The
Voyage
1.
The Financial Log Book
Steady
progress and some spectacular gains with some holdings. There is
some “survivorship bias” in the portfolio in that some losing
positions were sold or profits taken on a few winning investments.
At some point, I will take a long look-back in time and prepare a
table showing all acquisitions and sales since the Financial Log Book
was started in June 2007.
2.
View From the Masthead
Solar energy – the search is
renewed but I will take my time. I have yet to find a compelling
investment in solar cell technology and am looking elsewhere in the
“system” for less risky enterprises.
Thoughts on selling winners –
when is it time for a winning horse to be put out to pasture?
3.
View From the Gun Port
No targets in view for this
quarter.
Brief remarks on investing in
micro caps.
4.
Recommended Reading for the Moorings
Academics at Play – the worst
and the best
The Single Best Thing you can do
for your health – Can you spare 20 minutes per day?
5.
In the Wake
This
year's spring cycle tour – a jaunt through the Province of Quebec
and Vermont
1.
The Financial Log Book
| Entity | Initial Price/ Purchase Date | Price 2014-04-03 |
Gain/Loss
since Jan 1/14 % |
Gain/Loss Since Purchase % |
|---|---|---|---|---|
Central
Fund of Canada (CEF.A)
|
9.77
2007-09-04
|
15.07
|
7.4
|
54.3
|
Silver
Wheaton
(SLW)
|
12.37
2007-09-04
|
23.55
|
10.2
|
90.4
|
| Polaris Minerals (PLS)** |
10.70
2007-06-01
|
2.78
|
54.4
|
-74.2
|
| Cenovus (CVE) |
32.39
2010-07-27
|
31.66
|
5
|
-2.3
|
| Canadian National Railway (CN) * |
48.88
2009-04-14
|
64.94
|
7.7
|
169.1
|
| North West Company (NWF) |
16.23
2009-05-07
|
24.83
|
-1.3
|
53
|
| Waterfurnace Renewable Energy (WFI) |
28.62
2010-04-12
|
22.96
|
-3.2
|
-19.8
|
| Oceaneering International
(OII-N) |
52.95
2012-12-13
|
70.75
|
-10
|
33.6
|
| Deere & Company (DE) |
88.07
2013-01-0
|
89.98
|
-0.4
|
2.2
|
| Rocky Mountain Dealerships (RME) |
11.89
2013-01-03
|
10.95
|
-13.6
|
-7.9
|
| HollyFrontier (HFC) |
47.95
2013-01-28
|
48.62
|
-0.6
|
1.4
|
| Titan Logix (TLA) |
1.25
2013-09-11
|
1.27
|
0
|
1.6
|
| Kelso Technologies Inc. (KLS) |
2.20
2013-09-11
|
6.83
|
118.2
|
210.4
|
| U.S. Silica Holdings (SLCA) |
25.15
2013-09-11
|
49.09
|
44.9
|
95.2
|
| Oak Tree Capital Group (OAK) |
56.45
2013-10-28
|
50
|
-11.8
|
-11.4
|
| High North Resources (HN) |
0.62
2014-03-06
|
0.59
|
-4.8
|
-4.8
|
| Fairfax Financial Holdings (FFH) |
477.98
2014-3-25
|
506.65
|
6
|
6
|
*CN
split 2 for 1 on 2013.12.02
**
does not reflect impact of follow-on investment @ $.67 per share
Precious
Metals
Investor sentiment has soured in the precious metals market:
Investor sentiment has soured in the precious metals market:
- stock prices have cratered as companies are facing the consequences of an expansion mania where caution and prudence were expunged from corporate mindsets
- resource nationalism is rearing its head thereby adding new "burdens" to mine development
- ETF "investors" have been spooked and have withdrawn their money from gold and silver bullion funds
- precious metals miners have been caught in the slipstream of crashing base metals miners as the global economy has slowed demand (also coupled with an oversupply in certain instances)
As
a result, I am looking to establish new positions. I outlined the
basics of my strategy in an earlier posting. It is speculation,
pure and simple. My sense is that the timing is not yet right to
implement my strategy. (I am going to take profits with some of my
holdings in order to build a reserve for speculation in precious
metals.)
