from his value investing roots, with Charlie Munger’s influence, and Benjamin would later admit that he was “no longer an advocate of elaborate techniques of Security Analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook ‘Graham and Dodd’ was first published; but the situation has changed a great deal since then”.

Photo: (Warren Buffett (far left) and Ben Graham (third from left)

Back to School; Conversations with Ryan Modesto, Aaron Dunn, and Paul Andreola

Investing

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I don’t know about you, but this is my favourite time of year; autumn. Summer’s over and it’s back to “school”. The change in weather brings cooler days/nights, and that means more time inside. In the autumn, I read more, and thus learn more, with a warm cup of coffee, latte, or tea by my side, whether that be at home or at my local Starbucks.

Now, I wasn’t a particularly good student through my school years; my teachers would often tell me that I was inconsistent, and didn’t pay attention in class or to detail on assignments. But that’s because I was more interested in other things, and not what was mostly taught in science, math, or english class. And while other kids were completely immersed in the world of Harry Potter, pouring over every book in the series, I was on the internet, and in the local library, researching Warren Buffett, and the world of business/investing, as well as conceiving every which way to make money at a young age. Now that I’m older, I definitely agree with Mark Twain when he said, “I never let my schooling interfere with my education”.

So, I’d like to kick off the season with a special 3-in-1 issue. I asked Ryan Modesto (5i Research), Aaron Dunn (KeyStone Financial) and Paul Andreola (Small Cap Discoveries), to educate us about their journeys into the investment world (i.e., their “education”), including their thought processes, as well as provide some exclusive, and tailored content for you all. Ryan – insights on 25 Canadian small-cap stocks (sourced from members of the Capital Compounders Club), Aaron – thoughts on when to sell a stock (and when to buy more). Paul – explanation of “reverse engineering the perfect stock”. I know all three guys; they’re great people, and experienced investors. Our stock picks have some overlaps because we approach the markets, and construct our portfolios with a similar framework; leaving no rock un-turned to find growth stocks in the micro-cap, small-call, and mid-cap space.

Hopefully, all of this content will build on what you already know and help you become better investors. “The more you learn, the more you earn” as they say. I even encourage you to email Ryan, Aaron, and Paul if you have any questions or comments based on what you read. I’ve included their email addresses in each respective section below.

(By the way, Aaron Dunn and Ryan Modesto are both presenting at the Toronto Money Show this weekend; Sept 8/9. And I’ll be attending on Sept 9th. Let me know if you’re going too…)

Ryan Modesto (5i Research), ryanmodesto@5iresearch.ca 

At a young age, I was always interested in the concept of money: What is, how it worked, and how the value of something was determined. It first manifested itself through the discovery that I could loan out my personal savings from my piggy bank to my older siblings and magically make more money off of what I already had. Seeing dividend cheques to family members in the mail and the concept of owning a business and making money while doing ‘nothing’ immediately grabbed my attention and encouraged me to learn more about businesses, how they operate and how they make money.

It was this interest in how money and businesses work that led to my affinity for fundamental investing. Out of interest over any conscious choice, I would always find myself looking into companies: How do they operate, what’s their strategy, what do they do better, and how do they make a profit on a particular good or service. Naturally, this progressed into gaining an education in business/finance and eventually working in the field of high net worth portfolio management while investing for myself all the while.

When first starting out investing, I quickly realized that where someone could truly add value was in the less followed small to mid-cap space. In my opinion, most individuals don’t need a professional to tell them that BCE Inc., Bank of Nova Scotia or Enbridge will likely make good investments. It is the smaller names with less coverage where the help is needed (and is the niche we try to fill at 5i Research) and where great opportunities can be found. This is especially the case in Canada where many great Canadian companies operate outside of energy and metals but simply do not get the time of day from the broader investment community.

As is probably apparent, I take a bottom-up fundamental approach to investing with a focus on small to mid-cap names. Typically I will not bother with companies below a $100 million market-cap as this acts as a low-bar type of filter. If a company is really on to something and goes from a $50 million market-cap to $100 million, chances are that the growth potential will still exist and it is also significantly de-risked in terms of proving out the business model and that there is a demand for the goods and services the company provides.

Fundamentally, I try not to limit the metrics we look at but if we were to focus on a few metrics, it would likely be:

•    Revenue growth expectations
•    Strong balance sheet (debt load, cash, financial flexibility)
•    Insider ownership
•    Return on Equity
•    Past growth trends of top and bottom lines
•    Attractive margins relative to the industry
•    Qualitative factors – Company strategy, competitive advantage, shareholder friendly (no dilution, dividend raises, share buybacks, etc.)
•    Valuation relative to growth and peers

As far as the process goes, I run various stock screens that filter out companies that rank well on metrics we are looking for. This helps with idea generation. I also like to look at 52-week highs to find companies for adding to a watch list. Otherwise, the process involves reading as much as possible for new ideas and then diving into the fundamentals when an idea piques my interest. Whether it is news items, quarterly reports, management commentary or signals (such as ZCL composites signaling investors), I try to take in as much as possible within time constraints to help find the best possible opportunities, some of which are included in the list below.

Ryan’s Insights on 25 Canadian Small Caps (sourced from members of the Capital Compounders Club) – 

Covalon Technologies

A bit small for our tastes but revenue has more than doubled in the last two quarters and it looks interesting for a higher risk investor. Except for 2014, the company has ad negative operating cash flows all the way back to 2002 and it is low on cash so it may be due for a financing sooner than later. Insiders own a large amount of shares.

Imaflex

Insiders own over 50% of shares. The recent quarter was strong with revenue up 32.3% to $24.1 million and they gained an additional contract for Shine and Ripe, which is a key area to watch. At 13 times’ next years earning expectations, IFX is worth a closer look.

Biosyent

This is a company that has been a bit of a wild ride for investors. Revenues are expected to grow at 16% for the next three years but the valuation is taking a lot of that growth into consideration it seems already, with shares trading at nearly 5 times sales. The balance sheet is strong, however. It is not a company that ranks too high on our list, but does have potential.

Terravest Capital

With 69% of revenues coming out of Canada and a focus on the energy sector, it is difficult to be overly excited about TVK. Debt has been growing while cash flows are a shadow of what they were compared to the last two years.

Cargojet

Investors that want to gain exposure to the e-commerce trend could be well served by a company like Cargojet. Our main issue with CJT is that it is on the expensive side with only mid-single digit growth and a lot of debt. So if the economy hits a bump, names like CJT could see a lot of volatility.

Pure Multi Family REIT

RUF is doing well and we like the US exposure, which offers a bit of a stronger economy for investors. With the recent sad events in Texas and the allocation this company has to the geography, an investor may want to wait a little here in case there are some damages that occur.

Lite Access Technologies

Between a $50 million market-cap, negative momentum and the company hitting new lows, we would see little reason to own a name like this at this stage.

Savaria Corporation

We have covered SIS since it was just $5.16 and are very happy with the returns. But we think the company is just getting started. The recent purchase of Span-America has good synergy potential and strong tailwinds (aging demographics) should support the company longer-term. We have recently updated our report on SIS which can be accessed through a free trial.

goeasy

This is another name that we have covered since it was at $7.40 and operates as EasyHome. The company has been seeing a lot of success in the small personal loan space and is growing its customer base at a good rate while having a cheap valuation and good dividend. It is economically sensitive, so there is more risk in a name like this inherently, but we like what we are seeing here.

Nemaska Lithium

We like the lithium space in general, so as a proxy to demand for lithium, we think Nemaska is interesting. While it is speculative, we think it can have a place in a high-risk investors portfolio.

Pioneering Technology

This is a name we recently added to our growth model portfolio. While small, PTE posts solid margins and is profitable already. Insiders own a good chunk of shares, the balance sheet is strong and not a whole lot of debt is on the balance sheet. Revenue has grown at a rate of 25% annually over the last five years and 50% over the last two years.

Redishred Capital

At a $32 million market-cap and some very volatile trading, it is hard to like KUT too much at this stage and it is a name we would give time.

Ten Peaks Coffee

We have included our recent report update on TPK as a bonus to readers. TPK is a name we want to like, but with such a long lead time until their expansion is underway and risks that exist as the build out progresses, it is a name we think an investor can come back to in a year or two.

Bellatrix Exploration

Between the high debt and share consolidation coupled with a weak energy market, we find it hard to like BXE.

Intrinsyc Technologies

ITC is an interesting name that could see some growth through the Internet of Things trend. They are getting contracts and growing the top line. This is a company that will see volatile results quarter to quarter as they still rely on relatively large single contracts that can skew results any given quarter. The key is to look at the longer-term trends in results. They also have a sizable contract that could be signed in the near-term as a catalyst.

Namsys

Good ROE, high insider ownership, strong balance sheet. Its still a bit small for our tastes and while growth is good, it is from a small base. Could be a name to watch but a little too soon in our view.

Diversified Royalty

Up 11.8% as we write this due to the purchase of Air Miles Trademarks. DIV paid $53.75 million for the trademarks and DIV is looking much better after this deal. It raises DIV’s revenue by $8.5M and increases distributable cash per share by 50%. The dividend is being maintained, but the dividend payout ratio drops from above 150% to 107% and should drop under 100% with time.

Symbility Solutions

With SY trading at above a $100 million market-cap, we think it is getting interesting. Management expects $40 million in revenue this year. Context is helpful here though: SY has been around for some time now and the share price is only up 45% since 2001 or 2.8% per year, not exactly a great investment relative to the volatility and not one of our favourite names.

Avante Logixx

A lot of the growth is coming from past acquisitions but not much of this flowing to the bottom lines in the form of higher EPS. The company did note there could be an acquisition by them on the way which could act as a short-term catalyst but overall XX is a company that ranks lower on the list for us.

Siyata Mobile

Our issue with Siyata is getting our heads around the business potential. They are getting attention and making some good moves but at the end of the day we are not confident yet in the size of the market potential and the differentiation of the offering that exists. We would give this name a few quarters before considering a position.

ZCL Composites

We like ZCL. They have been a solid capital allocator, have been increasing dividends materially and buying back shares. So management is trying to get investors’ attention. Add in a decent dividend yield and fair-to-cheap valuation and we think ZCL is a solid name.

Automotive Property REIT

This company comes down to the distribution and how sustainable it is. Based on cash flows, the distribution is more or less 100% which is ok given the business model but does not leave a whole lot of wiggle room. A bit more cash n the balance sheet to act as a cushion would probably make us more comfortable here. For high risk but outsized income, we think APR looks ok.

Highliner Foods

HLF is getting quite interesting from a value investors point of view. We are not fans of the negative momentum but with a 5% yield and trading at 9 times earnings, HLF is likely getting a little oversold at this stage. The company likely fell asleep at the wheel a little with the weakness in breaded products but we think it could be a name to average into over time.

Freshii 

We like Freshii but the investment case here comes down to valuation. On a one and two year outlook, the shares are quite expensive, but if the company can deliver on the growth potential, we think it will do well over the long-term. If you can think 3-5 years out on this name and ignore the volatility, we think an investor will do well. The franchises can be cheap to open and fit both small and large formats and they ‘feed’ into the healthy eating trends in North America.

CVR Medical Corp

Between being down 40% in the last year and below a $20 million market-cap, this company will need to do a lot to get back into investor favour and we would give this name time before getting involved.

Aaron Dunn (KeyStone Financial), adunn@keystocks.com

My journey into the stock market began, believe it or not, with reading a book. The book was The Intelligent Investor by Benjamin Graham who also happens to a key mentor of the famous Warren Buffett. Like the rest of the world, I knew who Warren Buffett was; or at least I was familiar with his reputation well enough that I knew it was worth listening to the people who mentored him. I didn’t know much about the inner workings of the stock market at the time. What I did know was that it is a critical part of our economic infrastructure and a place where capital could be grown or destroyed.  How to pick winning stocks in a practical sense was a mystery to me. Armed with the confidence of having recently completed several courses in finance, economics and accounting in my business program, I was determined to unravel this mystery. Warren Buffet once said that everyone should read this book so I knew it would be a good place to start.

A pivotal moment came for me when reading a section titled Business Valuations versus Stock-Market Valuations in Chapter 8. In this small section, Benjamin Graham laid forth the concepts of differentiating between price and value, how a company and its stock chart were not the same thing, and how focusing on share price movements over fundamentals was inhibiting investor performance.  That one section rang clear with me and opened my eyes to what investing and the financial markets really were and what they could become. In its best form, I saw symbiotic relationship between individual people that needed to grow their savings and companies that needed capital to expand their businesses; creating jobs and powering economic growth. I saw a mechanism for individual investors to profit directly from the hard work, innovation and ingenuity of talented business people and gain exposure to growing industries and niche markets that would otherwise be unavailable to them.

The reality of the stock market is not this simple. But I believe that fear and mistrust of the financial markets stem mostly from a lack of understanding. When armed with tools to understand investing and make informed decisions, people are able to avoid the situations that get them into trouble…unscrupulous advisors and promotors and speculative or highly complicated investments.  I knew very quickly that my path was to help guide people on their journey through stock market and to the end destination of achieving their financial goals.

Aaron’s Thoughts on Making the “Sell Decision” – 

In my experience, investors fret far more over making the decision to SELL than they do to BUY. Selling elicits powerful emotional triggers. Selling after a huge return allows you to lock in profit but there is the fear of missing out if the share price keeps rising.  Selling after a big decline allows you to avoid further losses but eliminates the opportunity of any future recovery. These are the decisions that cause many investors a great deal of stress. The fear of lost opportunities balanced with the fear of losing existing capital. Making the wrong decision can cause an emotional sting that stays with you for many months or even many years.

The way to approach the SELL decision is to remove the emotion from the equation. At one point you made the decision to BUY the stock and you need to return to those initial reasons. Those reasons should have been based on an informed analysis of the financial characteristics of the company, the market in which the company operates and the share price valuation relative to the underlying profitability (don’t overpay for assets). What’s changed since you bought the company? Have positive earnings turned into net losses? Has growth slowed or the outlook deteriorated? Has the management team made promises on which they haven’t been able to deliver? Has the company become significantly more expensive on a price-to-earnings or price-to-cash flow basis? Every situation is different but these are the types of questions you need to ask yourself.  Not liking the answers is an indication that it is likely time to SELL.

At KeyStone, we’ve made many hundreds of BUY and SELL decisions over our 17 year history. Within these individual scenarios there is a clear pattern that can be applied to any stock investment. Below I’ve provided 4 individual, real life examples of when we were faced with the decision to BUY, SELL, or HOLD and the process we used to provide value to our clients.

Case Study 1: Share Price Down – SELL Now!

An abrupt drop in a company’s stock price can cause fear and panic. For many value investors, a lower share price marks a potential opportunity but in many cases the market is correctly revaluing a company based on a change in financial characteristics.

