CHR Medical Corporation (CRH) - New Addition to the Financial Log Book

In recent months, I have investigated potential investments in the health care industry. The investigation has been conducted along two lines of inquiry:

1. Prevalence of Diseases and Other Conditions Requiring Medical Intervention
2. Screening for Companies with Attractive Investment Metrics

I will report on my findings from time to time.  CRH is one of the companies that attracted my interest.  

First ... a story.  When I worked in government, we had a long relationship with an organized interest group which was comprised of small business owners, many of whom were in it for the life style.  Most were undercapitalized and dependent on contractual relationships with government for their land base.  I liked working with these individuals: some were rogues, others were doing their best to get by, and all were not shy about expressing their opinions in direct and sometimes salty language.  

One of my first introductions to the organization was at an annual convention where our newly appointed department head made his first appearance on behalf of our organization.  The convention chair introduced Mr. X and proceeded with a rant about the misdeeds of government.  He then turned over the microphone.  Mr. X smiled, laughed a bit and then said, "I haven't been roasted like that since my stag."  Immediately, the tone of the meeting changed.  I filed that experience away for later use.  

A few years later, it was my turn to meet with a group of the same people.  The atmosphere was tense as the implementation of a few pending policy decisions would have an adverse impact on some of their businesses.  

I started with an observation.  "Do you know that 5 percent of the members of your organization have hemorrhoids? Immediately all eyes ran down the table to where I was sitting.  After a short pause, I went on: "I guess that means that the rest are perfect assholes." The risk paid off, and we went on to look at ways to mitigate the impacts ... and as it turned out, they worked worked in the end, although with a few bumps along the road. 

And so, to the subject of hemorrhoids and the medical community  ... by way of an introduction:
https://www.youtube.com/watch?v=W2gABYTmXos

CHR Medical Corporation (CRH)

The company is based on a technology known as the CRH O’Regan System.  Click on the following link for a brief overview of the system and its benefits.
http://physicians.crhsystem.com/crh-oregan-system/

Company Strategy

The Transformation

Here is the story of the company's transformation, an excerpt taken from an interview in 2013 with Edward Wright, the CEO of CHR Medical.

"The company, when I arrived, had a strategy to build clinics. We would hire doctors and staff and spend a substantial amount of money on marketing to drive patients to these clinics. Initially we had clinics in San Francisco, L.A., Las Vegas, Chicago and Atlanta.

"We were losing lots of money. It's expensive, we've got lots of costs. I very much had a mindset for retail and wholesale, and this is very much a retail model to me. All along I'm thinking, we've got an unbelievable device here, I would like to have more of a wholesale approach where we could put this in the hands of doctors who could use this with their patients.

"In moving forward with the direct-to-physician model, we identified gastroenterologists as suited for the CRH O'Regan system. Each year in the U.S., GIs perform the vast majority of about 15 million colonoscopies, with 15% to 20% of these resulting in a diagnosis of hemorrhoids.

"Our goal was to give GIs the education and support necessary to create a paradigm shift in the treatment of hemorrhoids – giving them the ability to provide a continuum of care to their patients. To date, we have trained nearly 1,500 physicians on the use of our technology, with more than 115,000 procedures annually.

"In December 2010, we shut down the last of the clinics and moved the business entirely to wholesale. If you fast-forward to today, our run rate is approaching $8 million. We sell the device for $65. The company is now selling about 120,000 units year, primarily into the GI community.

"The company was never profitable until the first quarter of 2011. The moment we exited from the clinic model, the company became profitable in that quarter and has remained profitable now for 12 consecutive quarters, having just reported on July 23 a net income for the second quarter of 2013 of $502,000 on revenue of $1,950,000.
https://www.biv.com/article/2013/8/how-i-did-it-edward-wright/

Further Adaptation

In recent years, the company has made further changes to its business mode.  In addition to offering its medical device, it has broadened its approach to include anesthesiology for doctors administering endoscopies and colonoscopies - to the point where earnings exceed revenue from sales of the company's original device.  Significantly, the company is expanding by acquiring interests in medical services providers in the U.S.  Here is the best synopsis of the business model:

Read the following commentary to get a better understanding of how the company has adapted to exploit some opportunities in the GI sector.  It is fascinating and a tribute to the acumen of company management.

