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

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

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

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

5) Does the company have a worthwhile profit margin?

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

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

8) Does the company have outstanding executive relations?

9) Does the company have depth to its management?

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

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

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

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

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

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

Source: Common Stocks and Uncommon Profits. Philip Fisher.

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.

[This article was originally printed in the Financial Post]

I was reading a new investment book this week, Market Masters, by Robin Speziale. (Well, I sort of had to read it, since there was a chapter on me in it!) The book is a collection of interviews with successful investors, and makes for a very good read. At the end, Speziale speculates on what actually makes a good investor.

One of his conclusions: good investors simply love the investment game. If you think about it, most successful investors are very, very rich, yet most keep plugging away, trying to find good stocks and get great performance, year after year. They are not doing it for the money. The love of the process, and the passion for investments, means that these portfolio managers are never really ‘working,’ but just doing what they love. And why not? There are many things to love about the investment world, whether you are a professional or not. Here are five of them:

Lazy people can make money, and get annual raises too!

When speaking about investments to young people, I always highlight how investments are one of the only ways a lazy person can make money. Invest in dividend paying companies, and every three months, or every month, another deposit lands in your account. What did you have to do for this free money? Absolutely nothing. What’s more, if you buy the right company, you might get annual raises — dividend increases — as well, all for, again, doing nothing. Lazy long-term investors, in fact, can do very well indeed.

It is always interesting

Even though I have been in the business, like, forever, every day is entertaining. Companies get taken over, have problems, discover oil, make acquisitions, grow earnings, win some contracts and so on. You almost never know what might happen with a company or with the market. As I write this, one of the stocks we follow is halted. News could be good, or could be bad, but either way something is going to happen. It is hard to get that variety in other businesses.

There are tax advantages

Capital gains taxes have the lowest tax rate in Canada, so when you make a good investment and take a profit, you get to keep a lot of it. Dividends in Canada come with the dividend tax credit, making dividends a preferred form of income over salary for most Canadians. So, while others slave away at a salaried job and pay the highest marginal tax rates, many investors are sitting back, earnings gains or dividends and still paying lower tax rates.

Math works in your favour

When you pick a bad stock, you can have a 100 per cent loss, when that stock goes to $0. However, when you pick a great stock, you can have a 1,000 per cent or more gain. You can only lose all of your capital on the bad investment, but can make 10-times or more of your capital when things go well. Thus, one good winner makes up for a few big losers. You really only need one amazing stock pick in your life. Don’t believe me? Take a look at Intuitive Surgical, a $6 stock in 2001, trading at $620 per share today. Or, how about Monster Beverage, trading at 18 cents, split-adjusted, in 2001, and now at $130 per share. That is a 72,122 per cent return in 15 years.

Business can be bad and you can still make lots of money

When you are employed, and your company has a tough year, you might not get a raise, nor a year-end bonus. In the market, though, you can still make money when things are bad. Either through selective stock purchases — not all stocks go down, even in a bad market — or, for those more aggressive, through short selling. You can still profit, even when times are horrible. What other business can say this?

Now, since I have been in the industry so long, I clearly might be biased here. But you have to admit, compared to many industries, investments do have a lot of good qualities.

Peter Hodson, CFA, is CEO of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).

[This article was originally printed in the Financial Post]

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.

If you have some free time to yourself this long weekend, I would recommend watching some great movies on the financial world / the stock market.

These are my top 6 stock market movies (some are on Netflix):

1. Wall Street
2. The Wolf of Wall Street
3. Inside Job
4. The Big Short
5. Margin Call
6. Boiler Room
7. (Am I missing any?)

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.

Become a Patron Now to Access My Exclusive Content – Top Performers, Portfolio, Watchlist.

Some readers email me and ask about my portfolio holdings. I won’t disclose all of my holdings in this newsletter but I’ll share with you my top 10 best performers in 2016 (see below). Ceapro and Canopy Growth Corp (formerly Tweed) were the clear out-performers. But I had my share of losers too. Davids Tea (-44.71%), Ten Peaks Coffee (-38.65%), and Exco Technologies (-36.28%). I don’t know what I was thinking with Davids Tea to be honest…(I’ve since cut my position). I do have another regret from 2016. And it was not investing in Teck Resources, which posted a mega 403.18% return, making it the best performer on the TSX in 2016. Overall, my portfolio beat all three indices that I track: S&P/TSX, S&P 500, and DJIA. Do you own any of these stocks?