Grenville Strategic Royalties (GRC) is a company that we recommended to clients back in February of 2015 at a price of $0.62. They had a relatively unique business which was to provide financing to small and medium sized companies in exchange for ongoing royalty payments. The company had recently transitioned into profitability, was generating attractive returns, paid a dividend yield of 8%, and had a compelling growth profile while trading at a valuation well below peers at the time. The company continued to execute its strategy well over the year following our recommendation for which the market rewarded it and its investors with a growing share price. But on April 26th, 2016, the situation changed for us after the company released its Q3 results after market. The numbers (revenue and cash flow) on the report continued to look good but what troubled us was that management had recently made nearly $6 million in follow-on (secondary) investments into companies which only months later were now being classified as distressed. This particular decision was going to cost the company in future quarters but more importantly it reflected in what we saw as a fundamental flaw in management’s decision making process. In this case, it appeared to us that management had made decision to throw new money to prop-up poor investments as opposed to making the hard but prudent decision of accepting mistakes and cutting loses. We knew when we invested in the company that management’s decision making ability was pivotal to success. With our confidence in management shook and future profitability in question, we knew we had to immediately issue a SELL recommendation on the stock even with certainty that the share price would open much lower on the next day.

No surprise to us the share price closed the next day down 35% to $0.52 compared to $0.80 per share immediately before the release of the financial results. With the dividend, the return was about flat or slightly higher based on the original recommendation price but still significantly below where the stock had traded in just the weeks and months before. It’s difficult to SELL a company when you are underwater as the string of a loss and hope of a recovery are powerful motivators for many investors. But we knew that the situation had changed significantly since we recommended the stock. We wouldn’t buy the company in its then current condition, so why should we continue to HOLD it? After issuing our SELL recommendation the situation did not improve for the company. Profitability deteriorated, they discontinued their once attractive dividend and the share price continued slide, trading now at only $0.12 per share down another 77% from where we were able to get out.

Case Study 2: Share Price Down – HOLD or BUY More

Applied Optoelectronics (AAOI: NASDAQ) is a company that we recommended as part of our U.S. research in April, 2016, for a price of US$15.99. At the time the company had 5 straight years of revenue growth, 3 straight years of earnings growth, margins were improving and it was selling leading edge technology into a high growth market. The stock was also trading at a valuation well below peers after factoring in the growth rate. Very shortly after our recommendation the company released its quarterly results and much to the surprise of both us and the market, earnings were well below expectations. The result was a near 30% drop in the share price to $11.70 in a single day. Now anyone investing in the stock market needs to accept the reality of share price volatility, but when a company you own falls by so much in a single day, the general reaction is one of panic and this will cause many investors will instantly hit the SELL button. This is a very understandable reaction and in many cases selling will be the right move to make. But rather than being reactionary, we needed to understand what happened in the quarter, review the business fundamentals in the context of this new information, and go back to the original reason that we recommended the company in the first place.

Revenue growth in the quarter was actually tremendous but the company reported a net loss compared what was expected to be strong profitability. The issue came down to a significant increase in costs, partly resulting from redesign activities associated with cost reduction efforts as well as higher R&D expenses. Based on our analysis, it appeared that this was just a short-term bump in the road in what was still a healthy business selling into a growing market. We knew when we recommended the company that there would be lumpiness in quarterly performance, and while this was much more than we expected, the longer-term investment thesis and fundamentals had not materially changed. Based on this analysis, we advised clients to HOLD their positions after the disappointing quarter and then we re-initiated our BUY recommendation after the next quarterly report was released and it was clear that the company was back on track.

Applied Optoelectronics recovered very quickly after its quarterly blunder and went on to close 2016 at $23 per share, up 44% from our original recommendation price. The stock then went on to be one of the top performing stocks on the NASDAQ for the first half of 2017 and today trades at over $60 per share, or 275% above where we recommended it (much better than the 26% loss we would have incurred had we sided with the market and overreacted to the quarterly report).

Case Study 3: Share Price Up – Get Out and Take Profits

High Arctic Energy Services (HWO: TSX) was recommended in our research in January, 2013, at a price of $2.36. Unlike the name implies, the company had nothing to do with the high arctic. It also wasn’t your typically oil & gas service company which is an industry we generally avoid due to the cyclicality and highly volatile share prices. This company was different. Most of its business was in Papa New Guinea where it provided drilling and equipment rental services to what we saw as a very attractive market.  The company’s work in the region was primarily provided under multi-year contacts with strong demand in the area underpinned by a US$19 billion LNG (liquid natural gas) plant being constructed in partnership between ExxonMobile and OilSearch. Unlike its North American counterparts, High Arctic’s revenue and cash flow profile was relatively stable. The company also had a balance sheet flush with cash, no debt, and traded at an incredibly attractive valuation relative to earnings.

The stability of High Arctic Energy was certainly tested when the energy sector started to fall apart in 2014 and oil prices fell from over $100 per barrel to a low of under $30 over the subsequent 2 years. In spite of the challenging industry conditions, the company continued to produce strong growth in revenue and cash flow while its North American peers were reporting net losses and struggling to keep afloat. High Arctic added more and more net cash to its balance sheet, eventually amassing a substantial cash war chest which we expected would be used for reinvestment back into the business, to pay dividends, and to pursue accretive acquisitions.

Finally in February of 2017, when the share price was trading at $6.20 per share (up 163% from the original recommendation not including dividends) we elected to issue a SELL recommendation and crystalize our profit. Why did we decide to SELL when it appeared things were going so well? As with the other examples, we went back to the original reason we liked the stock and compared that profile to the company that we saw on that day. The fundamentals of the business were still strong, but management had eventually decided to invest the company’s excess cash into an acquisition. Unfortunately, rather than finding a way to invest more into what was working well for the company they decided to take a contrarian approach and purchase oil & gas services assets in North America where the profitability profile was highly uncertain.

For us, this shifted the focus of the company, from a very unique and relatively stable overseas operator to what appeared now to be a fairly standard North American energy services business. This is not what we signed up for and with the share price up over 160% since our initial recommendation, and 50% over the previous 6 months, we were also now holding a stock that had become more expensive on a price-to-earnings basis. It wasn’t an easy decision to SELL a stock which at the time had such strong share price momentum behind it. Focusing on the business fundamentals and original reason we became shareholders allowed us to remove emotion from the process. Within a few weeks of our SELL recommendation the share price started on a steady decline and is now down 40% from the day we decided to exit.

Case Study 4: Share Price Up – Keep Buying More!

Warren Buffett once said that his favourite holding period for a stock is forever. This is clear departure from the way a lot of people trade try to invest today which is more focused on constant trading and trying to capture quick returns. What Buffett means is that some companies will continue grow and thrive over multi-year and multi-decade periods and as long as the investment thesis remains intact then you never have to SELL. These are the best companies to own. For at least the past 6 years, we think that Brookfield Infrastructure (BIP.UN) has fit this profile.

We recommended Brookfield Infrastructure in March of 2011 at a price of $14.40 per unit (adjusted for a 3 for 2 stock split in Aug 2016). The company was a dividend growth play. It paid a yield of close to 6% at the time and income distributions were increasing. Underpinning these income distributions were utility-style assets with 80% of cash flow derived from regulated or contracted revenue. In spite of being a stable, utility-like business, it was also a growth stock with a large backlog of organic growth projects and a successful acquisition strategy. Investors had the opportunity to purchase unit in this company at what we considered to be an attractive valuation of about 15 times free cash flow.

Since the time of our recommendation, the company’s stock price has been on a steady rise upwards and trades at over $55 today. This is a 281% increase over the recommendation period or an average of 23% per year before accounting for dividends. To put this into perspective, the TSX index overall has averaged about 1% per year over this period before dividends. What makes this even more notable is that we recommended the company as part of our conservative income research…large, established, and stable companies that pay a nice income yield and let you sleep at night.

Over the past 6 and a half years, the question has been brought up many, many of times of whether or not clients should continue to BUY or lock in profits and SELL their positions. When you are up 50%, and then 100%, 150%, and then over 200% on a stock, there is a concern that these attractive profits could be lost and a tendency to cash out and protect your gains by moving capital somewhere else. In some cases, this would be a wise move, but the decision to SELL or BUY once again comes down the fundamentals and an analysis of why the price has been rising. We have updated Brookfield Infrastructure 17 times since our recommended on 16 of these occasions reiterated our BUY recommendation on the stock (most recently in August of this year).

Why continue to BUY a stock that has already appreciated so much? Put simply, a thorough analysis of the company indicated to us that the original investment thesis was still intact. The rising price was not driven by investor exuberance and market momentum but rather by double-digit growth in cash flow and income distributions per unit and an outlook for future growth that continued to be strong. It’s nice to cash out on a big gain but by focusing on the fundamentals over the stock chart, you can stay invested in a stock which continues to generate solid year-over-year performance. In the case of Brookfield Infrastructure, since 2011 the company had paid over US$7.00 in income distributions to its investors representing over half of the original purchase price.

Paul Andreola (Small Cap Discoveries), paul@brisio.com

A former investment advisor and serial entrepreneur, Paul has been profiting in the small cap space for over two decades. His relentless focus on growing, profitable small caps has uncovered some of Canada’s biggest winners in the last few years. Paul started Small Cap Discoveries with co-editor Brandon Mackie to share his ideas and help retail investors reach their investing potential.

Paul uses a focused criteria in his research: high revenue growth, fundamental cash flow and earnings in micro-cap and small cap companies. His successful track record in getting 100%-1000% returns from his stocks comes from studying financial statements and industry reports and using his street sources, so by the time he talks to management—he knows almost as much about the company and the industry as they do.

Paul has honed his skills from 30 years of varied small cap experience. He has been the co-founder of two public companies and CEO and director of another—all three in the technology space. He also helped raise the initial funding for each. This experience gives him an important view when he is interviewing management for newsletter stock picks. He knows the pitfalls and mistakes that management teams must avoid.

Paul also spent 10 years as a retail stockbroker, again focusing exclusively on small caps. He knows the capital structures that work and don’t work in the micro cap space. He knows the company, the industry, AND the stock. His goal is to be first in identifying small cap growth stocks before they are discovered by the broader market. That involves hours of exhaustive fundamental research, and then drawing on a tight network of experienced and senior contacts.

There are no resource stocks in Paul’s portfolio—which is where most of Canada’s small cap crowd focuses. The Canadian micro cap market – especially the non-resource space – is a huge opportunity for investors willing to dig deep and uncover these hidden gems. Paul understands the intricacies of the public markets and the challenges small cap companies face. He is now funnelling all that experience and discipline into a newsletter called Small Cap Discoveries.

Paul is also the CEO and director of Brisio Innovations a small publicly listed investment holding company that owns many of Paul’s favourite micro cap investments.

Some recent winners –

RX.V ($1.20 – $7.50),
COV.V ($0.15 – $1.40)
CPH.T ($2.20 – $12.50)
PTE.V (0.125 – $1.10) current holding
HTL.V ($0.10 – $0.78) current holding
LTE.V ($0.25 – $1.88) current holding
IPA.V ($0.30 – $1.15) current holding

We review financial statement (quarterly and annual reports) of every company in Canada. We do not use screening software. We do it the old fashioned way because we find that screening software will miss the occasional company and those likely turn out to be the better opportunities because the lower number of people seeing them. Also by manually reviewing financial statements we can find the accounting adjustments that could overstate or understate the true state of the company.

We have a strict set of criteria that we use to sift through the thousands of Canadian listed companies. We look for growth, profitability, shares structure, share ownership and ultimately price to value. It’s hard to value growth companies, especially small ones. Many of these companies are small, illiquid and difficult to analyse as there is not much information available. But because we have been doing this for many years we know where to look and more importantly what to look for to get the info we need to make the proper calculated decision.

The first screen only puts the company on the work list. Then the real work begins. We dig into the financials, management history, capital funding history, structure and a host of other things. We start interviewing management and sometimes talk to customers, shareholders and almost anyone with a history with the company. But we also look at probably one of the most over looked items with publicly listed companies…. “how discovered the company is”.

We believe there is a discovery process that drives the bulk of a company’s share price when it is small. What we mean by this is the process of a company going from investment obscurity to market darling. This can be where the explosive share price growth comes from apart from just how well the company performs. We have a formula to figure out how well known the company is in the investment community.

Most small companies don’t have the means to properly gain market exposure. Little budget, little experience and some with little incentive or need for exposure.

Let’s compare 2 microcap companies….one that is quietly working away building the business by internal cash flow and perhaps management self funding. The other needs constant outside financing to execute it’s business plan, develop their product, finance their losses etc. Who gets the attention of the broker/financial community? Usually it’s the company that can generate the most fees and commissions for the brokers. Financings are the golden goose for most brokerage firms. The weaker, riskier company needing money usually gets the interest of those who then have the ear of the investing community. Out come the research reports and the brokers and management promoting the future of this company. Meanwhile the other profitable little company quietly whiles away in near obscurity.

It’s these obscure little companies that have proven to offer the best risk/reward opportunity for savvy smaller investors. They also offer another advantage for small investors….sometimes they are too small for larger investors. It’s a weird situation. Those investors that very good at micro cap investing become too big for micro cap investing. They have to move up the food chain to bigger companies to be able to move the needle. Therefore a new crop of savvy micro cap investors are needed to take advantage of these smaller opportunities. It’s where Warren Buffett learned his trade. He is now far too big to play with these little companies.

I truly believe it is one of the last areas where small investors have an advantage if they put in the time and effort.

Paul’s Explanation of “Reverse Engineering the Perfect Stock” –

We are going to tell you about the perfect stock that could make you millions of dollars. Few investors know about this stock even though it’s a multi-bagger in plain sight. Okay, on with it – what is it!? Here are a few clues…

The stock is a micro-cap, under $20 million-dollar market cap, and has had three straight years of operating profits. The company is rapidly growing at over 25% per year, all of it generated organically.

The company has high gross margins at 75% and a scalable business model, allowing operating earnings to grow at a 50% clip.

The company’s industry is experiencing secular tailwinds and growth is expected to accelerate over the next few years.

Being a first mover, the company has no competitors in its niche and new entrants have failed to displace this company because of switching costs and the mission-critical nature of its product.

The combination of pricing power and lack of capital requirements allow the company to achieve extraordinary returns on its invested capital, well over 100%. The company is debt-free and funds its growth entirely from operating cash flows.

Insiders collectively own 40% of the company and the CEO has a 25%+ stake. He bought in with his own money 5 years ago and has added to his stake through open market purchases.

Management has maintained a clean share structure consisting of less than 30 million shares outstanding and no warrants or preferred shares. The low float and small size of this company have kept its stock off the radar of institutions, which own less than 10%.

We all know there is no such thing as a “perfect stock.” That said, we believe there exists certain characteristics that form the DNA of any investor’s dream: a multi-bagger than you can hold on to for years.

What follows is our list of 14 such qualities, organized by key fundamental, business model, and technical criteria (note we use stock/company interchangeably throughout). Enjoy!

Key Fundamental Criteria:

Profitable

Profits are the lifeblood of any company and cash flows generated by the business ultimately determine the value of your investment.

A company that can fund itself internally avoids financing risks, which can cause massive losses through dilution or excess debt. While bio-techs prove positive cash flows are not necessary for success, working with profitable companies will simplify your valuation process and margin of safety assessment.
At a minimum, we will want to see two solidly profitable quarters and preferably a 3-year track record of profits (or more!).