In
my view, the drivers of a potential rise in the precious metals
market will be: fear generated by economic uncertainty, a desire on
the part of many individuals to secure their wealth (especially in
countries where the rule of law is suspect or where banking systems
cannot be trusted) and, the "bandwagon effect" i.e. when
prices rise over a period of several months, the investing public
will be inclined to "invest" in precious metals in order
not to "lose out" on potential profits.
Note:
the difference between “investing” and “speculating” is not
clear as the following article suggests:
http://blogs.cfainstitute.org/insideinvesting/2013/03/05/speculation-and-investment-communicating-the-differences-in-style/
Over
the years, I have refined my approach to speculation. Here are a
few elements:
Preparation and
implementation take place at several scales (I have omitted the time
scale for reasons of simplicity as the relationships of spatial and
temporal scales are complex .... I am still thinking a lot about
hierarchy theory in this regard.):
- Broad Scale (global/national)
- I monitor geopolitical/economic trends in the general press and the perspectives provided by think tanks which “look under the hood” for causal relationships.
- I look for potential manifestations of the trends in investment activity (money flows, sector activity, general market conditions i.e. I try to identify sectors which may either be significantly impacted for bad or good (basis for long/short strategies)
- Company Level
- In the early stages of a mania, the market may be characterized by public refinancing efforts on the part of established companies, some “dormant” companies may resurrect themselves and as public interest increases, new companies may present themselves via IPO's
- Within targeted sectors, I look for companies which have the potential to benefit disproportionately from the trends: a “better” story, a robust investor relations program (“shriller shills”), a high profile in the media, some positive developments in the business as “proof” of the company's future prospects, the trend of stock prices (note: speculation targets can involve fraudulent companies in addition to those which are bone fide enterprises with excellent management, good financials etc. ... in the best of all worlds, I try to hitch my wagon to the “best of breed” as they tend to have “the best good stories”
- I look for early indications of “rising stars” by reading trade publications and regional newspapers which serve geographic areas where trends are expressing themselves in the community. At times, I'll also visit on-line discussion groups as these are used often by shills to promote companies.
In general, I try
to get a sense of the sentiment of the market and the “market
action” as described so well by Jesse Livermore, perhaps one of
the greatest speculators in North America. If you ever wish to
speculate, you should visit this site as a first step.
http://www.jesse-livermore.com/
When it comes to
placing my bets, I have learned to take the following approach, to:
- speculate only with money I am prepared to lose (the caveat it that it is not worth speculating with nickels and dimes as the absolute returns do not warrant the expenditure of effort)
- use no leverage
- go “long” only as opposed to “shorting”
- speculate only for the short term (weeks or 6 months at most)
- take profits once gains get north of 50 percent
- cut losses once they get south of 20 percent
The first three
points are iron clad – no exceptions. The last three are
guidelines only ... it all depends on my subjective “feel” for
the action. However, once gains exceed 50 percent, I tend to become
quite conservative. It all depends on one's personal outlook and
approach to dealing with uncertainty.
The “ideal”
conditions for speculation are not common and I will wait for years
for them to be expressed. It takes a lot of concentrated effort and
constant monitoring – something which is not always possible when
life's other interests take priority. Returns are, by no means,
guaranteed. Often, the returns are not great. For these reasons,
speculation now occupies much less of my time than previously.
However ... old habits die slowly, particularly if they have
produced positive results. When/if I indulge in speculation with
precious metals, I will write about it in The Financial Passage
Maker.