P.S. Bill Ackman initiated two new (undisclosed) positions in his Pershing Square Hedge Fund, representing 13% of committed capital. New Position 1: 4% weight. New Position 2: 9% weight. Bill’s in recovery mode, as his fund was down -20.5% in 2015 and -13.5% in 2016 (net returns). Based on my interview with Bill in my book, Market Masters, he’s likely to have invested in North American Companies, with market caps > $15 billion. I predict that Pershing Square will post a positive net return this year. Read more about Bill Ackman’s new positions here.

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

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I was at a party over the holidays and made a bet with an acquaintance who works in the investment industry. It started when I asked him, “What are your top picks for 2017”? He proceeded to list the stocks that he believed would outperform the market. But then I stopped him half-way at “Visa”. I said, “I’ll bet you that MasterCard will outperform Visa in 2017”. Just friendly competition. After all, we were at a party (drinks were flowing). He replied, “$100 bucks it won’t!”. So, at the end of 2017, we’ll both pull up charts of MasterCard and Visa and see who wins the $100 bet. You see, I chose MasterCard based on my past research into both companies; their financials/key metrics, current valuations, and projections. In 2016, MasterCard (+6%) beat Visa (+0.6%), but both stocks under-performed the S&P 500 (+9.5%). Year-to-date in 2017, MasterCard and Visa are neck-and-neck.

However, the morning after the party, I thought about the quote from John Maynard Keynes, explaining the concept of the “Keynesian Beauty Contest”, that I included at the beginning of my book, Market Masters:

“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. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment, Interest and Money, 1936).

So, in other words, I was contemplating whether I should have instead placed my bet on the stock (Visa or MasterCard) based on what others think that others think are ‘prettiest’ (i.e., most likely to outperform) – “Third Degree Thinking”.

Robert J. Shiller wrote an article in the New York Times (2011), further exploring the Keynesian Beauty Contest concept:

“The best strategy, Keynes noted, isn’t to pick the faces that are your personal favorites. It is to select those that you think others will think prettiest. Better yet, he said, move to the “third degree” and pick the faces you think that others think that still others think are prettiest. Similarly in speculative markets, he said, you win not by picking the soundest investment, but by picking the investment that others, who are playing the same game, will soon bid up higher.”

Shiller continues by arguing:

“When you hear a conversation among professional investors — including those who manage money for big institutions like university endowments and pension funds — it often sounds as if they are engaged in just this kind of guesswork. You wonder how many people are actually basing their decisions on what is taught in business school: calculating an optimal portfolio based on a rational statistical analysis of fundamental economic data.”

What do you think about the Keynesian Beauty Contest?

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.

[This was originally sent to my newsletter subscribers on December 24, 2016]

The holiday season is almost here. And what better time to catch up on some books you’ve wanted to read all year, or watch some movies or TV shows from past and present. My tradition is to watch National Lampoon’s Christmas Vacation. That movie never gets old for me. It’s such a dysfunctional Christmas for the Griswold family.

I’m also a Seinfeld fan, and while it’s not a Christmas episode, I do recommend that you (re)watch “The Stock Tip”, which is the fifth episode of the first season of Seinfeld. In that episode George Costanza tells Jerry Seinfeld and Elaine Benes that a friend of a friend of his has given him a stock tip, and he encourages them to invest in it too. Jerry does so, but as soon as he does, the value of his stock falls. I like the episode because I think we’ve all been there, one way or another, and lived to regret it. Over the weekend, I was talking with a friend, who runs one of the great (and often times hilarious) financial blogs in Canada (http://dontfuckwithdonville.blogspot.ca) and we both agreed that conducting ones own independent research is essential in the stock picking process. Going on just a stock tip is a bad idea. Anyway, it’s a funny episode, and I think you’ll enjoy it over rum n’ egg nog or whatever’s your holiday drink.

I also want to let you know that this month I donated $1,000 to the SickKids Foundation and that next year I’ll be writing another cheque, as I’ve committed to them a portion of my own royalties for the lifetime of sales from Market Masters.

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When I interviewed Canada’s Top Growth Investors (Jason Donville, Martin Braun, Peter Hodson, Martin Ferguson, and Ryaz Shariff) for my National Bestselling book, Market Masters, I learned from them how they went about discovering high-growth stocks. The common characteristics were: small/mid-cap, low prices, low/ or no dividend, mostly knowledge-based industries (e.g. technology, healthcare, consulting, etc.), new products/services, intelligent capital allocators as managers, and high rates of growth in book value per share, earnings per share, and free cash flow per share, as well as high returns on capital, all combined with durable competitive advantages.