Rapidly Growing

Assuming a company is generating returns on capital above the costs of that capital, growth is enormously beneficial to the company and its shareholders.

New products, customers, and business lines typically bring more profits and drive the company’s intrinsic value.

Ideally, all of this growth should be organic. Too often, acquisitions don’t deliver on their promised synergies and yield much of their value to the seller through premiums paid. We will want rapid organic revenue growth, a minimum of 25% year-over-year.

Attractive Valuation

The key to investing is not finding the best companies, but rather the largest discrepancies between price and intrinsic value.

Buying at a low valuation provides downside protection in the event your thesis does not play out, while allowing for huge upside if things go well. Valuation is more art than science, and finding the most useful metrics to employ can be tricky.

Our valuations usually begin with an adjusted Enterprise Value/EBIT multiple, which incorporates the company’s balance sheet and strips out non-operating items to better present true earnings power.

We will want this multiple below 10 and ideally below 7 – the lower, the better.

No Debt / Financing Requirement

Debt can juice a company’s returns but often leaves the business vulnerable to the unexpected: a major customer loss, a regulatory change, or a patent infringement suit.

This situation is made worse when the market knows an equity raise is coming, effectively holding the company hostage to its share price. Investing carries enough risk as it is – crossing off dilution/bankruptcy risk is key to putting the odds in your favor.

Example: A $10 million dollar market cap company has $6M in debt, no cash, earns $2 million dollars a year in EBIT, and trades at 8X Enterprise Value/EBIT.

If the company suffers a major contract loss which cuts EBIT in half, you would face an 80% loss on your investment assuming the company maintains its valuation multiple(1 million X 8 = 8-6 = 2 million).

High leverage magnifies negative events in a big way.

We will want our company to have no debt and plenty of cash in the bank for growth investment. The company should have no need for future debt/equity raises and fund itself entirely through internal cash flows.

Durable Competitive Advantage

Durable competitive advantages, or economic moats as Warren Buffet calls them, are derived from only a handful of sources: brand power, switching costs, patent/government protection, and network effects.

Economic theory holds that in absence of one of these forces, competitive pressure will reduce all company’s Return on Invested Capital (ROIC) to the cost of capital.

Sources of economic moats are not all created equal. Government protection often proves unsustainable and brand power can be just as easily eroded in some cases.

We will want our company to benefit from switching costs, network effects, or both. Banks, software providers, and business service companies are all beneficiaries of switching costs. Social media and auction platforms are prime sources of network effects.

High Returns on Capital / Low Capital Requirements

The less capital investment a company requires to keep its competitive position, the more profits that are left over to invest in growth or be returned to shareholders.

By nature, some companies require little capital while others require seemingly endless amounts to stay afloat.

This intrinsic quality, along with competitive positioning determines the Return on Invested Capital our company can achieve. Return on Invested Capital (ROIC)  is a key value driver – the higher the ROIC, the more shareholders stand to benefit from growth.

Example: Capital-light/high-ROIC businesses include software, database, and franchising companies.

Capital-intensive/low-ROIC investments to be avoided include railroad companies, automotive manufacturers, and above all, airlines. By requiring our company to have a ROIC above 50%, we will be big beneficiaries from any growth the company generates.

High Gross Margins

Gross Margin (GM) refers to how much profit is left after the direct costs of products/services are covered. The higher the gross margin, the more profits will accelerate with sales growth.

Example: If Business A has 75% GMs and Business B has 25% GMs, Business A will experience three times the impact on profits from each dollar of new business as compared to Business B.

High gross margin companies include patent licensors, medical device manufacturers, and pharmaceutical companies. Examples of low gross margin companies are automotive suppliers, construction contractors, and retailers.

Gross margins will vary widely based on industry but in general, the higher the better. We will want our company to have gross margins of at least 50%.

Scalable Business Model

Scalability refers to a company’s ability to leverage its infrastructure as it grows. A good measure of this is the Degree of Operating Leverage (DOL), or the percent change in EBIT divided by the percent change in revenues.

Example: Once a Software-as-a-Service (SaaS) company invests in the infrastructure to create and sell its software, each incremental subscription can be delivered at virtually no additional cost.

Compare this model to a restaurant, which must pay rent, labor, and food costs with every location opened. Software and database companies are often scalable, while restaurant operators and manufacturers tend not to be.

Ideally, we will want our company’s operating expenses to grow at half the rate of revenues or less (DOL >= 2).

Non-cyclical, Recurring Revenues

Recurring revenues afford a business the advantages of predictable cash flows to base investment decisions on and high lifetime customer values.

Recurring revenues also aid investors in projecting future cash flows and performing valuations.

A stable, non-cyclical business offers the similar advantage of predictable cash flows, while offering safety in case of a sharp economic downturn.

Example: Any business with a subscription model, such as SaaS or security monitoring, is likely to have recurring revenues. Food, tobacco, and alcoholic beverage companies are all classic examples of recession-resistant businesses.

We will want a business with over 50% of their revenues recurring and a low sensitivity to general economic conditions.

Small-cap

Much like large companies forge their own anchors as they grow, small companies have the law of small numbers on their side. Small size often offers a long runway for growth and magnifies each positive development.

Example: Think of a SaaS company doing $10M per year annually that announces a $2M contract. This business becomes 20% more valuable over night, and perhaps far more given the operating leverage inherent in software.

We will want to stick to companies below a $300M market cap, and ideally less than $50M.

Low Float / Clean Share Structure

Low float (freely tradeable shares) results from a low share count, high inside ownership, or a combination of the two.

From a technical standpoint, a low share float can lead to massive price increases as investors rush to bid on a limited supply of shares.

On a more fundamental level, the float is a reflection of how management has financed the business in the past and their relative ownership of the company.

We will want no more than 50 million shares outstanding and preferably less than 30 million. The float should be significantly lower due to insider ownership (discussed below). We will also want to see a clean share structure, with low or no warrants or exotic convertible instruments.

High Insider Ownership

We want a management team that behaves like owners and this is not possible unless they ARE owners.

For the micro-caps we are interested in, we will want to see insiders collectively owning at least 30% of the company, with the CEO himself owning at least 15%.

It is also important to assess how management got their stakes – did they buy in with their own money or was it given to them through options and share grants?

Management adding to their stakes through open market purchases is often a big plus. This demonstrates insiders believe in the company’s future and you should too.

Low Institutional Ownership

For a variety of reasons, many institutions cannot invest in the small-caps we are interested in. Some have restrictions against stocks under $5 or companies that trade on the Toronto Venture Exchange (TSX V).

With all the desirable qualities discussed thus far, institutions will be drooling over our company waiting for the company’s size/liquidity to reach their buying criteria.

When this happens, look out! Triple digit gains are quite likely as institutions pile into a “must own” stock.

To leave this big catalyst open, we will want to see institutional ownership under 10%.

Secular Industry Tailwinds

Never forget to look beyond the fundamental and technical factors to understand the underlying trends in the company’s industry.

Beyond a company’s own efforts, secular industry tailwinds are often necessary to sustain our 25+% revenue growth target.

Industry tailwinds also have the bonus of attracting investor attention, which can lead to big gains as our company is viewed as a unique play in a hot sector.

Example: Organic foods, mobile applications, and network security software are all industries undergoing secular growth phases.

100 Baggers; Where to Look for the Big Winners

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I was at the Toronto Reference Library this past weekend, and found the investment book gem, “100 to 1 in the Stock Market”. It’s the ONLY original copy remaining in library circulation, published in 1972. I had to make a special request at the library to retrieve it from their archives. I’m kinda a book nerd. Anyway, the author, Thomas W. Phelps uncovered 365 stocks that turned into 100-baggers, within the 1932 – 1971 period, and explained how one could find the next 100-baggers (where each $1 invested grows to $100 or more). I’ve posted below the “the four categories of stocks that have turned in 100-to-one performance records”, as explained by Thomas W. Phelps in the chapter, Where to Look for the Big Winners:


Phelps influenced guys like Chuck Akre (especially on point #4 in the screenshot above) and many other top investors. Here’s what Akre said about “100 to 1 in the Stock Market”, and his own investing journey, in the famous speech – An Investor’s Odyssey: The Search for Outstanding Investments – that he gave at the 8th Annual Value Investor Conference in April 2011, Omaha, right before the annual shareholder meeting of Berkshire Hathaway:

In 1972, I read a book that was reviewed in Barron’s… called “101 to 1 in the Stock Market” by Thomas Phelps. He represented an analysis of investments gaining 101 times one’s starting price. Phelps was a Boston investment manager of no particular reputation, as far as I know, but he certainly was on to something which he outlined in this book. Reading the book really helped me focus on the issue of compounding capital… Here was Phelps talking about 100-baggers, so what’s the deal? Well Phelps laid out a series of examples where an investor would in fact have made 100 times his money. Further he laid out some of the characteristics which would compound these investments. So in addition to absorbing Phelps’ thesis, I’ve been reading the Berkshire Hathaway (BRK.A)(BRK.B) annual reports since I’ve made my first purchase in 1977, so this collective experience moved me along to a point where I’ve developed my own list of critical insights and ingredients for successful investment. 

Akre, who founded Akre Capital Management, coined the term “compounding machines” to describe businesses that are capable of compounding the shareholders’ capital at high rates for long periods of time with little risk of permanent loss of capital. And he came up with a brilliant visualization to explain his investment philosophy, which he called the “the three-legged stool” (he actually has a stool in his office’s main boardroom as a constant reminder).

“(1)The first leg of the stool has to do with the business models that are likely to compound the shareholders’ capital at above-average rates, combined with leg two, (2) people who run the business who are not only exceptional at running the business but also see to it that what happens at the company level also happens at the per share level–and then leg three, (3) where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate in places where they earn these above-average rates of return.”

Now, I don’t want it to seem like finding, and then investing in 100-baggers is easy. The odds are stacked against us all. But I do believe that the quest, and hard work involved to find 100-bagger stocks makes us better investors. We’re pushing ourselves to turn over every rock to find the possible future winners. That means sifting through thousands of stocks, on multiple exchanges, and reading countless financial statements, and quarterly releases.

In my last newsletter issue, MicroCap Interview, I revealed my micro-cap watchlist. Since then, I’ve decided to experiment in the Canadian micro-cap space. Micro-caps are those companies on the TSX and TSX Venture Exchange that trade below $100 million market capitalizations. Out of hundreds of companies, I selected only 16 stocks (see below – do you own any of these stocks too?). I looked for micro companies that can possibly turn into multi-baggers on the foundation of their unique product/service, large addressable market, long runway to grow, exceptional management, high/steady gross margins, high revenue growth, and in most cases – profitable, cash flow positive, high return on equity (ROE), and return on capital (ROIC) operations.

My Canadian MicroCap Portfolio (est. Aug 2017) –

Namsys Inc
Vigil Health Solutions
Pioneering Technology Corp
Vitreous Glass Inc
AirIQ Inc
DMD Digital Health Connections Group Inc
Redishred Capital Corp
Sunora Foods Inc
Bevo Agro Inc
Imaflex Inc
Diamond Estates Wines & Spirits Inc
CVR Medical Corp
Intrinsync Technologies
Greenspace Brands
Ten Peaks Coffee
Ceapro

I’ll provide updates in the future – hopefully it all works out. I’m well aware that some micro-caps might fail, while others will be average performers, but it’s the 2-3 that possibly turn into multi-baggers that I’m really excited about. Overtime, I’ll invest more capital into the winners, and trim or eliminate the losers, if any decline more than 50%. We’ll see – time will tell. (note – I previously owned 4 micro-cap stocks in my list above – Intrinsync Technologies, Greenspace Brands, Ten Peaks Coffee, and Ceapro, but have now segmented those into my new MicroCap Portfolio).

Jeff Bezos on the Future; What’s Not Going to Change in the Next 10 Years

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Jeff Bezos, no doubt, is one of the top Corporate Leaders of our time.

Bezos on the ‘future’:

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.”

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Chuck Akre’s “three-legged stool” – the Foundation of Compounding Machines

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Chuck Akre’s “three-legged stool” – the three foundations of “Compounding Machines”, as he calls them:

“(1)The first leg of the stool has to do with the business models that are likely to compound the shareholders’ capital at above-average rates, combined with leg two, (2) people who run the business who are not only exceptional at running the business but also see to it that what happens at the company level also happens at the per share level–and then leg three, (3) where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate in places where they earn these above-average rates of return.”

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Terry Smith of “Fundsmith” and 20% Annualized Return

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Across the pond, in the U.K., there’s a fellow named Terry Smith who runs the successful “Fundsmith” fund. He’s a really intelligent, and no-nonsense investor. Smith has achieved a 20% annualized return since inception. In this video interview (https://m.youtube.com/watch?feature=youtu.be&v=CbkqcG00IOU), Mr. Smith discusses Capital Compounders vs “Value Stocks”. Check out the video. It’s only 5 mins.

Fundsmith’s TOP 10 HOLDINGS Q1 2017

Amadeus
CR Bard
Paypal
Microsoft
Stryker
IDEXX
Waters
Intercontinental Hotels
Pepsico
Philip Morris

Robin Speziale Net Worth: $450,000 – August 2017

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Robin Speziale’s Net Worth: $450,000 (2017)

I’m going to start updating my blog with Net Worth Updates. Most likely on an annual basis. Currently, (August, 2017) this is my Net Worth: $450,000.

I’ve built my net worth over time through working – part-time and full-time, investing in stocks, dabbling in online opportunities (eBay, websites, etc.) and receiving book royalty payments from my publisher (ECW Press; Market Masters), and SmashWords (other eBooks).

I’m 30 now. But my plan is to build my net worth up to $1,000,000 within the next decade (i.e., before 2028) by the time I’m 40, but preferably to build a stock portfolio that’s worth $1,000,000 (I like liquid assets). Lots can happen between now and then, so we’ll see.

Assets –

  • Condo: $420,000
  • Stocks: $300,000
  • TOTAL ASSETS: $720,000

Liabilities –

  • Mortgage: $270,000
  • TOTAL LIABILITIES: $270,000

Robin Speziale Net Worth –

$450,000

Unlearn What You’ve Learned; My Advice to All University, College Students and Young People Out There

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Most people live their lives with an ‘illusion of control’. They go to school, get good grades, and then enter the workforce. They “choose” a profession – whether that’s an engineer, scientist, or accountant, and then in-debt themselves to a big mortgage, two cars, a cottage, and other shiny things. And for the next 40 years, they work at a job that they don’t really like in order to pay for those things that they don’t really need. They’ve become “debt slaves” to the system, and looking back, realize that all of that schooling was a process to merely create productive corporate workers out of them. They’re lost, and ask themselves, “what’s the point in all of this – what have I done with my life?”, but only have this epiphany until it’s too late.

Well, I’m telling you now; unlearn what you’ve learned.

The great Mark Twain said: “I never let my schooling interfere with my education” and that “all schools, all colleges, have two great functions: to confer, and to conceal, valuable knowledge.”

Unlearn what you’ve learned.