Agriculture
Rocky
Mountain has had a rough patch due the overhang of a very bountiful
grain harvest in western Canada and the inability of the
transportation system to move product to the market.
http://www.theglobeandmail.com/report-on-business/bmo-gives-grain-farmers-a-break/article18467965/
As
a result, some farmers are somewhat cash starved and reluctant to
invest in new machinery. This is reflected in the price lower price
for RME and higher prices for used farm machinery.
http://www.producer.com/daily/canadian-farmers-stuck-with-last-harvest-scramble-to-plant-next-crop/
In
my view, long-term investors should not be discouraged by such
developments: year-to-year fluctuations in yields and farm incomes
are normal, but the long-term fundamentals of investing in
agriculture are very sound.
The
economic boom on the prairies has created a shortage of mechanics
for farm equipment dealerships. This is unlikely to be a transient
condition.
http://www.producer.com/2013/06/mechanic-shortage-affects-dealers/.
Oil
and Gas
I
expected some volatility with High North Resources. It is a
speculative investment. However, it has a good strategic location
in light of successful operations on the part of companies operating
adjacent leases. Further, it would appear that the payback on $2
million wells is in the vicinity of one year, suggesting that the
company has the potential to bootstrap its expansion through organic
growth.
I
would recommend the readers consult the following article. While it
is unabashedly positive, readers should note that operational
difficulties can have a disproportionate impact on fledgling
companies and therein lies the risk of investing in such entities.
Nevertheless, the rewards can be great, especially in the event of a
take-over (which I fully expect will happen with HN, given the past
record of its president.)
http://www.accesswire.com/415213/Moving-the-Starting-Blocks-Up-High-North-Resources-Enviable-2014-Position
A
tremendous amount has been invested in the Canadian tar sands in the
belief that:
- the costs and technical risks of development would be justified given the size of the reserves and the pending arrival of “peak oil” with its lofty prices
- customers (i.e. the United States) would provide a ready market for Canadian oil given Canada's stable geopolitical environment and America's inclination not to be held hostage to oil from the Middle East and Venezuela
Things change:
- new extraction technology (fracking) has resulted in a revolutionary change in the oil and gas supply situation in the U.S.
- the U.S. is using energy more efficiently than before e.g. standards for automotive transportation are more stringent, manufacturing has shifted to less energy intensive modes etc.
- the cost of solar cells has dropped significantly and continues to do so – this coupled with more efficient cells has the potential to offer viable alternatives to oil and gas fuelled electricity generation, especially when the costs of transmission are considered
These developments
have affected the political calculus as parties adjust to these
circumstances. The following article provides a neat summary of how
the Harper Government has reacted.
To my mind, the
Canadian government has to focus on the “long game”. No longer
is there any need for the U.S. to be held hostage to Canadian oil to
the degree that some in Alberta would prefer. There will always be
a significant demand for Canadian oil and gas ... but on different
terms than many in Alberta (and Ottawa) would like. Canada has to
recognize that America may now have decades to decide whether or not
to countenance major new north/south pipelines. This is a source of
comfort to Washington ... but not to Ottawa ... and therein lies the
rub for Harper et al: the “roaring mouse” is not about to
stampede the great elephant south of the border.
In the meantime, I
will maintain investments in the tar sands (Cenovus), fracking in
the U.S. (U.S. Silica) and refining (Holly Frontier). To my mind,
it will literally pay to heed long-term trends and not pay much
attention to short-term noise such as Harper's frustration over
pipelines of all types: Keystone and various proposals to move oil
over the Rocky Mountains, an area where the Constitution and First
Nations may pose insurmountable barriers to plans to supply
non-North American markets with Canadian oil.
As to why Canadian
producers are interested in penetrating off-shore markets, read
this:
http://www.telegraph.co.uk/finance/newsbysector/energy/10839701/China-steps-up-speed-of-oil-stockpiling-as-tensions-mount-in-Asia.html
In an earlier
edition of The Financial Passage Maker, I noted that China is
investing heavily in its navy in order to project its power outward
for a variety of reasons:
- to protect sea lanes which are vital to trade and access to resources such as oil
- to bolster its territorial ambitions and enhance its claims to seabed resources such as natural gas and oil.
