Background to The Financial Passage Maker

Purpose of the Newsletter

This newsletter provides ideas for people interested in building wealth, largely through capital gains on investments in stocks. The newsletter is premised on the assumption that readers will have other sources of stable income to meet the requirements of daily life and that they will be in a position to accept a relatively greater degree of risk for a portion of their portfolio in order to build their wealth.

I eat my own cooking: all commentary reflects activity in my personal investment accounts. Through this newsletter, I will share ideas with the expectation that readers will assess my thinking critically and make their own investment decisions. It is not my intention to offer investment management services nor to recommend portfolio managers. In my experience, it is far more rewarding and prudent for individuals to take charge of their own finances. I have always been amazed how otherwise intelligent people will thoughtlessly abrogate personal responsibility for their financial well-being and rely on others who are often poorly informed or hampered by institutional constraints to act in the best interest of their clients.

The Financial Passage Maker addresses matters other than building financial wealth, the value of which is often overestimated in terms of its contribution to a rich and fulfilling life.

I will issue the The Financial Passage Maker more or less on a quarterly basis and will supplement it, when useful, with short notes.

The Financial Passage Maker - What's in a Name?

In many ways, investing is analogous to the activity of sailing, hence the name of this newsletter. As a cruising sailor, I make extensive preparations to reach my destination safely and in comfort, including: adhering to a rigorous maintenance program, equipping the boat with the best of safety and navigational gear, ensuring that captain and crew are prepared, and by planning routes with care. While I try to travel in fair weather, I am always alert to change and prepared for adverse conditions. I take remedial action early when ominous signs appear.

My Background

I was driven to investing by necessity in the 1980's; namely, the need to have a nest egg to enable me and my family to survive a potential layoff and retrain for a new career. This “family driven duty” eventually developed into an intellectually and financially rewarding pursuit where I consistently earned more from this activity than from my wages after eight years of trial and error. I was encouraged by a few friends to produce a newsletter and share my experience with others.

I have a post graduate degree in Geography although I studied fine arts briefly and dabbled with molecular biology. My professional career was spent largely with the Government of Ontario where I was involved with a variety of activities: land use and parks planning, policy development, managing wildlife research, and developing and administering a variety of programs to nurture collaborative private sector/university research and the commercialization of research discoveries. My wage-based career culminated with the founding of an energy research centre while on secondment to a not-for-profit organization. 

I am now devoting more time to a variety of pursuits including snowboarding, sailing and golf, musical composition, travel, and this newsletter.  I also commit to learning or doing one big new thing each year ... so I never know what lies around the next corner.  Two years ago, it was a long walk on the Camino de Santiago de Compostella.  This spring, it's a cycling trip notionally along the Mississippi River coupled with completing the outfitting of a trawler on my return. 

Most of my research takes place in very early morning hours as I find it is conducive to uninterrupted reading and contemplation. It also sets the table for “creative dreaming” once I return to sleep. (I make up for this by means of a siesta in with Hunter, our Standard Schnauzer.)

Each new day is an adventure of opportunity and learning!

General Investment Approach

I place an emphasis on securing capital gains for reasons of tax efficiency, although I will pursue outstanding opportunities for income.

I do not confine myself to predetermined investment styles or specialize in certain sectors to the exclusion of others. Often, I concentrate on a few strategic areas in order to maximize returns where I see fine opportunities as opposed to maintaining a diverse portfolio simply because it's the thing to do. Some people may question this approach, but I reckon that small investors are somewhat more agile than their institutional counterparts and can “put up an umbrella” or go inside when rain threatens, i.e., sell off decliners and go to cash.

I place a great emphasis on learning and independent thought and I read voraciously. For the most part, I make investments on the basis of strategic ideas which emerge as result of extensive reading. I refine emerging ideas using a variety of techniques, each tailored to meet the characteristics of the “idea”. For example, five years ago, I saw an opportunity and used a systems approach with the oil and gas industry in order to build a mental framework to direct subsequent research and investment.

As a general rule, I place an emphasis on value investing and “early in on ideas”. As such, I am not afraid to run against the tide of popular opinion as some of the best opportunities emerge when market sentiment is at its lowest or leading ideas are not appreciated generally.

I hold most positions for more than four years and trade rarely in order to minimize costs.

I recognize that I can be wrong and exit losing positions without regret.

Management of Risk

Many people manage their portfolios with an eye to minimizing losses and preserving capital with the result that this preoccupation predisposes them to the risk of not fully realizing gains on winning positions. It is just as important to maximize returns as it is to minimize losses.

Portfolio gains in the short term are driven largely by the “magic 10 per cent” of investments that generate outstanding profits. In order to maximize returns from the magic 10 per cent, I “ride the winners.” I exploit winning positions fully without taking profits prematurely. (There are some exceptions to this and I will address them in the next edition of The Financial Passage Maker.)

I also place a reliance on the magic of compound growth achieved by investing in sound dividend-paying companies and re-investing the proceeds.  

In order to minimize losses, I use a variety of strategies:

• I adjust the size of initial investments commensurate with perceived risk. I restrict the size of investments in smaller, riskier entities and put proportionately more in more stable entities;
• I try to minimize geopolitical and some financial risks by investing in more stable countries with sound legal systems which respect ownership rights;
• Within reasonable bounds, I diversify investments in various sectors, e.g., major and mid-tier producers, and explorers in the mining industry;
• I have a greater tolerance for price variation in junior companies than in more mature companies; and,
• I try to minimize business risks by investing in entities with sound management, robust financials, clear corporate strategies, and competitive advantages.