I wasn’t a very good student in school. I got so-so grades. And most of my teachers told me that I was either inconsistent, didn’t pay attention to detail, or seemed uninterested in class. Well, they were right. I was uninterested. While I quickly skimmed through my science textbook, I poured over books on investing in the stock market throughout high school, latching onto role models like Warren Buffett, Peter Lynch, and Benjamin Graham as I developed an insatiable drive to make it on my own by investing in stocks. I decided that I didn’t just want a “normal” life. I wanted financial freedom so that I could have real control and do something that I actually enjoy.

And so when I entered the University of Waterloo in 2005, I was more excited about the fact that at 18, I could open my first brokerage account and trade stocks. Fast forward to today; I built a $300,000 stock portfolio before 30, which I plan to grow to $1,000,000 before 40. And that’s not even “work” to me. It’s fun. How much fun? Well, on my way to building wealth, I wrote three books on finance & investing, with one becoming a national bestseller; Market Masters. I wanted to share the wealth; that is, knowledge on investing in stocks. I was only 28. Oh, and I was rejected by 50 publishers. Not to mention that I don’t even have a finance background to even “qualify” me for writing a book on finance. No bachelor’s degree in finance. No CSC. And no CFA. Honestly; I’d probably flunk all those exams. But I’m self-taught. I really know how invest in stocks and build wealth in the stock market. I’m great at it. And there’s the secret: I’m great at investing because I love the process. I’m always learning.

So, put down your text books from time to time and actually educate yourself on what YOU want to learn. You’ve got no excuse today with the proliferation of information on the internet; everything is available at your fingertips. What do YOU want to learn? What excites you? What comes easy to you? Build on that. If you want to be financially free, deliver value to people, feel pride in what you do, and take control of your life, you need to monetize something that you are passionate about. Make it your business.

Start with an idea, and then be mindful about how to make it happen. Here’s my blueprint: Mix intelligence, energy, and focus.

Be mindful of all three because you need intelligence, energy, and focus to actually achieve something. Trust me; there’s people who are intelligent but have no energy. And people who are full of energy but have no focus. You need all three. And when I say intelligence, I mean learning something of value, and being knowledge in something that actually inspires you. Remember what Mr. Twain said: don’t let school interfere with education.

So after reading this, think about what I’ve said today and unlearn what you’ve learned. I know; it’s tough. And you’ll be breaking from convention. But I don’t think you want to become like everyone else; living your life with an ‘illusion of control’: go to school, get good grades, and then enter the workforce, working at a job that you don’t really like in order to pay for those things that you don’t really need. Don’t become lost, asking yourself, “what’s the point in all of this – what did I do with my life?”, and only realizing that until it’s too late. Unlearn what you’ve learned. Educate yourself; learn about something that really interests you. Build something great with your knowledge. Make it your business. Lead a great life. A free life. And take control of you.

My MicroCap Portfolio Experiment – Investing in 16 Canadian Micro-Cap Stocks

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I’ve decided to experiment in the Canadian Micro-cap space. Micro-caps are those companies on the TSX and TSX Venture Exchange that trade below $100 million market capitalizations. Out of hundreds of companies, I selected only 16 stocks (see below – do you own any of these stocks too?). I looked for micro companies that can possibly turn into multi-baggers on the foundation of their unique product/service, large addressable market, long runway to grow, exceptional management,  high/steady gross margins, high revenue growth, and in most cases – profitable, cash flow positive, high return on equity (ROE), and return on capital (ROIC) operations.

Check out my MicroCap Portfolio (est. Aug 2017) below – 16 micro cap stocks. I’ll provide updates in the future – hopefully it all works out. I’m well aware that some micro-caps might fail, while others will be average performers, but it’s the 2-3 that possibly turn into multi-baggers that I’m really excited about. Overtime, I’ll invest more capital into the winners, and trim or eliminate the losers, if any decline more than 50%. We’ll see – time will tell. (note – I previously owned 4 micro-cap stocks below – Intrinsync Technologies, Greenspace Brands, Ten Peaks Coffee, and Ceapro, but have now segmented them into my new MicroCap Portoflio).

My Canadian MicroCap Portfolio (est. Aug 2017)

Namsys Inc
Vigil Health Solutions
Pioneering Technology Corp
Vitreous Glass Inc
AirIQ Inc
DMD Digital Health Connections Group Inc
Redishred Capital Corp
Sunora Foods Inc
Bevo Agro Inc
Imaflex Inc
Diamond Estates Wines & Spirits Inc
CVR Medical Corp
Intrinsync Technologies
Greenspace Brands
Ten Peaks Coffee
Ceapro

 

Francois Rochon – The Compounding Machine

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I’ve previously written about Francois Rochon, founder of Giverny Capital, but now I’d like to announce that Francois Rochon has joined the Capital Compounders Club on Facebook (join now!). I met Francois in December, 2016. He’ll be in the sequel to my book – Market Masters. Please join and welcome Francois, the Compounding Machine, to the group!

Francois Rochon founded Giverny Capital (est. 1998), a money management firm located in Montreal (Old Town), QC. Assets Under Management (AUM) are over $500 million. His investment philosophy comes down to “owning outstanding companies for the long term”, which means that Francois selects, and invests in outstanding ‘Capital Compounders’. See a list of Giverny Capital’s 13F holdings on Whale Wisdom: https://whalewisdom.com/filer/giverny-capital-inc….

The Rochon Global Portfolio has achieved a 15.9% annualized rate of return since inception, clearly beating the index. That means $100,000 invested in 1993, with Rochon, would have compounded into over $3,180,000 by the end of 2016. (source: http://www.givernycapital.com/…/Rendements-Rochon-global-en…). Francois is a Compounding Machine.

Here are Francois’ key points on investing, that he re-posted recently in the Giverny Capital 2016 Annual Letter:

  • We believe that over the long run, stocks are the best class of investments.
  • It is futile to predict when it will be the best time to begin buying (or selling) stocks.
  • A stock return will eventually echo the increase in per share intrinsic value of the underlying company (usually linked to the return on equity).
  • We choose companies that have high (and sustainable) margins and high returns on equity, good long term prospects and are managed by brilliant, honest, dedicated and altruistic people.
  • Once a company has been selected for its exceptional qualities, a realistic valuation of its intrinsic value has to be approximately assessed.
  • The stock market is dominated by participants that perceive stocks as casino chips.
  • With that knowledge, we can then sometimes buy great businesses well below their intrinsic values.
  • There can be quite some time before the market recognizes the true value of our companies. But if we’re right on the business, we will eventually be right on the stock.

More Reading:

8 Keys to Successful Investing- https://static1.squarespace.com/…/The_Keys_to_Successful_In…

Column in the Montreal Gazette-
http://montrealgazette.com/…/francois-rochon-special-to-the…

DIY Investor Feature: Philippe Bergeron-Bélanger

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When I first started the Capital Compounders Club (https://www.facebook.com/groups/capitalcompoundersclub), I promised to post DIY investing stories on our very own members. My philosophy; the more you learn (from others), the more you earn….

So, first up is club member Philippe Bergeron-Bélanger, who’s been a full time investor since August, 2014. Philippe lives in Montreal (I love that city), and also runs a free investment blog called Espace MicroCaps with Mathieu Martin (another club member) where they both share their top investment ideas and educational articles about microcap investing.

Philippe’s returns have been great; he says his capital has gone up 8x since 2014. And he’s only 30.

I’ve posted below the Q&A style interview with Philippe. There’s lots of great info on micro-cap investing, including Philippe’s micro-cap criteria, current holdings, and his favourite non-mainstream book pick (it’s on my reading list now).

Read on…

DIY Investor Feature – Philippe Bergeron-Bélanger

Age:

30 years old

Occupation:

Full-time investor since August 2014

City:

Montreal

Website/blog/Seeking Alpha Reports:

I run a free investment blog called Espace MicroCaps with Mathieu Martin where we share our top investment ideas and educational articles about microcap investing. We also organize networking events at Bier Markt Montreal with speakers and companies in the space. Our message board has over 300 members and is the only French one in North America with a focus on microcaps.

Short Bio:

I have a background in finance and accounting. Out of university, I started to work at Travelers as a surety underwriter. One of my colleague there introduced me to microcaps and my first two investments went up multiple times my invested capital. Needless to say, I was hooked. In August 2014, I decided to quit my job to become a full-time microcap investor. I never looked back.

Investing Style and Influences:

Interestingly, I have made some money playing poker while studying at university. It taught me the importance of having sound decision-making processes and the discipline to stick to them. It helped me detach myself emotionally from money, and start thinking in terms of risks, rewards and expected returns. As an investor, our goal should be to maximize potential return “per unit of risk”. Some prefer to minimize downside first, think “margin and safety” and then find the best investment opportunities for that say level of risk. Some prefer to focus on potential return only. I’m more a student of the former than the latter. Influences: Ian Cassel (MicroCapClub) and Paul Andreola (Smallcap Discoveries) had the greatest impact on my investing style.

Investing Strategies:

I run a concentrated portfolio of Canadian microcaps. My goal is to find undervalued and undiscovered equities that have the potential to at least double my money on a 3 years timeframe. In a nutshell, I look for mispriced growth stocks because I can make money in two ways: 1) Expansion of valuation multiple and 2) Growing revenues and EPS.

Stock Selection Process:

I look for growth businesses that present the following attributes and/or have the potential to show them in a relatively short timeframe: High gross margins and/or high asset turnover, operating leverage (expanding GM% and EBITDAS%), cash flow positive from operations, positive Working Capital, tight capital structure with minimal to no debt, low dilution risk from options and warrants, high insider ownership (ideally a founder-operated business), low institutional ownership, no analyst coverage, low customer concentration risk, some sort of niche competitive advantages and/or intellectual property, etc. I don’t tend to put a lot of weight on past performance as most microcaps are too early stage or have struggled for years before showing glimpses of hope. If they were solid businesses, they wouldn’t be microcaps after all. In other words, I can get comfortable with only a few quarters of sound financial performance if I pay a reasonable-to-cheap price given the growth potential of the company. Note that I don’t invest in resource or financial companies.

Risk Management:

The best risk-mitigating activity is to do a lot more research than anyone else. You want to get an informational edge on other investors before investing and AFTER. You need to follow your positions closely.

Biggest Wins/Losses:

Wins –

Lite Access Technologies Inc. (LTE.v) – in at 0.25$, still holding

Pioneering Technology Corp (PTE.v) – in at 0.125$, still holding

Biosyent Inc. (RX.v) – in at 1.50$ and sold at 9.50$ in 15 months

Losses –

Ackroo Inc. (AKR.v) – in at an average cost of 0.085$, still holding

MicrobixBiosystems Inc. – in at 0.40$ and sold at 0.22$

Portfolio (Current holdings)

  • Imaflex Inc. (IFX.v)
  • Lite Access Technologies Inc. (LTE.v)
  • Ackroo Inc. (AKR.v)
  • Pioneering Technology Corp (PTE.v)
  • Namsys Inc. (CTZ.v)
  • ImmunoPrecise Antibodies Ltd (IPA.v)
  • Siyata Mobile Inc. (SIM.v)
  • Aurora Solar Technologies Inc. (ACU.v)
  • CovalonTechnologies Ltd. (COV.v)
  • GatekeeperSystems Inc. (GSI.v)
  • RenoWorksSoftware Inc. (RW.v)

Annual Returns:

My TFSA is a good indicator of my past performance. I’ve been investing for 4 years now and my capital has gone up 8x.

Advice and Outlook:

1) Companies that are dominating a niche tend to do better than those chasing large opportunities. They run a profitable business in their niche and can reinvest profits to expand their TAM.

2) Turn off the noise, stop listening to mainstream media and focus on finding companies that should do well in any macro environment. Remember that the price you pay is your margin of safety.

3) Don’t use leverage. If it’s not good for the companies you invest in, it shouldn’t be good for you either.

A great investing book you’ve read that isn’t mainstream:

Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months by Jesse Stine

Ryan Irvine and Boyd Group Income Fund; the +4,250% Capital Compounder

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Do you own Boyd Group Income Fund (BYD.UN)? It’s one of the best performing stocks on the S&P/TSX over the past decade. Boyd’s market cap grew from $25 million to $1.8 billion, and today, it is the largest operator of collision repair centres in North America.

Well, someone you’ve probably never heard of – Ryan Irvine, Founder of KeyStone Financial – recommended Boyd “in November 2008 at $2.30/share and today it trades in the $95.00 range (it has paid over $3.00/share in dividends) and returned over 4,250%”. That’s a 40+ bagger! ($1 investment turns into $40+). Peter Lynch would certainly be proud. No doubt – Boyd is an exceptional capital compounder stock. (Btw email me and I’ll send you a free copy of my new book, Capital Compounderswhich includes stocks similar to Boyd Group Income Fund).

That’s why I’m featuring Ryan Irvine in this issue of my newsletter. He’s going to explain “the anatomy of great stock selection”; how he selects capital compounders, walking-through his profitable analysis of Boyd Group Income Fund. Ryan’s based in Vancouver, and has been running KeyStone Financial since 2000. KeyStone is an independent stock market research advisor firm. It’s similar to Peter Hodson’s 5i Research. For the past 17-years, KeyStone has specialized in uncovering, before the broader market, under-followed small-to-mid-sized companies based on the GARP (growth at a reasonable price) approach. KeyStone’s Small Cap Strategy has achieved a whopping 37.2% average annual return since inception.

Consider this issue on Ryan Irvine a “lost” chapter from my book, Market Masters. However, the following three sections below that comprise this issue – “My Investing Journey”, “Small Cap Investing Methodology” and “The Anatomy of Great Stock Selection – Boyd Group Income Fund”, were all written by Ryan who I met in Toronto earlier this year. We found many overlaps in our investing philosophy so I asked him if he’d be interested in sharing his stock-picking principles with all of you. This issue is going to be a longer read than usual but I think you’ll enjoy what Ryan has to say. And if you have any questions for Ryan – email him directly; rirvine@keystocks.com.  Cheers,  Robin.

***
By Ryan Irvine, Founder, KeyStone Financial, August, 2017 – 

My Investing Journey

The journey to create KeyStone Financial and KeyStocks.com started back in high school in a stock picking contest put on by one of my math teachers.

I found the idea of capital markets exciting and while there was plenty of information to be found on the TD’s, Royal Banks, and at the time Nortel’s of the world, what intrigued me were the underdogs, untold stories, or the stocks trading at under $10 or even in the pennies (my price range at the time) that could be the next great company. The ones that could provide the returns that could easily win that contest.

The problem, there was very little information on these types of companies.

With some digging, what you could find were what I later discovered (after they lightened my wallet) were glorified sell side reports written by brokerages that were paid by the companies they were covering through financing fees or worse, puff pieces authored essentially by paid shills for the companies. Most of these were mining exploration companies. The TSX and TSX-Venture are laden with these black holes where capital that should be put to productive use, goes to die. I learned this the hard way and it is one of the primary reasons KeyStone has little coverage in the resource segment in Canada – it is beat to death in this country and most investors are already overexposed. As far as the junior exploration segment, we would not touch it with the proverbial ten-foot pole.