The company created a paradigm shift in the GI sector with the CRH O’Regan System by giving gastroenterologists an opportunity to effectively treat hemorrhoids, which they often diagnose during colonoscopy procedures for colon cancer screening. That opened an untapped revenue stream for gastroenterologists.
http://biotuesdays.com/2015/10/27/crh-medical-to-consolidate-gi-anesthesia-market/

Future Prospects

The Business Environment

The medical services niche served by CRH is fragmented and there are more opportunities for expansion using the joint venture ownership structure and variants thereto.

I will leave it to readers to examine quarterly financial reports and assess the profitability of the company's business model.  In quickly growing companies, one should be prepared to accept variation in quarterly earnings and the fact that the market usually over-reacts to earnings "disappointments".  (I use dips of this nature as opportunities to add to my positions if all else appears to be unchanged.)

Some Catalysts

When investigating potential investments, I always look for catalysts which could increase the value of a company.  Here a few which are relevant to CRH:

• expansion of its services/technology to other countries e.g. in 2013 Wright mentioned that they were investigating the possibility of an entry into China
• listing of the stock on a major American exchange on September 15, 2015 and growing coverage by analysts will likely generate more interest in the company on the part of investors see:  OTC Markets Group and NYSE MKT:CRHM

A Few Concluding Thoughts

• I will monitor the company's return on investment (and other measures of profitability) very closely. Likely as not, future deals will be somewhat less profitable as "news gets around" in the GI medical community i.e. prospective service companies may request more favourable terms.  
• A company cannot grow forever at sustained rates.  I will monitor changes in strategic direction.  For example, how will the company approach future acquisitions?  Will it favour expansion outward from a regional core (as it seems to be doing) or will it expand to other countries?  
• Changes in the medical payment system have the potential to help/hinder future operations.  
• Will the company seek to expand the range of services it provides?  
• I will monitor the company's balance sheet very closely.  To date, it appears that management has been astute. However, when on a roll, management sometimes "relaxes" its discipline in the expectation that things will move forward as they have in the past.   

CHR Medical Corporation has been added to the Financial Log Book. 

Postscript

A few months after the meeting with XYZ group, I had a chance encounter with one of the members.  As it turned out efforts to resolve the issue were later frustrated by the intervention of an interest group, meaning that some businesses had to change locations ... a bureaucratic policy changed by political pressures. Mr. Y said, "I still have your card.  Do you know where I keep it?"  .... pause ... "in the centre of my dart board."  Win some ... lose some.  And he never could/would learn about what went on behind the scenes.  

When to Sell - The Thinking Process

The decision to sell is much harder than the decision to buy for a variety of reasons.  On the one hand, it can be a recognition of "failure" in the event that the selling price falls below the purchase price.  On the other, it forestalls the possibility of further gains if the selling price increases above the purchase price.

Most treatises on the matter start by listing reasons for selling. Many of the following reasons are inter-related:

• stock becomes "over valued"
• the onset of adverse changes in management and boards of directors
• company's failure to deliver on its business plan e.g. botched product launch, inability to secure financing etc. 
• company's ability to compete declines
• a take-over makes the assets less desirable
• a "major" event causes severe (and potentially irreparable damage) to a company's business e.g. major legal actions with major settlement costs
• undesirable external changes in the company's operating environment e.g. adverse socio-political developments
• need to rebalance a portfolio in the event that the price runs up significantly
• a better investment opportunity emerges
• need to meet margin calls
• need for cash for personal purposes
• tax loss at the year end

I suspect that most investors sell out of fear - fear that they will experience yet further losses if they hold on in an environment of general market pessimism.  The actions of the crowd are infectious.  

Thinking About Selling Should Start Before the Purchase

This is the key lesson I have learned.  I'll use an analogy.  A few years ago, I snowboarded on a large western mountain, my first time on anything with a vertical over 1000'.  It was a bit intimidating until I had a chat with an advanced skier at the head of a long run.  His practice was to visually scout out the slope beforehand: to look for changes in gradient, snow conditions, light etc - every thing which might affect his run.  He then charted a mental path down the slope, noting points where he would turn, reduce/increase speed and potential bailout points if things got difficult.  This done, he set out way points to guide him.  His other piece of advice was to ski only to the end of the line-of-sight path and to stop and lay out another line once another part of the slope came into view.  

I started to use this approach and found that life on the slopes became a lot easier and more enjoyable.  

It's much the same with investing, especially with respect to the decision to sell.  