This poses a real
dilemma for India, a country which has to make some hard choices as
it competes with China for natural resources. So far, China has the
upper hand.
http://thediplomat.com/2014/05/the-developing-india-china-maritime-dynamic/
And what of Russia?
http://thediplomat.com/2014/05/russias-elusive-quest-for-influence-in-asia/
Is it any wonder
why China is promoting pipelines? For the foreseeable future, China
will be unable to compete with the United States and its powerful
naval forces, hence its penchant for securing land-based
transportation to meet its energy needs.
Rail
Transport of Oil
The performance of
Kelso Technologies has been spectacular and I expect that it will
continue to make significant gains, especially as it ramps up
production in its new plant and adds new products to its catalogue.
Government regulators have reacted to a series of well-reported
tanker car derailments and a major change in tanker rolling stock is
now underway.
Readers should
check out the company's robust financials and its performance in
recent years.
However, the good
times will not roll on forever. I am very mindful that this is a
cyclical industry and will not hesitate to move on to other sectors.
(I have yet to work out the exit strategy.)
Kelso “graduated”
from the TSX Venture Exchange to the Toronto Stock Exchange on May
22, 2014. It will be traded under the same symbol KLS.
Polaris
Minerals
My faith in the
fundamentals of this company have been reaffirmed: its reserves of
high quality aggregate and a coastal location which allows it to
ship its products to a variety of markets along the west coast. The
major challenge for the company is increased access to
unloading/transhipping facilities in key market areas. I sometimes
wonder if the company may be subject to a take-over proposal;
however, if any consideration of this nature would have to consider
arrangements with First Nations – something which Polaris appears
to have developed quite successfully for the benefit of all
partners.
2.
View From the Masthead
Solar Energy
The
following article by Ambrose Pritchard stimulated me to look once
again at solar energy.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10755598/Global-solar-dominance-in-sight-as-science-trumps-fossil-fuels.html
In
one of his rare optimistic moods, he makes several points:
- the growing proportion of solar to new electricity generation capacity each year in the U.S. (and probably elsewhere)
- the role of the U.S. military (and other militaries) in supporting cutting edge research to make solar generation/storage more practical
- the eye-popping reductions in cost for solar panels
- very significant increases in the efficiency of solar panels in converting solar energy into electricity
On
the plus side, I would add the following positive points re the
future of solar power:
- in developed countries, there is a robust infrastructure in place to deliver electricity to consumers, although it has to be tweaked to account for periodicity in solar supply
- the “global power system” is increasingly “going electrical”, meaning that solar power is “going with the trend”
- popular opinion is inclined to support more solar power (and it doesn't have equivalent negatives associated with wind power)
- solar power installations do not have the same geographic limitations as wind and other “clean” energy sources such as water, tidal, and large-scale geothermal technologies (biomass is a notable exception)
This
said, there are some practicalities which have to be addressed and
it is here that I am focussing my search for new investments. Here
are a few:
- energy storage: cheaper, more efficient batteries are needed
- “energy integration”: the “blending” of periodic solar power with existing power sources (includes fields such as power management, physical infrastructure for distribution, “soft” topics such as customer education and billing regimes etc.)
- issues of scale: “best fits” of the technology or “systems” which are most cost effective and socially acceptable at various scales, ranging from individual sites (buildings) to large generating stations serving larger consumers and/or a network of more widely distributed customers
- construction and maintenance
- financing
While
I am still refining my “search criteria”, here are a few
waypoints that I have laid down to plan my voyage:
- I'll tend to stay away from the “next best thing” in new technologies. Why? Because new high tech ventures are highly risky and, for a variety of reasons, generally take a loooong time to yield fruit
- I'll search for “systems” which are in the early stages of securing a customer base i.e. companies such as Waterfurnace which are well-positioned for a catalyst to propel them to the next level.
- I'll focus on distribution, especially on companies which have a competitive advantage.
- Maintenance systems will also be another area of investigation, especially as income streams are reliable. This includes services and hardware for monitoring.
At
present, I'm building a systems model to assist me with my thinking.
Once I have worked out some promising themes, I'll pursue them in a
leisurely way, much as I did for for the theme of “rail tanker
safety” two years ago.