On I went to university (Simon Fraser) to get grounding in financial and security or stock analysis specifically. The education has served me well, but the philosophy taught academia at the time and still today in most institutions surrounds the efficient market hypothesis (EMH). EMH theory basically states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Many academics blindly take the theory hold, where in my reality I disagree with it strongly. I recall a 4th year class where our professor was lecturing about how to construct the perfect portfolio to mirror the market. I put up my hand and asked why we would not try to pick stocks that actually beat the market? The professor immediately replied that this was impossible and told me to re-read the chapter on EMH. I put my hand back-up and asked him how he would explain Warren Buffett’s multi-decade track record of outperformance that is considered impossible according to EMH. He replied, “Who is Warren Buffett”. I later realized this was one of the issues with having a math teacher teach a finance course. Sure, he could teach us how to crunch the numbers, but he was not an investor and would not help me beat the market.

In fact, a good deal of academia and financial education today still tells us you cannot. The system is actually set-up to produce applicants who are well suited to fill the well-oiled machine that is the North American financial system. This was not going to be my path. Once I recognised this, I decided I should pave my own path.

For a different line of thinking I turned to books such as The Intelligent Investor by Benjamin Graham and basically anything about or from Warren Buffett, perhaps the greatest equity investor of all time.

In 1993, the year I graduated high school, Warren Buffett gave an interview that would truly impact the way we conduct research at KeyStone today with a gentlemen by the name of Adam Smith. Alas, while Buffett has been around a long time, in economic circles this was a less famous Adam Smith. In the interview, he was asked if a younger Warren Buffett were coming into the investment field today, what areas would you tell him to point himself in?

“Well, if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time, Buffett Replied”.

The interviewer Smith chuckled, half surprised at this notion and replied, “But there’s 27,000 public companies (in the country).”

And with a wry smile Buffett replied, “Well, start with the A’s.”

Some years later I read the interview and the quote made a big impression on me. It has helped shape the way we conduct our “discover research” at KeyStone.

Today, you can use digital tools to screen stocks. Select whatever criteria you’d like. 25%+ revenue growth – cash flow positive – PE under 25 – market cap under $500 million and the screener will spit out a bunch of names. So why the heck would we put ourselves through all those annual reports? Because screeners are nowhere near perfect. For the average investors, they are a great start. But, they do not typically remove one-time items that obscure true earnings power, they cannot read an outlook, find you backlog numbers, or interview a management team among other things.

Only by actually looking at the financial statements of 1,000s of public companies can we be sure we are not missing something. Often the real opportunities appear outside of what a typical stock screener or data terminal will provide you.

Small Cap Investing Methodology

Core to our strategy is to start with businesses (small-cap stocks) that have achieved profitability – in most cases they have a history of growing profits. We look for revenue and operational cash flow growth and perhaps most importantly, a viable growth path or multiple paths ahead for the business. Specifically, in reference to small-cap growth stocks, we prefer strong balance sheets with great net cash positions or, at the very least, reasonably manageable debt levels. Businesses that have strong balance sheets can not only weather the inevitable downturns, but profit from them by scooping up assets on the cheap. They are then positioned to post extraordinary growth in boom times. We prefer to buy businesses at a bargain, but often (dependent largely on general market conditions) buy a great business for a reasonable or fair price.

A solid growth path, good profitability, strong balance sheet and reasonable valuations – essentially a variant on GARP or growth at a reasonable price is core to our research philosophy. While core, they are by no means exhaustive.

In fact, we also find a strong management team with skin in the game. Typically, a company that consistently generates strong cash flow and possesses the core criteria we look for above confirms a strong management team – they most often go hand in hand. But, in a perfect world, we also like to see a good management team with significant ownership stake in the business. While it cannot always be the case, we are looking at key management in an ideal small-cap owning between 5 and 40% of the business. If management’s share ownership position is a significant or meaningful percentage of their own personal wealth, their interests are aligned with shareholders and they are more likely to implement dividends, grow dividends, limit dilution, make only cash flow accretive acquisitions and general conduct themselves in a manner which creates shareholder wealth.

There is no substitute for experience as well. I believe an analyst who hasn’t gone through a severe downturn can never be as seasoned or successful long-term than one that has felt this type of pain.

Becoming a good investor is about more than just the numbers. In fact, almost any analyst can run the numbers and study investment theory.  They can read about the effects of a true bear market, but it will not prepare them to experience it in action. There is nothing that can compare to owning a stock and watching it drop 50% in a matter of days. The decision then to sell, hold or buy when the market is irrational and you and your clients are feeling real pain is difficult without experience.

This broad experience in the face of adversity (and adversity faces even the best analysts and the best businesses) translates into how we treat a set-back in a stock in our recommendation universe.

We recently experienced this exact scenario in a stock we recommended in our U.S. Growth Stock research this past year.

In April of 2016 we recommended shares in Applied Optoelectronics Inc. (AAOI:NASDAQ) which makes high-speed transceivers and other components for fiber-optic networking equipment. The stock traded at $15.99 and boasted strong growth from a built out in the hyperscale data centers market by Amazon, Microsoft, and it was looking to add Facebook (now confirmed).

Two days later the company pre-announced a first quarter 2016 earnings warning for the upcoming quarter dropping the stock by around 30% and over the next couple weeks the stock touched the $8.00 range or 50% lower than our recommendation price.

The stock had limited coverage at the time and so the stock languished, but we maintained our rating at hold as we had done extensive research and expected quarterly volatility. The company had stated that it expected to make up for the shortfall in upcoming quarters. By the third quarter, the company had posted a positive earnings surprise and the stock had recovered to $18.00 range where we recommended buying more.

In fact, we have recommended buying the stock all the way to the $65 range this year as the company has now reported 4 consecutive record quarters, having more than made up for that quarterly miss. The stock now trades $100 up over 500% since our original recommendation and is ranked in the top 3 in terms of performance on the NASDAQ in 2017.

It would have been easy and natural to panic and sell the stock following the earnings warning, but we would like to think it is experience that helped us continue to hold and then buy in the face of adversity.

An analyst who is also an investor is a better analyst.

It is what makes Warren Buffett the greatest investor and stock picker. It is key to having the experience and steady hand to do as he famously advised, “Be fearful when others are greedy and greedy when others are fearful”.

As to our approach, we have more of a bottom-up style. We focus on the business, the fundamentals, the valuation, and look for a margin of safety via the value we achieve in a discount purchase, the balance sheet, lack of cyclicality or other unique elements. We read the filings, the presentations, listen to conference calls and related research. We prepare questions and talk to management. We also look at the competition if possible to see how they are performing and get a general idea of the sector.

The macro environment, particularly if there is a direct link to the prosperity of the business is not ignored, but we do not find it prudent or valuable to spend too much time on things that are out of our control. Our time is better spent focusing on learning about the business than trying to predict the direction of interest rates, the price of gold or where we are in the business cycle. Generally, we view one’s broader opinion or the broad consensus opinion on the economy to offer little value in our investment decisions.

I am fond of saying that even if you properly apply our methodology described above but buy just one stock, even if it is our table pounding buy of the year, then you are crazy.

On the flip side, you can rigorously apply our methodology and buy 50 stocks and I will tell you are wasting your time. Sounds like we are not sold on our own criteria. This could not be farther from the truth.

In fact, while we are very confident in the long-term success of our research, as part of a portfolio strategy it is incomplete.

For our clients, our strategy does not stop with our research. We advocate an approach we like to call Focused Diversification. The strategy runs counter to what most investors are told by big bank advisors who place them in multiple ETFs or mutual funds who stress diversification. In fact, we have seen many portfolios which hold up to 50 funds. A portfolio composed as such or which anything more than a couple well diversified funds is essentially going to leave an investor over diversified, over complicated, paying far too many fees and underperforming the index as a result over time.

For an investor that wants a passive strategy we would recommend investing in a couple of low cost, well diversified ETFs or index funds and calling it a day. This would be far easier to manage and you will incur less fees and either mirror or outperform the fund and ETF laden portfolio.

A portfolio consisting of anything greater than 20-25 individual stocks from an assortment of industry and with a global business reach will provide the average investor with all the diversification needed. In fact, there is little benefit of diversification past the range of investments. With most funds holding over 50 stocks, holding a basket of 10 or 20 funds is “diworsification”.

To beat the market, you cannot be the market.

The Anatomy of Great Stock Selection – Boyd Group Income Fund

One of our longest standing BUY recommendations in our portfolio, Boyd Group Income Fund (BYD.UN:TSX), can serve as an excellent example of the type of stock we love to uncover for our clients. It is the type of winner that allows an investor to make other mistakes (and we do) and still produce strong returns in a focused portfolio.  We recommended Boyd in November, 2008 at $2.30 and today it trades in the $95.00 range (it has paid us over $3.00 in dividends) and returned over 4,250%.

For the anatomy of this great stock selection we get into our time machine and set the mood of the market at the time. The year was 2008, the month was November and markets were in panic mode. The credit crisis and market meltdown were in full swing and investors were selling shares indiscriminately – like they were going out of style.

There was definitely blood in the streets, but the carnage was fresh and we had not likely reached full capitulation.

Despite the fact that prices had fallen precipitously and assets appeared on sale there was a lack of recommendations coming forward from Bay Street as analysts and investors were afraid to catch falling knives. From the value investor perspective, we were like kids in a candy store.

Great companies were on sale. And while it tested our stones (trust us it did), we started increasing the frequency and volume of our recommendations at this time. Over the next six-months we recommended in the range of 15 stocks. To give an idea of how rare this is, over the first 7-months of 2017 we have added only two stocks to our Canadian Growth Stock Focus BUY Portfolio.

For our first buy we were looking for a stock with recession resistant qualities. After all, we were in the midst of a potential great recession that was uncharted territory and destined to last for quite some time. We were looking for a simple business that would not easily go away and could potentially grow, even in tough times.

Enter the Boyd Group Income Fund (BYD.UN:TSX). The company was the largest operator of automotive collision repair service centres in Canada and was among the largest multi-site collision repair companies in North America. Recession or not, people tend to fix their vehicles as a means of getting from A to B is often essential in keeping gainful employment.  Despite this, Boyd had basically zero following on Bay Street and the company’s total market cap was in the $25 million range. The company posted revenues in its last quarter alone of over $50 million.

Boyd had recently undergone a turnaround. In fact, since the start of 2007, the company had managed to cut its total debt outstanding in half, reinstate regular cash distributions, increase same store sales, and grow cash flow significantly. Organic growth was solid and the company had embarked on a U.S. acquisition plan that appeared to chart a path towards sustainable long-term growth. The management team owned a significant stake in the business, adding to the appeal.

Partly due to the crisis environment and partly due to its complete lack of analyst coverage (a perfect stock for us), the company was trading with very attractive valuations. The following is an excerpt from our 2008 Buy Report.

“Boyd’s PE multiple based on continued operations is currently south of 4, its price-to-sales is a paltry 0.14, and its EV/EBITDA is 3.32. Based on that, the company’s continued positive outlook, and the fact we like to get paid for holding a security in the current market, we will initiate coverage on Boyd with a BUY recommendation and adding the company to our FOCUS BUY list.”

Monthly distributions and dividends of $0.015 were reinstated commencing December 2007. Shareholder distributions increased to $0.01625 commencing April 2008, subsequently increased to $0.0175 commencing July 2008, increased to $0.01875 commencing October 2008, and finally increased to $0.02 commencing January 2009. At the time, this annualized distribution of $0.24 represented a very conservative annualized payout ratio estimated to be in the 25% range (many funds payout between 80-95%), a sustainable level that allowed for continued balance sheet improvement.

Over the next 9-plus years Boyd has delivered on its growth plans and then some. With each quarterly earnings beat, our comfort level with the management team and company grew. The stock has been recommended at ever increasing prices no less than 25 times in separate reports from KeyStone and it has maintained its position in our Focus BUY Portfolio. It is currently the longest standing buy recommendation.

Again, we recommended Boyd in November 2008 at $2.30 and today it trades at over $95.00 range (it has paid us over $3.00 in dividends) and returned over 4,250%.

Boyd’s market cap has risen from $25 million to $1.75 billion and the company has expanded from roughly 75 locations to 475 locations today. Despite the astonishing rate of growth, the company’s share count has only increased from 12 million to 18 million.

Despite being by far one of the best performing stocks on the entire TSX over the past decade, Reuters only tracks 12 analysts covering the stock. And this is a “surge” from between 0 to 3 analysts over the first 5-years we were recommending the stock.

The lack of coverage outlines the Street’s lack of interest in companies that are not serial share issuers – they just do not make them enough money. This lack of coverage has been a golden opportunity for our clients and produced one of our best recommendation of all time in a stock that is anything but sexy, but produces some of the sexiest returns one can imagine.

By Ryan Irvine, Founder, KeyStone Financial, August, 2017 – 

***

Don’t forget to join the Capital Compounders Club! There’s already 200+ members on Facebook discussing their growth stock ideas in the stock picking competition.

Think Short; Becoming a Skeptical Buyer

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I’ve been investing in stocks for 12 years. I opened a brokerage account in my dorm room at the University of Waterloo in 2005, and have since built a nice portfolio. But it’s certainly not perfect. One of the most important things I’ve learned, and accepted over time, is that I’ll never have a perfect track record, or even close; i.e., ~100% winners. My portfolio will have losers now and in the future.

That being said, I’ve become a much better investor by limiting my blow-ups, whether that’s through not selecting as many future severe under-performers, or promptly selling out of a declining position in my portfolio that’s violated my thesis (i.e., initial reason(s) for buying a stock). So, now I consider myself a perpetually skeptical buyer, meaning that I’m consciously, and decidedly not easily convinced; I have doubts and reservations about the markets, and stocks… all the time. I’m always mindful about why I’m interested in a stock. My interest won’t ever be based on a ‘tip’, emotions, or a ‘hunch’. I conduct my own extensive, independent research on every stock before I initiate a new position in my portfolio. If you’ve read my new book,Capital Compounders, you’ll know that I think only 10% of the Canadian stock market is actually investable, with ~ 50 truly exceptional businesses. The same ratio can apply to the U.S. market, but an even lower one in many international markets, where maybe 5% of stocks are actually “investable”. Indeed, there’s a lot of bad companies, and even more mediocre ones, publicly traded on the stock market. I’m that skeptical.

Since becoming an increasingly “skeptical buyer”, which has come through experience, and many mistakes, I’ve been enthralled with the world of short sellers. People like Marc Cohodes, Carson Block, and Andrew Left who initiate shorts in companies; betting that a stock will fall in price, and then gaining if that scenario plays out in the market. Studying these prominent short sellers has improved my investing success. I employ these short sellers’ shorting frameworks in my own stock selection process by removing stocks from my universe that I’m skeptical about based on many of their short criteria. What remains in my watchlist, and then in my portfolio, are companies/stocks in which I am least skeptical. And that’s really the best I can do because I’ve accepted that ‘I don’t know what I don’t know’. I’ll never know everything at any given time but I can adjust my positions based on new inputs that I learn over time. This is why I concentrate my portfolio in small-cap and mid-cap stocks where I feel I can have an informational edge because of the low analyst coverage and/or institutional ownership in the space.