As an example, Jason Donville’s investment in Constellation Software is a 30-bagger (i.e., a $1,000 investment turned into $30,000). There’s more examples in my book.

And when we talk about “Super Stocks”, the first American fund manager to come to mind is Peter Lynch. Mr. Lynch, who ran the Magellan fund at Fidelity from 1977 until 1990, achieved a 29.2% compound annual return. Remarkably, during his tenure at Fidelity, Lynch invested in more than a hundred “tenbagger” stocks (i.e., $1,000 turns into $10,000), including Fannie Mae, Ford Motor, Philip Morris International, Taco Bell, Dunkin’ Donuts, L’Eggs, and General Electric

“These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers…” — Peter Lynch

I’ve posted for you below the 30 best-performing U.S. super stocks of the past 30 years. There might be some surprises in the list. For example, The Home Depot (#2 position) has achieved a total cumulative return of 67,795%. And you might own some of these stocks in your portfolio today. But remember that while these super stocks are now all mature large-cap companies, at one point in time they were small/mid cap stocks. The question is, which stocks today will turn out to be the top performing stocks in the next 30 years?  Email me your predictions.

Sources: WSJ. FactSet; Windhorse Capital Management

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.

There is nothing like Market Masters for the Canadian “Do it Yourself” (DIY) investor. Before I wrote the book, I would browse the Business / Investing bookshelves at my local Indigo, Chapters, and Coles book stores and only find investing books written by Americans for Americans. Sure, there are lots of Canadian books on personal finance, budgeting, saving, how to get started investing, mutual funds, etc. but those do not count. Especially any book that promises “sleep easy investing”… (*yawn*) or that teaches “investing for dummies”. I’m talking about Canadian books on good old stock picking. There was nothing.

That’s why I wrote Market Masters.

I wanted to create a go-to manual for Canadian DIY investors, featuring the top investors from across the country, their stock picking strategies, spanning different investing styles, and packing it all into 600 pages.

So, I started on the book-writing journey. I wrote the first draft of Market Masters in 2015, drawing material from my interviews with 28 top Canadian investors, and then shopping the manuscript around to ~50 publishers. They all rejected Market Masters. Most rejection emails were automated. But some were typed up by someone at the respective publishing house. For example, one editor flat out said, “Your book won’t sell”. Another explained that “People would rather read this type of content in magazines”. It wasn’t until I sent the manuscript to ECW Press that Market Masters found a home. The publisher’s founder, Jack David, saw the potential in Market Masters. He believed in me, my book, and the value it would bring to DIY investors across the country. There truly wasn’t anything like it. Fast forward to today, Market Masters was released nationwide, in stores and online, in February ’16, and then two months later, became both a Globe and Mail and Toronto Star National Bestseller. It’s been read by thousands of DIY investors across the country. And it’s quickly becoming one of the most popular Canadian investing books of all time.

Here’s what one reader said about Market Masters: “While America has a healthy supply of financial authors, Canada’s under covered market is lucky to have someone like Robin Speziale. Just as Jack Schwager authored multiple editions in his Market Wizard series, so too should Robin with a Market Masters series”.  Another reader said: “This book is the best investment I ever made! I am on my second reading. Lots of great ideas concerning how to invest in the market. Diverse opinions and lots of examples. It was interesting to read how these Marketing Masters go about choosing the stocks they do.”

Since the release of Market Masters, there’s been lots written about the book, including Will Ashworth’s (Motley Fool) wonderful write-ups of some of the top investors featured in my book. Will took a liking to Market Masters after picking it up from his local library. In his articles, he summarizes his favourite investors’ concepts and then in some cases makes stock recommendations of his own based on their investment frameworks.

Check out Will Ashworth’s articles:

• 3 Stocks to Buy From 1 of Canada’s Most Successful Hedge Funds
• 6 TSX Stocks Just Hit 52-Week Highs: You Only Need Buy 1
• You Can’t Go Wrong With These 8% Free Cash Flow Yields
• 3 TSX Stocks Growing Book Value Faster Than Warren Buffett

I hope that you enjoy Market Masters. I think you’ll gain an edge in the market after you read it if you haven’t done so already. Before you purchase the book you can read a sample here for free.

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

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

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

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

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

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

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

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

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

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

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The Outsiders Podcast

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

Free Cash Flow is King

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

Some of My Favourite Investing Blogs and Resources Right Now:

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

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