One
last thought. Much has been written about the potential of CNG for
transportation. The costs of infrastructure for fuelling stations
are prohibitive and the technology is still in the early stages of
development. Read this to learn more:
http://business.financialpost.com/2014/04/09/ride-to-lower-costs-for-lng-run-trucks-rockier-than-expected/?__lsa=11b5-cfe2
Thoughts
on Selling Winners
I
have learned to “ride my winners”. It is a fact that 20 percent
of holdings generally account for 80 percent of portfolio gains over
time. Selling winners “prematurely” is a sure-fire recipe for
not realizing this potential. Here is an interesting article, 5
things to do before selling a winning stock
http://business.financialpost.com/2014/05/09/winning-stock-investing/
I
would add the following considerations:
- has management demonstrated its ability to manage the changed fortunes of the company? (sometimes, company management is not able to cope with expansion)
- is there some “catalyst” which could significantly change the company's future prospects? e.g. patent infringement, unanticipated product defect etc. I watch for things like these like a hawk, recognizing that unfounded “scares” often cause stock prices to tank, only to rebound weeks/months later on when the market recovers its confidence in the company
- is the business sound and profitable? (e.g. success attracts competition; is the market for the company's products/services still growing?)
An
admission: I am not always consistent with my penchant for “riding
my winners”. A case in point: a few years ago, I bought Questor
Technology Inc. (QST) with the thought that the company was well
positioned to profit from more stringent regulations on air
pollution. Share prices have risen significantly from the original
$.40 purchase price. I sold off more than half of my position when
the stock reached $1.58 with the simple rationale that I would take
some profits. I was also affected by a groundswell of angst in the
financial press about the future of the stock market. In other
words, I was swayed by emotion and not by facts. Since then, QST
has risen to $3.60. I continue to hold my position and I follow the
company with considerable interest. http://www.questortech.com
“Riding
winners” is not to be conflated with “greed” - the notion of
holding on for more gains in the absence of the “facts”. While
there is a role for speculation at times (i.e. I have written
previously about speculative ventures in precious metals and rare
earth minerals), I rarely indulge in such activity – only when I
see the early stages of a potential contagious mania.
I
remind myself that a more reliable approach is to adopt a mindset of
investing in a business and all that entails.
3.
View from the Gun Port
I
have made investments in a few very small companies recently.
However, I will not mention them in The Financial Passage Maker
as I do not want to be perceived as influencing stock prices to my
benefit. One of the companies has a market cap of approximately $25
million and pays a solid dividend.
The
company is typical of a certain “class” of listed businesses
which share one or more of the following characteristics:
- a well-established business with reasonably predictable costs/earnings
- business is very simple to understand
- flies “under the radar” and may not even have a company web site
- market cap less than $50 million
- shares are closely held by management (generally a family and its sycophants)
- shares have very low daily trading volume
- dividends are quite high (yield above 7 percent) as the owners “pay themselves” as opposed to using capital to expand the business
I buy companies
like these to secure dividend income. Sometimes, as the owners'
circumstances change, such companies are the targets of take-over
offers, often at a slight premium.
There are a few
websites/blogs which focus on beasts of this nature. Here is one of
them:
How else can you
find these tiny companies? You can use stock screeners and select
them on the basis of market capitalization. You can also check out
“related companies” on sites such as Google Finance when you get
a quote on a specific company. Out of curiosity, I often do this
and get taken down unanticipated avenues of investigation.
- Readings
for the Moorings
Academics Having Fun
The following essay is hilarious and I recommend it highly, especially if you have had a bad day and need a laugh. http://www.wilsonquarterly.com/essays/history-past-life-reeked-joy
Here are a few excerpts ... note that there is more than a grain of truth in what is written:
Theologically, Luthar was into reorientation mutation.
Orthodox priests became government antennae.
The French revolution was accomplished before it happened.
Many (most?) academics take themselves too seriously. For example, have many twerps have you had to suffer during your university studies?