Now that I’m a more skeptical buyer, before I initiate a new position, I always ask myself, “What can go wrong?” Because, who wants to lose money… And if I do initiate that position, I always make an agreement with myself that I’ll sell out of the position if there’s an violation in my initial thesis. Things change. I can be wrong. But I don’t want to be emotional about it.

Ok, let’s cover one short sellers’ framework that you can use in your own stock selection process to become a more skeptical buyer. I called up Marc Cohodes this summer and cited some points from our discussion in “The Truth is Out There” issue. But that was just about the Canadian housing market in general, where I concluded “something’s gotta give”. So, for this issue, here’s Marc Cohodes’ short selling framework; how he thinks, and selects stocks to short:

“I never, ever, ever get involved in what I would call open-ended situations… I have avoided pie-in-the-sky names. To use an analogy, I’m not interested in climbing into a tree and wrestling the jaguar out of the tree. I’m interested in someone shooting the jaguar out of the tree, and then I will go cut the thing apart once it hits the ground. Instead of open-ended situations, I like to short complete pieces of garbage with fraudulent management and horrifically bad balance sheets. I look for change, I look for ‘if this goes away tomorrow will anyone miss them’?…” To add, Marc usually bets on the jockey, not just the horse, meaning that there’s (unfortunately) rotten managers out there. And he looks for companies that are “frauds, fads, or (impending) failures”, stalks them (Marc calls himself a “stalker”) until they’re weak, and then quickly pounces, initiating a short position; riding the stock down, covering when the time is right, and making money through the process. Again, this thinking can help you in avoiding and/or removing bad stocks from your portfolio. It’s certainly helped me. Always be asking yourself:

– Is management good? Are they honest? Professional?
– Can this company potentially be a fraud (Enron), fad (Heelys), or failure (Blockbuster)?
– Does their product/service have staying power? (i.e., durable competitive advantage)
– Will I know the signs to look for when a company starts to turn for the worse? (especially on the balance sheet, and income statement)
– Do I have the emotional fortitude to pull the sell trigger if I’m wrong?

Becoming a more skeptical buyer isn’t easy. It takes experience and learning from ones mistakes in the market. Being skeptical has certainly improved my investing performance as there’s less ‘blowups’ in my portfolio over time.

Don’t forget to join the Capital Compounders Club! There’s aready 200+ members on Facebook discussing their growth stock ideas in the stock picking competition.

Join the Club!

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I’ve received a lot of reader mail since my book, Market Masters, released worldwide in 2016. And I’ve even met some of you in and around Toronto for coffee at Tim Hortons, Starbucks, and Indigo to talk stocks. It’s really been great to connect with you – passionate DIY investors not just in Canada, but from around the globe – U.S., U.K., India, Israel, and Europe.

Recently I thought, wouldn’t it be interesting if we all got together to talk stocks, and growth investing ideas? To see who else has read Market Masters(or my new book, Capital Compounders)? And to be in touch with like-minded people from around the world? Obviously, we can’t all meetup at a coffee shop. So, I’ve started a new Facebook Group that I would like you to join. Click on this linkand join the Capital Compounders Club. It’s free but exclusive (closed group). However, once you join, you can invite your friends, and family, and post whatever you want – stock/company ideas, videos, new stock buys/sells, articles, investing strategies, etc.

Also, I’m launching exclusive content that will only be available to you in the Capital Compounders Club:

  • Stock Picking Competition (once you join the club, reply to the “Pick a Stock!” post with your top stock – winner will be announced on October 31st)
  • DIY Investor Features (email me at r.speziale@gmail.com if you want to reveal your investing strategies, and I’ll send you a quick profile sheet to fill-out, which I’ll publicly post once complete
  • Live Q&A Sessions with top investors… to be announced soon…
  • Events in and around Toronto (maybe even a pub night)

Join the Capital Compounders Club Now! (If you have Facebook, it’ll take 3 seconds)

Portfolio Update (Q2 – 2017)

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My stock portfolio is up 13.5% year-to-date (January through June), beating the averages; DJIA +8.67%, S&P 500 +8.49%, and S&P/TSX -0.67%.

As many of you know, my portfolio is primarily invested in Canadian and U.S. stocks, based on my investment strategy – Small/Mid-Cap Capital Compounders, Mispriced Large-Caps, and Speculative Takeovers. Learn more about How I Pick Winners.

My Top 10 Performers in Q2 2017 are posted below. As I stated in my Q1 2017 Portfolio Update, I invested more capital into some of those top performers. I also initiated new positions at the beginning of Q2 – Shopify, Winpak, Pollard Banknote, Pinetree Capital, and Boyd Group.

Top 10 Performers Q2 Returns
YUM CHINA 45.0%
NINTENDO 44.1%
TECSYS 39.7%
ALIBABA GROUP 30.6%
SLEEP COUNTRY 27.0%
PINETREE CAPITAL 24.4%
SHOPIFY 24.1%
PACIFIC INSIGHT ELEC 18.4%
MCDONALDS 18.2%
YUM BRANDS 15.4%

Nintendo is a great example of one of my “Mispriced Large-Cap” holdings. Nintendo has always been a video-gaming powerhouse. I’m still a big fan and I’m almost 30. But its stock lost 80% of its value from 2007 to 2015. The Nintendo Wii was a big hit but then Nintendo seemed to just dwindle from there. It started to look like Nintendo could share the same fate as Sega. But then in 2015 Nintendo’s management made several key announcements, with plans to unlock their Intellectual Property (IP) – Nintendo Theme Park at Universal Resorts, Mobile Games (partnership with DeNA), and talks of movies, virtual reality, etc. This was big news in 2015 because Nintendo has always been apprehensive to venture into new markets. That’s why I initiated my position in Nintendo’s stock in 2015. They’ve got a treasure chest of valuable IP, which I would compare to Disney’s; let’s see it continue to go to work! (I’m up 100% on Nintendo since 2015). You can read more about Nintendo’s IP plans here.

You can see my full watchlist / portfolio in my new book, Capital Compounders (email me if you want a free copy). But also note that I’ve added more stocks to my watchlist – Brookfield Infrastructure Partners, Fairfax India, Waste Connections, Mogo Finance Technology, and Jamieson Wellness.

One of my biggest losers in Q2 2017 was Canopy Growth (WEED). It’s down 25% in the quarter. But I’m still long. I started buying shares in WEED at ~$1/share, when it was trading on the Venture Exchange. There’s still a very significant wealth transfer from drug dealers to licensed producers/sellers happening in Canada that I compare to Blockbuster/Netflix…isn’t capitalism great?

Overall, I’m happy with my performance so far this year. But the tide could turn. In Canada, overnight rates may rise for the first time in 7 years, which could be worrisome given our high consumer/mortgage debt load (~$2 trillion), combined with a lofty housing market, which I wrote about in “The Truth is Out There“. I’m not terribly concerned though as my portfolio is not exposed to the financial sector. Most of my holdings are in technology, consumer, and diversified industries. If I’m up +15% for the year (excluding dividends) that’ll be good for me. But even if the market comes down I’ll just buy some stocks on sale as I’ve done before in other corrections, crashes, and bear markets. I’m building wealth for the long term.

How Marc Cohodes Shorts Stocks

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Here’s how Marc Cohodes, veteran short-seller, and the guy who “brought down” Home Capital, shorts companies:

Marc Cohodes:

“I never, ever, ever get involved in what I would call open-ended situations. . . . I have avoided pie-in-the-sky names. To use an analogy, I’m not interested in climbing into a tree and wrestling the jaguar out of the tree. I’m interested in someone shooting the jaguar out of the tree, and then I will go cut the thing apart once it hits the ground. Instead of open-ended situations, I like to short complete pieces of garbage with fraudulent management and horrifically bad balance sheets. I look for change, I look for ‘if this goes away tomorrow will anyone miss them’?….”

In summary, Marc Cohodes looks for companies that are “frauds, fads, or (impending) failures”, stalks them (Marc calls himself a “stalker”) until they’re weak, and then quickly pounces, initiating a short position; riding the stock down, covering when the time is right, and making money through the process.

Learn more investing strategies in my new book, Capital Compounders, on Amazon: http://a.co/3XHhnKe

MarketMasters

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.

The Truth is Out There – Canadian Housing Market; The Numbers, Opposing Views, And Who to Believe?

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I’ll be honest. I don’t know what the heck is going on in the Canadian housing market. Are house prices overvalued? Is this a nationwide bubble or just in pockets? Will the market crash? How severe? And when? I don’t know. So, I thought, why not call the one guy who seems to have the answer – Marc Cohodes (Home Capital’s notorious short seller)…

But before we get to my phone conversation with Marc, at his chicken farm in sunny California, here’s some housing data:

Current Average Prices for DETACHED Houses (April, 2017)-

– Toronto: $1.5 million
– Greater Toronto Area (GTA): $1.2 million
– Vancouver: $1.6 million
– Metro Vancouver Area: $1.5 million

Is this a dream? They’re all MILLION DOLLAR PLUS houses. Pinch me.

Back to reality. Let’s conduct an experiment and use CIBC’s mortgage calculator. Imagine that you’re a young family, new to the market, and want to buy an AVERAGE $1.5 million detached house in Toronto. And we’re not talking about the top of the range (best neighborhood) house. It’s just an “average” house. A 20% down payment on that average $1.5 million house would be $300,000. And so the mortgage amount would be $1,200,000 (= $1,500,000 house price less the $300,000 down payment). Oh, and by the way, CIBC’s online mortgage payment calculator has a limit of $2,000,000 (not kidding – we’re getting so close…).

OK, so we’ll choose the 5 year fixed closed mortgage (4.79% posted rate) with a 25 year amortization period. Then click “submit”… and… we get a whopping $6,837 in monthly mortgage payments. Now, let’s say we’re the average Torontonian family; our average HOUSEHOLD/FAMILY income would be around $75,000. But that’s just “gross” income. We need to subtract federal and provincial income taxes from $75,000, which leaves us with just $60,000 in take-home-pay. Can that “average” income afford an “average” detached house in Toronto? Hell no! Buying a $1.5 million house in Toronto right now would mean forking up $300,000 / 20% down payment (good luck!) and then paying $82,000 in mortgage payments every year for the duration of the mortgage!!! (the actual figures may vary based on differing mortgage loan factors but you get the point). That’s WELL above the average Torontonian family’s cash-on hand / equity (for down payment) and take-home pay ($60,000). Plus, families still need to pay maintenance costs, hydro, as well as eat food, and clothe themselves to survive (no duh)…

Indeed, houses are extremely out of reach for so many people right now, including me. In 2014, I bought a new 600 square-foot condo located in Regent Park, a former “slum” neighborhood east of downtown Toronto that’s being completely re-developed with market condos. I wanted a good deal so that I could affordably enter the Toronto real estate market at the time (remember, I didn’t have a trust fund waiting for me). Daniels’ gentrification is expected to be complete in 2020. Anyway, let’s say that you (the “average young family” in our experiment) give up on buying a house in Toronto. Well, years ago, one could find cheaper housing alternatives in the Greater Toronto Area (GTA). But guess what? “Cheaper” today means $1.2 million in the GTA for a detached house. There goes that alternative. This example is pretty much exactly the same in Vancouver ($1.6 million) and its surrounding housing market ($1.5 million) for detached houses.

So, WHO can actually afford all of these MILLION DOLLAR PLUS detached houses in Canada’s most populated cities (Toronto and Vancouver) and their surrounding regions? What’s going to happen to all of the disenfranchised “average” Canadians who want to buy a house but can’t because they’re priced out of the market? How much foreign capital is ACTUALLY being pumped (laundered?) into the housing market (and what happens when that foreign demand slows)? Are rich foreign students actually using “gifted” money from parents as down payments, with no income of their own in Canada, to obtain mortgage loans at Canadian banks? Do some Canadians have an insatiable drive to “trade up” their house every couple of years? Am I seeing more McMansions sprout up in the newer GTA suburbs? Are Canadian Banks’ underwriting and lending practices really that sound? Have we overextended ourselves in debt (mortgage and consumer – Canadian household credit is above $2 trillion dollars and mortgage debt is 75% of that)? Can house prices go up forever; and does this mean I’m going to live in my 600 square foot condo for the rest of my life? What’s going to happen to all of those real estate agents (including the part-time-agents who have full-time jobs but make client calls during work and then show houses at night)? If I attend one of the many “Get Rich By Investing in Real Estate Seminars” happening in Toronto can I actually get rich? Should I tell my parents to sell their $1 million+ house in Mississauga, cash out, and live like royalty in some warm country? Can the speculators / house flippers sell to a “greater fool” forever? Should I listen to those TV commercials and actually take out a HELOC on my home (because I feel so “house rich”)? Can house prices really rise faster than salaries forever? What happens to the variable rate mortgage holders when the Bank of Canada finally raises the overnight rate? Who’s left holding the bag if/when there is a crash in the Canadian housing market? These are all the questions I’m asking today. Something’s gotta give… or so I think.

These three guys – Marc Cohodes, Hilliard MacBeth, and Carson Block – all think that a Canadian housing crash is coming.

Marc Cohodes

I called Marc last week. He’s the guy who shorted Home Capital. I asked Marc, “What’s going on in the Canadian housing market?” To which Marc replied, “The Toronto, GTA, and Vancouver housing markets will all most likely crash. People there don’t make that much money to sustain a market. Only a small segment of the population makes $200,000+ to actually afford those houses. Remember, housing is shelter. But now Canadians are trading houses like they’re stocks on the Vancouver stock exchange…a big storm is coming”. Scary stuff. So, I then asked Marc, “What should the average Canadian do?”. He replied: “Sell all of your Canadian stocks and convert your cash to USD.” (This isn’t my recommendation to you. It’s just what Marc Cohodes said on the call.)

Hilliard Macbeth

I also contacted Hilliard MacBeth. He’s the guy who wrote the book, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash“. I asked Hilliard via email: “What do you think will finally break the housing market’s back?” To which he responded:

“Regarding the proverbial straw that broke the camel’s back and its timing: These are questions that everyone asks, all the time, going all the way back to my first interview in September, 2014, with The Globe and Mail. Unfortunately, there is no easy and definite answer. In fact, it is impossible to predict what factor or factors will be the catalyst. And, in the end, will it really matter? The exact timing doesn’t matter except to people who are trading houses (or condos) like stocks and trying to squeeze the last drop of profit out of the price gains, with a plan to sell at the exact top? Anyone that is familiar with the real estate’s industry’s lack of liquidity for sellers will recognize immediately that there would only be a few sellers able to complete that difficult task, and those few would need a lot of luck to pull it off.

I conclude in the book that the way to adjust your exposure to real estate is to sell BEFORE the market peak, and before anyone knows that it is the market peak.

Since I can’t successfully predict the timing I prefer to focus on what we know and what we can do: First, it is a bubble, of massive proportions, and all bubbles burst at some point.  Second, the unwinding of the bubble will take years, not months and so people should avoid getting too aggressive trying to buy while the market is falling in the first year or two. Third, there are significant exposures within investments related to real estate, primarily in finance, that many people are very heavily weighted in their investment portfolios. The Canadian banks are the best example of this concentrated bet that investors are not paying enough attention to.” [end quote]

Carson Block

And finally, there’s Carson Block, who like Marc Cohodes, is a successful short-seller. I was just about to contact Carson and get his opinion about the Canadian housing market when news hit Bloomberg: “I’m starting to believe that there could be some real problems with Canada, says Carson Block”. “Particularly given what happened to Home Capital in recent weeks I kind of wonder if Canadian investors are really nervous…”. Carson concluded the interview by warning that “the conditions seem to exist for there to be some pain inflicted on the markets. That suggests that Canada is the hottest market in the world for short sellers; if not, it could be.”

Damn. If the “doom-and-gloom” guys like Marc, Hilliard, and Carson are right then things aren’t so sunny in “sunny ways” Canada. But what about the experts sitting on the other side of the fence – Stephen Poloz, Benjamin Tal, and Evan Siddall? Let’s take a look at their arguments:

Stephen Poloz

In May at the Group of Seven meeting of finance ministers and central bankers in Bari, Italy, Stephen Poloz, Governor of the Bank of Canada, tried to clear up doubt about Canada’s mortgage lending practices, including the crash (“run on the bank”) of Home Capital. “We’d be looking for signs that there are problems with the [financial] system as opposed to preoccupying ourselves with individual institutions…the question would be: What caused this? Is it something unique to the institution itself, or is it something in the system?… I think this situation [Home Capital] is pretty clear on that; it’s idiosyncratic.”

Benjamin Tal

And then also in May of this year, Benjamin Tal, Deputy Chief Economist at Canadian Imperial Bank of Commerce (CIBC), said “It’s clear that the Home Capital situation is not the ultimate test of Canadian housing. The situation is contained and the quality of the assets is solid. Any reference to that reality from the [central] bank will carry a lot of weight.”

Evan Siddall

And finally, meeting with reporters at the start of June, Evan Siddall, Chief Executive Officer, CMHC said “We don’t think this is a pervasive problem in Canada…it is a discrete issue…the quality of the portfolio remains quite high. There is no specific concerns really in that portfolio or any part of our business. We have a robust fraud mitigation system in place and it’s working.”

Pheww. This is a lot to take in. And I still don’t know what to think. It’s concerning. Should we listen to the experts? If so, which ones? It’s the “crash and burn” guys vs. the “everything is going to be alright” guys. All I do know is that one side is probably going to be right… time will tell. But for now, “the truth is out there”… somewhere…

What do you think about the Canadian housing market right now?

MarketMasters

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.

My New Book – Capital Compounders

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I am happy to announce my new book – Capital Compounders.

For a limited time (until May 31st), I’m going to make Capital Compounders FREE! Click here: https://drive.google.com/drive/folders/0B9VmITHOukaYVHVQSEtzQlBsejg?usp=sharing

You can learn more on Amazon:

Capital Compounders is a quick-and-easy read on how to get started in the stock market, and make money investing in growth stocks.

Cheers,

Robin Speziale
National Bestselling Author

My 70 Stock Investing Rules

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There’s been a huge influx of new subscribers to my newsletter this past month. If you want new content on investing you can subscribe here. Join 1,000 other subscribers!

As many of you know, I’ve been investing in stocks since I was 18. I started in my dorm room at the University of Waterloo in first year (2005) and haven’t stopped investing in the stock market since. It’s been a passion of mine but also a path that I feel confident enough in to build wealth over time. I’ve achieved a 15% compound annual return in my personal stock portfolio over my 12-year investment career. You can read more about my investing background here.

But what I haven’t gone into depth sharing with you all is how I invest in stocks. My thoughts on the market, which types of stocks I pick, and why. My journey in writing the best-selling book, Market Masters, was certainly an inflection point for me. By meeting with, and learning about top investors’ investing strategies, and their frameworks, I upgraded my own investment approach. Experience also played a crucial role, having invested through the financial crisis (’08), two bear markets, and a handful of corrections. So, while it’s not all perfectly structured, with lots of rough notes, I’ve outlined below My 70 Rules on Investing in Stocks. These rules will give you access to my investment thought process.

For the budding investor, these 70 rules will hopefully be valuable information to help get you started in the stock market. And for the experienced investor, maybe there’s something new that you didn’t think about before, or at least that my rules validate how you’re already investing in the market.  Enjoy.

My 70 Rules on Investing in Stocks:

1. I’ll only hold 25-40 core stocks in my portfolio, because at that point I’m well-diversified, and am not diluting my portfolio with ‘so-so’ picks. I have high conviction in my current holdings. Plus, I can more easily follow 25-40 stocks on a quarterly basis than I can 40+ stocks. Any number above that and it becomes a circus.

2. I don’t let any stock grow larger than 10% of my portfolio. That opens me up to potential risk. My winners will approach 10% position size as they grow, so I take profit off the table, and allocate those funds to my new emerging opportunities.

3. I only invest in companies where I can confidently project future cash flows. I can’t confidently project cash flows for companies in cyclical industries like mining, financial services, and pharmaceuticals, etc. I find it funny when I see shiny models that project 10 years of cash flow in unpredictable businesses. That’s like putting lipstick on a pig. And an ill-fated attempt at fortune-telling.

4. Similarly, I don’t invest in “price-takers”, like oil & gas companies that have to price what they sell based on prevailing crude oil market prices, for example, but rather invest in “price-setters”, that can raise prices year-after-year to generate higher revenues. Plus, it’s virtually impossible to fudge top-line revenue figures through financial engineering, like it can be done with net income / profit.

5. There’s only two ways a company can continually increase revenue over time: by raising prices or increasing volume (whether that’s through increasing the number of customers, average transaction size, or transactions per customer). I invest in companies that can achieve both price and volume growth. Also, revenue needs to be sustainable and recurring over time. I don’t like lumpy, and inconsistent ‘one-off’ revenue. To illustrate, I find it amazing that a ‘dollar’ store – Dollarama – can do both; increase its store count (volume) and its prices (higher than a dollar!). That’s why I’m a happy Dollarama shareholder.

6. I really like companies that can expand globally. Think about a company’s product’/services’ addressable market. The growth potential is enormous when the addressable market is virtually everyone in the world. That’s why companies that can become near-monopolies, with little-to-no competition, like Google, are ideal investments, especially at early stages in their business life cycle.

7. The companies that I invest in need to have a competitive advantage, whether that’s through their operating model, distribution network, brands, niche products/services, patents, technology, regulatory protection, goodwill etc. I ask, “How hard would it be for a competitor to take any of their business?”. And, “Can technology or innovation disrupt this business model?” I also employ Porter’s 5 Forces to validate a company’s competitive advantage.

8. Cost cutting isn’t a business strategy. Companies that cost-cut to generate profit, and appease the street for however long, aren’t worth my time. You can only cut costs so much until there’s really nothing great that remains. I want revenue growth. Companies that are growing are hiring, investing, and spending.

9. I don’t invest in any industries or traditional businesses that are going bust. Newspapers, anyone? And as of late, department-size brick and mortar stores. The best case study is the Blockbuster-to-Netflix wealth transfer. That’s why I always invest in relatively new businesses and avoid mature business models. I want to invest in the wealth-recipients, like Netflix in this example.

10. Companies should be earning high rates of return on capital (ROIC), generally around 15%, (and at a minimum above their cost of capital) consistently over at least 5 years, and preferably over 10 years. I don’t rely on Return on Equity (ROE) as a measure as it can be distorted with big debt loads. And lots of debt can sink companies.

11. What happens at the company level needs to also occur at the per share level. For example, growth in net income translating into an increase in earnings per share (EPS). Along those same lines, I want to see an increase in book value per share, and free cash flow per share, over time. Some management dilute their existing shareholders through mass expansion of shares outstanding, in other words; using their shares as currency.

12. I focus my picks in the more inefficient small-cap and mid-cap segments. Those are the smaller-market-capitalization companies ($100 million to $10 billion) that can double, triple, quadruple, and more on the stock market. If I owned large cap companies ($10 billion +), I’d just be replicating the index and its performance, and so could save myself time by just buying an Index Fund / ETF.

13. When there’s a systemic market decline; recession (e.g. financial crisis ’08), bear market (e.g. TSX 2015), or the common correction, I’ll invest more money into my existing stock holdings. Remember, the world isn’t actually going to end. I’ll happily buy great companies at cheaper prices. But when an individual stock drops in price, among a normal-range  market, I think long and hard before investing more money, i.e. dollar cost averaging, because…

14. Managing a portfolio is like gardening. Instead of watering my weeds, I water my dandelions, so that they can grow bigger. In other words, I reward my existing holdings (the “winners”) by increasing my stake in them when they post great earnings results quarter after quarter. I like to see 15%+ EPS growth. And I also like a beautiful garden.

15. Underperforming, cheap stocks (those “weeds”), can get cheaper, and cheaper, and cheaper. And they’re probably getting cheaper for a reason. That’s called a value trap. And I don’t like getting trapped. Not all stocks ‘bounce back’ as some investors hope (and pray!). I am always happy to pay a little more to invest in quality companies. And that’s fine by me because I’m buying a company’s future cash flows, not just what it’s worth today.

16. The companies that I invest in don’t have a lot of long term debt on their balance sheets. Preferably, no debt at all. Overall, tightly controlled and clean balance sheets.

17. Free cash flow is king. Companies that generate high amounts of free cash flow, combined with good capital allocation, can grow at high rates through reinvestment in the business, smart acquisitions, and opportune share buybacks, especially if shares are cancelled annually for a prolonged period of time. Plus, lots of cash means companies can self-fund, not having to heavily rely on the debt or equity markets, even through economic down-cycles when credit dries up. Exceptional free cash flow generators are usually those companies that require less capital expenditure to run their business. High cap-ex intense companies are sluggish, requiring too much capital to grow, and even then, deliver low returns.

18. The free cash flow / enterprise value ratio (FCF/EV) might be one of the best, but overlooked metrics, one can use to identify exceptional capital compounder stocks. That combined with high return on capital (ROIC) to demonstrate effective allocation of free cash flow.

19. Buy and hold “forever” doesn’t work. Sure, Warren Buffett says that his favourite holding period is “forever”, but what he says isn’t always what he does. Recent case in point: IBM. I understand that businesses don’t last forever. There’s life and death. It’s basic high school business class curriculum, where we learned that businesses go through several stages: Seed, Start-up, Growth, Established, Expansion, Mature, and then Exit. Look at the Dow Jones, S&P 500, and other major indices over history. Companies come and go. I make money when I can, from “Growth” through “Expansion”, and don’t hold onto a dying company.

20. I always strive to maintain around a 15% compound annual return in my portfolio. If one of my stock holdings isn’t keeping up with the pace, I’ll sell and allocate those funds into a company that can generate higher returns. I’m always thinking about opportunity cost; where money can work the hardest for me. Generally, a company’s compound returns are correlated to its return on capital (ROIC) over time. That’s why the stock holdings in my portfolio average 15% return on capital. Because I want to achieve a 15% compound annual return. It’s important to note that I find any compound return over 15% isn’t sustainable in the long-run. I would be taking on too much risk to achieve that hurdle.

21. I never invest in stocks just because they have high dividend yields. Most of my holdings have low or no dividend yields, where capital is used in more effective ways (e.g. re-investment into the business). High dividend yields are indicative of large-caps, mature businesses, and in some cases, businesses in decline.

22. I buy “growth at a reasonable price”, meaning that I won’t buy a stock with a 25 P/E and 10% EPS growth rate, but will buy a stock with a 30 P/E and 30%+ EPS growth rate. It’s all about the growth.

23. I’m not a value investor. I don’t buy obscure “net-nets” aka deep value stocks that I know nothing about, hoping that the market will see what I see, and then finally bid up the price of the stock in line with its underlying net-asset value. That could take months, years…never.

24. I need to understand the businesses in my portfolio. That means that most of my stocks (80% +) fall into these 3 industries: consumer franchise, technology, and diversified industrials. Some people want to look ‘smart’ by buying into complex industries like bio-tech. But I like boring, and unsexy companies that generate high return on capital on a consistent basis. Bonus if they’re leaders in their respective industries. Some of my best investments of all time are in companies that I spotted in the mall, supermarket, or just out and about; the products and services that people buy on a recurring basis. I don’t invest in the stock market to look smart. I do it to make money.

25. Before I initiate a new position, I don’t first think, “How much money can I make?”, Instead, I ask myself, “How much money can I lose?”. I consider all the ways a stock can lose money before I even think about the upside.

26. I accept that I’ll have losers in my career. Some stocks will decline, and not work out. But it’s my job to make sure that my winners always outnumber and outperform my losers. I just have to swallow my pride. Because investing can be a probability game even after countless hours of fundamental research. That said, as I progress in my investing career, my losers aren’t a result of investing in companies outside of my circle of competence (e.g. biotech), but rather placing too much faith in management that doesn’t deliver on its vision, and growth projections.

27. The stock market has buyers and sellers. I want to make sure that when it’s time to sell my stock in the future, that there’s a buyer who wants to purchase it from me. That “high-level”, simplistic thinking has saved me from bad transactions. Similarly, I don’t want to be the sucker buying a bad deal on the other end; for example, a mature/declining business at the peak of its cycle. I want to buy a company that has just entered its growth phase, where it’s worked out the kinks in its business model, and simply needs to replicate its successful formula.

28. The majority of my bigger, core positions are in mid-cap companies that continually earn high return on capital (ROIC), generate free cash flow, and grow their earnings and book value per share, through their expansion phase. But I’ll also plant seeds in smaller companies that have yet to fully prove themselves. And unlike my core holdings, some “seeds” aren’t even generating a profit (net income). I’ll invest more money as those companies’ plans do play out, but quickly trim when they don’t. And to hedge against a bet in a very small company, I’ll ask myself, “Is this company an acquisition target; does it have assets that a much larger company wants?” Sometimes the returns from those small-caps are mostly from just getting bought-out by a larger company. As a general rule, when I do invest in small-caps, there should be as much ‘optionality’ (e.g. takeover potential, and other factors, etc.) as possible.

29. I never want to lose 50% on any stock. I know when to cut my losses before I lose too much capital. A 50% loss requires a 100% gain to revert back-to-even, and then “getting-even” is exponentially harder the more money one loses. I don’t want to dig myself into a hole and then struggle to get back out.