Once, in my first year of university, some wonks decided that it would be a good idea to expose all “unwashed” first year students to a course entitled “Modes of Reasoning” ... probably in the mistaken belief that the course would be useful in arranging the neurons of students such that, one day, they might approximate the functionality of the professoriate.
The course was ghastly. The course was delivered in a huge lecture hall and since it was decided that all students would take the course at the same time, the lecture was piped into two other lecture halls. The lecturer was ill-prepared and not attuned to the audience. His “superior” attitude didn't cut it with kids (many of them took to inhaling some weed to endure the lectures). The content, as presented, was totally irrelevant and totally boring. The lecturer didn't share that view, contending at one point, that he was casting pearls before swine!
Things progressed to the point were there was a revolt and people walked out after a confrontation. The course was not offered in subsequent years and I imagine that most kids passed even if they did not attend more than three of the lectures .... I should know ... I was one of that group ... ahh, the joys of piggy-backing on the Bell curve.
However, university life can be wonderful. Many academics (usually the best of 'em) have a wonderful sense of play. Nowhere is this better illustrated than in Improbable Research. http://www.improbable.com
Among other things, Improbable Research hosts the Ig Nobel Prizes. Here are a few of my favourites:
Ig Nobel Prize Winner Dr. Elena Bodnar demonstrates her invention (a brassiere that can quickly convert into a pair of protective face masks) assisted by Nobel laureates Wolfgang Ketterle (left), Orhan Pamuk, and Paul Krugman (right). Photo credit: Alexey Eliseev, 2009 Ig Nobel Ceremony
I never used to worry about getting a colonoscopy ... but now I'm terrified ... no onion soup or bean burritos for me the day before:
2012 MEDICINE PRIZE: Emmanuel Ben-Soussan and Michel Antonietti [FRANCE] for advising doctors who perform colonoscopies how to minimize the chance that their patients will explode.
The Best Investment of ALL - The Single Best Thing you can do for your Health
Very often, there are simple answers to the most complex questions. Here is a great example.
I would urge all readers to view this 9 minute video. Simple answer short: exercise for 20 to 30 minutes per day. To my mind, it is the SINGLE BEST INVESTMENT you can make. https://www.youtube.com/watch?v=aUaInS6HIGo
- In
The Wake
The Belle Province maintains a wonderful network of bicycle routes: http://www.routeverte.com/rv/home. As a result, the Quebec is enjoying a growing reputation as a great place to cycle.
In the next edition of The Financial Passage Maker, I will report back on the trip.
Next year, we're considering the ultimate in cycling trips: starting somewhere in mid-America and cycling with the wind for several weeks. The big question: what to do when the wind is calm ... drink beer, perhaps?
Purpose
of the Newsletter
The
Financial Passage Maker provides ideas for people interested in
building wealth. It is aimed at thinking people who have decided to
take on personal responsibility for their financial well-being.
The
newsletter is issued more or less quarterly, a reflection of the fact
that good investment ideas are not all that plentiful ... certainly
not sufficient to justify a monthly or bi-weekly report. All ideas
presented in this newsletter are ones that I have invested in
personally. I am not interested in filling space with observations
on stocks I do not own. I eat my own cooking.
The
Financial Passage Maker chronicles the messy process of building
a financial portfolio. I hope that it will provide some useful
insights and enable readers to think critically for themselves. As
in all things, however, the path to financial well-being takes
consistent effort coupled with humility and a knowledge of self.
This can only be developed through practice over many years. My
personal voyage to financial well-being has had unanticipated
benefits that are worth far more than my balance sheets: new found
friends, new perspectives on the world, and a greater knowledge of
self. Further, I am now more able to help others.
The
Financial Passage Maker chronicles my voyage in the investment
world. In no way do I recommend that you base your personal
investment decisions on the contents of the newsletter unless you are
prepared either to consult a financial adviser qualified in your area
of interest or undertake due diligence on the basis of your own
research - or both. Remember, in the final analysis, you are
responsible for your own financial well-being. Would you have it any
other way?
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