30. I’m wary of “blue chips”. They’re never a sure-thing in the stock market. I can list lots of once “blue chip” companies that don’t exist today or are at least shells of once large companies. They’re not as “defensive” as one would think. Mature businesses are ripe for disruption. As an aside, one day after work (this was 2006, and I was 18), I was riding the go-train home (Lakeshore West), and started talking with the “ambassador” – the guy who announces the stops on the intercom. After some small-talk, and upon him learning that I’ve just started investing in the stock market, he tells me, “Son (he was around 65 years old), I’ve done really well in Citigroup, Bank of America, and Yellow Pages. Buy blue chip companies that pay a dividend, and you’ll do just fine.” I didn’t buy any of those so called “blue chips” in 2006…

31. I’d get a bit cautious once ‘normal-average-everyday’ people, who’ve never bought stocks in their lives, are getting into the stock market because of a certain hot sector, or hot stock. Especially when they proclaim, “It can only go up” and “It’s so easy to make money right now”, without conducting any fundamental research. That’ll probably be a good sign that a peak is forming in the market (actually, reminds me of the Toronto housing market). But I also realize that markets can stay euphoric for far longer than I think. Regardless, I don’t cash out. I stick with great companies as long as they’re great. I don’t just sell when I think my stocks have become overvalued (unless they’ve crossed my 10% portfolio size threshold), or when the market is reaching its “peak”. Some people might never buy stocks because they’re always “too expensive”, and then miss out on every bull rally until they die.

32. I know and accept that I’m not going to get rich quick. I control my greed. Because greed can lead to very bad decisions in the market. I don’t feel ‘smart’ when my stocks have gone up in a bull market. Because a rising tide lifts all boats. Conversely, I invest more in the market when I feel fearful, because that’s when most people are selling stocks, and driving down stock prices, so that they’re cheaper for more astute, and experienced investors.

33. I research small-cap and mid-cap companies as much as I can. And I read as much on the markets as possible. Everyday. I can truly have an informational edge in these oft-overlooked smaller-cap companies, with little-to-no institutional or analyst coverage. For the most part, everything is already priced into those liquid, well-known large cap companies. There’s no opportunity for me to generate alpha there.

34. I don’t care about any macro-economic trends. I don’t follow trends. I just invest in great non-cyclical companies that sell products in good and bad times.

35. When I pull up a company’s metrics on a 10-year table (I use Morningstar.com), I’ll know if I’ve found something special when the business is growing at a consistently high rate over time, and especially if it’s posted little downside during a recession. That’s important; I always check to see how a business performs through a recession.

36. A company’s stock price performance needs to match its underlying fundamentals overtime. My favourite companies have stock charts that rise steadily over time, in line with their intrinsic growth, with very little volatility in their stock prices. Just an almost perfect upward trend line. These are difficult to find. But Lassonde Industries comes to mind and is a good illustration.

37. When I first learn about a new company, I add it to my “watch list”, conduct further research, and follow it for some time before I decide to initiate a positon. I give myself a ‘cool-off’ period to avoid buying any stocks on emotions.

38. Only 90% of the Canadian stock market is investable in my opinion, with ~ 50 truly exceptional businesses, at any given time.

39. I get excited when I find a great company that issues black and white annual shareholder reports (without photos), has an outdated and amateur logo, and is still using a website that was designed in the early 2000s. These are the ‘gems’ that have yet to be fully discovered by the institutions and masses. Once companies get bigger, on the foundation of their success, they upgrade all of those things.

40. It’s usually best when management has a stake in the company and/or is an owner/operator. Because they’re shareholders too. They want the stock price to go up as much as you do. But management must also demonstrate operational excellence, combined with superb capital allocation, intelligence, and a strong drive to compete. Further, management needs to have an achievable vision for the company, with the ability to execute and realize that vision. And finally, management needs to have integrity. Why integrity? If management is caught with having committed a fraud, or breaking any laws, your investment in a company can quickly go to zero.

41. We’re at a point in time where every industry is getting disrupted by technology. It’s not just the technology companies anymore, like Apple (iPhone) eclipsing RIM (BlackBerry). Everything! Which is why I like to invest in companies that serve a need/want that can’t be easily disrupted by technology in the next 10 years. Food, and drinks, for example. Everyone will still be eating burgers, and drinking coffee, the same way they do today, in 10 years’ time. Technology won’t change that basic human behaviour.

42. If I don’t think a stock can become an “x-bagger”, I won’t invest in the company. For example, a 3-bagger means that a stock goes up 3 times from its initial investment. $100 invested would turn into $300. That’s why I like to invest in companies that are sized $100 million to $10 billion in market cap. More so on the smaller-end, because if a company “makes it”, I can potentially earn 100x my investment (wishful thinking, and rare, but heck, it could happen! Paladin Labs did it). But then because of the law of large numbers, once my stock grows into a large-cap, I’ll usually sell, and allocate capital into the new emerging opportunities on the stock market.

43. I favour stocks that have strong tailwinds, like demographic trends, de-regulation, or shifts in consumer taste, driving profits in certain companies that are already selling those ‘beneficiary’ products or services.

44. I don’t invest in companies that will just be ‘one-hit-wonders’. Growth companies can only maintain their high growth by investing in research and development, expanding their business into new product lines, services, and markets, and/or evolving with their customers, over time. Innovate or die.

45. As soon as any management blames their problems on external reasons, like bad weather (seriously, I’ve heard this… as if customers can’t shop online), media, consumer taste, etc. I will usually quickly sell the stock. Management needs to adapt to change and accept their issues before they become BIG problems. I still remember going to RIM’s annual shareholder conferences from 2009 – 2011, and listening to the CEOs explain that “people want long lasting batteries, great reception, and keyboards”…….

46. I closely watch a company’s gross margin over time. Declining gross margins are a sign that competition is driving down prices. And I only want to invest in businesses that have strong pricing power, which is a result of their competitive advantage.

47. Even great companies have minor setbacks. But the difficult part is separating the minor setbacks from the big problems. I always sell when there’s a big problem that will continually hurt the business going forward. In other words, I sell when my initial thesis to invest in the company is later broken. I don’t wait and see.

48. Because I invest in more illiquid small-cap and mid-cap stocks, I can stomach volatility; in other words, the ups and down in their stock prices. But that’s as long as the intrinsic growth trajectory of those businesses is up over time. Amazon didn’t go straight up. Successful investors had to have the wherewithal and confidence to withstand the ups and downs in its stock price.

49. I mostly focus on Canadian equities, which comprise 80% of my portfolio. I feel I have an edge as Canada is my home country. However, 20% of my portfolio is in U.S. equities. I was buying U.S. stocks when the Canadian dollar was at-parity and also above-parity. But I’ll buy U.S. stocks again once the CAD reaches 90 cents. I don’t invest in European or Asian equities, as I don’t believe many companies in those regions are controlled by strong shareholder-oriented managers. Plus, the North American companies that I invest in sell products and services into those regions. It’s a win/win.

50. It isn’t enough that my fundamental research checks out on each stock. Stock price momentum needs to also be in an upward trend line over time.

51. I verify net accumulation in a stock by checking its accumulation/distribution on StockCharts.com. If accumulation/distribution is rising, especially in a stock that’s consolidating (trading flat), than that’s a good sign. I want other people buying, and accumulating the stocks that I invest in too.

52. I do a new scan of North American stock markets – TSX, Venture, NYSE, and NASDAQ – every 3 months for new issues. Also, some stocks appear on my filter for the very first time because they’ve finally surpassed a metric benchmark, like return on capital. That way I’m always on top of the market.

53. I’ll use leverage/margin in my portfolio, but won’t surpass 20% of my portfolio’s total dollar value.

54. When I sell a declining stock, on the basis that my original investment thesis has been invalidated, I’ll invest the proceeds into one of my winners. The winners can make up for the losses and then some.

55. There’s no such thing as passive investing if you’re a stock picker. I’m checking my portfolio on a daily basis. If I wanted to ‘buy and forget’, I’d cash out and put all of my money into an Index Fund. But that also means accepting those returns.

56. Losing money has been the best lesson for me. I know what to avoid now; companies, and management teams that destroy shareholder value. And with experience I can more quickly identify and screen-out those bad companies. It’s surprising how many companies are superb at capital destruction. But I also study other people’s mistakes. It’s cheaper. That includes mistakes by hedge fund managers, and other “smart money”. Nobody’s right all the time. As James Altucher says, the investors and hedge fund managers who are successful all of the time are probably criminals (i.e., insider trading) or about to lose everything.

57. Think about all the assets (intangible and tangible) that a company owns, and not only each assets’ cash flow generating ability now, but its ability to generate cash flow in the future. Having a lot of assets on the balance sheet doesn’t mean anything if the company can’t generate a high return on those assets for its shareholders. I love companies with wonderful assets, like Disney. The worst management teams buy bad assets through acquisitions, at too high a price, and then write off their mistakes later. Management needs to be good stewards of capital.

58. I go to StockChase.com on a daily basis, and check the “Predefined Scans” section, to see the stocks hitting new 52 week-highs. If I see companies hitting new 52 week highs, I conduct further research and buy based on my aforementioned criteria. Why? Because that break-through price momentum is being fuelled by high demand (i.e., investors and institutions buying the shares). Similarly, stocks that have finally broken out of a consolidation phase (flat-line) are interesting to consider.

59. I never say, “I missed out on that stock”, if I see it’s gone up 500% in 5 years, for example. Especially if it’s still a small-cap or mid-cap company. Because I know that those great companies can compound many times more. They’re still small. I also never say, “It’s too expensive so I won’t buy the stock”, after simply looking at the P/E and nothing more.

60. I don’t quickly overlook companies that aren’t generating a profit. They may be the next winners on the market. Amazon, for example. By the time Amazon started to generate a profit, it had already become a $400+ billion dollar company, compounding many times over, and making their loyal shareholders incredibly wealthy.

61. When I hear that there’s a change of management in a company, it makes me take a second look, especially if I skipped over the company in the past.

62. I avoid companies that only grow through inorganic growth, i.e. acquisitions, fueled by debt. Because once the debt, or acquisition opportunities, dry up (and often it’s both), the stock will fall straight to the ground for value investors to scoop up. Acquiring companies, and doing just that, isn’t a business strategy.

63. I like to learn about how successful investors think. Their framework on why and how they pick stocks. You can read my book (Market Masters), or The Money Train, Market Wizards, and One Up On Wall Street, to get into the minds of top investors.

64. There’s little spread to be made in merger-arbitrage these days, because of high frequency trading, and easily accessible information. And when there is a juicy spread, the takeover could very well fall through. Just look at the failed Ontario Teachers Pension Plan/Bell Canada takeover case. Investors in that merger-arbitrage play got crushed. So, I’d rather invest in small cap companies that could soon be taken over. They’re my “speculative takeovers”. For example, I purchased shares in Rona, speculating that Lowe’s would return to attempt another takeover, having been blocked the first time. Lowe’s did and succeeded in their second takeover attempt, sending Rona’s stock up 100% in one day.

65. I’ve come to realize that the market is largely psychologically-driven. John Maynard Keynes described the stock market as a Keynesian Beauty Contest, where “it is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be”. This can be demonstrated in what I’ll coin, in an homage to “the Nifty Fifty”, “The Sexy Six”: Facebook, Apple, Alphabet, Netflix, Tesla, and Amazon.

66. I compare my long ideas (stocks I want to buy) with current short positions (as a % of float), and the analysis by any prominent short sellers. I always look to see the reasons why others would want to short a stock. For instance, investors who were long Home Capital stock would have done themselves a big favour by reading what prominent short seller, Marc Cohodes, had to say about the company. But it’s certainly hard to sell when a stock has had a remarkable track record, high return on capital, and stellar share price performance. One thinks, “How could anything ever go wrong?…”

67. Usually the media headlines (e.g. “The Death of Equities” or “Sell Canada”) are most depressing exactly before the market starts to turn up again after a recession or bear market. Great buying opportunity. Which is why I keep cash on-hand (and still read news headlines).

68. If I’m buying stocks, and I see that other small-cap funds or hedge funds are buying too, that gives me some validation. But it doesn’t mean it’ll work out. Some of the funds that I follow, which also invest in small-and-mid cap stocks: Turtle Creek, Pender, Giverny Capital, Donville Kent, Adaly Trust, and Mawer New Canada Fund. I also follow analysts like Gerry Wimmer. My portfolio has a lot of overlap with these funds.

69. There’s always tail risk. Someday, some event will rock the stock market. But I’ll only know about it after-the-fact. Because of that fact (I’m not ALL-knowing after all), I don’t worry about things that I can’t control. I control risk by holding great stocks and controlling what I can in my portfolio.

70. The stock market exists to help companies raise capital, grow, and be successful. Why would I invest in bad companies that don’t grow? That’s what value investors do (or at least, try). But that’s not why the market exists. Remember, one of Warren Buffett’s best investments, GEICO, was a growth stock!

In summary, if I’m not beating the market’s long term return, (TSX ~10%), or beating it the majority of the time, then I should stop investing in individual equites and instead be putting my money into an index fund. It’s been 12 years (2005 – 2017) and I’m still actively picking stocks, with a 15% compound annual return. Hopefully I can keep it up. Because at ~ 15% compound annual returns, I can double my money about every 5 years, without taking on too much risk. I hope you enjoyed my 70 Investing Rules. If you did then I encourage you to also read my talk on “Capital Compounders”, which is from the Fairfax Financial Shareholders Dinner (2017). And also forward this email/newsletter to a family member or friend if you think it’ll help him or her be successful in the stock market.

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MarketMasters

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.

Logistec Stock

Investing

I was invited to the Fairfax Financial Holdings Shareholder’s Dinner in 2017. It was there that I gave a popular talk on Canadian Capital Compounders Today – 25 Market Beating Stocks. Logistec was one of those 25 Capital Compounder Stocks. Take a look at Logistec’s key metrics below, which reinforce why it’s a “capital compounder”.

Logistec:

Company CEO / Founder ROIC (5 Yr) Compound Return
Logistec Madeleine Paquin 13.9% 10.3%

Logistec, along with the other 25 Canadian Capital Compounders, have all beaten the market, and share these common characteristics:

  • Free cash-flow generative, high return on capital businesses;
  • Run by exceptional, and shareholder-oriented, managers who;
  • Effectively deploy capital, to grow their business, and continually deliver high rates of return for their shareholders

Note: Compound Annual Return is based on capital appreciation returns since inception on the Toronto Stock Exchange (S&P/TSX), up to April 10, 2017. And the Return on Capital (ROIC) 5-year average is from 2011 – 2016, sourced from Morningstar.com.

MarketMasters

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.

Enghouse Systems Stock

Investing

I was invited to the Fairfax Financial Holdings Shareholder’s Dinner in 2017. It was there that I gave a popular talk on Canadian Capital Compounders Today – 25 Market Beating Stocks. Enghouse Systems was one of those 25 Capital Compounder Stocks. Take a look at Enghouse Systems’ key metrics below, which reinforce why it’s a “capital compounder”.

Enghouse Systems:

Company CEO / Founder ROIC (5 Yr) Compound Return
Enghouse Systems Stephen J. Sadler 15.1% 12.0%

Enghouse Systems, along with the other 25 Canadian Capital Compounders, have all beaten the market, and share these common characteristics:

  • Free cash-flow generative, high return on capital businesses;
  • Run by exceptional, and shareholder-oriented, managers who;
  • Effectively deploy capital, to grow their business, and continually deliver high rates of return for their shareholders

Note: Compound Annual Return is based on capital appreciation returns since inception on the Toronto Stock Exchange (S&P/TSX), up to April 10, 2017. And the Return on Capital (ROIC) 5-year average is from 2011 – 2016, sourced from Morningstar.com.

MarketMasters

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.