• I state my investment thesis
• I establish some "way points" and monitor them closely 
• If the course of the company changes I start to investigate the validity of my investment thesis
• The investigation may cause me to sell or revise my thesis in light of further information e.g. a decline in the stock price may be the result of a transitory condition
• At yearly intervals (more or less) I review all of my investment theses - akin to surveying the next line of sight on the slope.  

It is very important also to define one's investment horizon.  For most of my investments, the horizon exceeds five years.  It is largely the result of the type of company I invest in - cyclical resource-based enterprises or others where businesses move more slowly e.g. the North West Company.  As a result, I am prepared to accept considerable variation in the price of a company's stock.  The current decline decline in the stocks of Deere and Rocky Mountain Dealerships is a case in point.  At some point, the agricultural cycle with recover along with the price of these stocks.  I see no reason to sell and try to time the market.  My original investment thesis has not changed. 

On the other hand, investments in other types of businesses involve shorter time horizons.  High tech enterprises are an example: the risk of technological obsolescence or loss of market share to competitors often creates volatile circumstances for investors.  In the case of precious metals, I have noted that prices are volatile.  I have decided to speculate but only with funds I am prepared to lose if everything goes south ... and never to use leverage.  In this instance, my waypoints differ from my other investments. 

The central point is to develop a "mental model".  It will differ for each investor in accordance with variables such as a person's tolerance for "risk" and "volatility", the sector, and the reasons for investing. It is more of an art than a science.  

Value Investing Sites

Just about every sailor I know has a desire to board other boats in the fleet.  Some do this just out of nosiness whereas other do it to learn how other crews have arranged things to meet their needs.  I do it for both reasons.  It's all part of life on the water.

This characteristic extends also to life in the financial community.  I have been amazed by how forthcoming some individuals can be in sharing their insights.  A few do it out of altruism.  Others do it out of a desire to participate in the chatter which makes life in the community so interesting.

On the other hand, the motives for some are somewhat more sinister. A few individuals join the chatter for self-promotion in an effort to gain more clients or otherwise profit from their activity.  Others make offerings solely to promote "investments" for their own personal gain and are nothing short of shills ... "you too can be a millionaire in no time".

As always, it pays to assess the motives and quality of a writer before embarking on a voyage in their boat.

Here is a useful compilation of some boats in the fleet.  I visit them primarily to learn how other skippers think - this as opposed to learning about the next best thing.

List of Value Investing Sites

While I've yet to step aboard all of them, I find myself making repeat visits to a few:

Oddball Stocks
The Brooklyn Investor
The Corner of Berkshire and Fairfax
Shadow Stock
Greenbakd

A few of the posts yield insights into the thought processes of investors.  Here is a very useful post in this respect:

My Investing Blueprint has ten steps.

Search Broadly and Continually for New Investment Ideas.
Act Like an Owner.
Only Buy Things You Understand.
Buy Good Businesses.
Invest in Companies with Great Management.
Buy the Cheapest Business Available.
Focus on Your Best Ideas.
Practice Patience.
Avoid Stupid Mistakes.
Be a Learning Machine.
http://gregspeicher.com/?page_id=117

This post has been made in the very early morning.  I got into the habit of working on things financial roughly between 2:00 and 4:00 AM when I first started out investing.  It was the only period during which I could think freely in an otherwise hectic professional career and an active family and social life.  The habit has persisted but in recent years, I have supplanted it to some extent by "creative dreaming".  More about that in a later post.

Junk Bonds - Resource Industry - Note Bene

Are we about to see history repeat itself? That’s been the question on everyone’s lips since the closure last week – or “shuttering”, to use the technical term – of the Third Avenue Focused Credit Fund, one of a number of funds set up to chase yield in a world of poor to non-existent rates of return. Two other smaller US funds have also since taken action to prevent investors removing their money...

Standard & Poor’s recently warned that an astonishing 50pc of US energy junk bonds are at risk of default, or $180bn in total. If we extrapolate this out to the $2 trillion of debt sold globally by energy and mining companies since 2010, the numbers begin to look strikingly similar to the sub-prime mortgage lending that front-ran the financial crisis. Of the $2 trillion of mortgage lending that became distressed, $800bn was sub-prime and $1.2 trillion Alt-A...

To close observers of credit markets, warning signs of a forthcoming high yield bust have been evident for a long time now.

All the old tricks have been present – companies funding special dividends to private equity owners by issuing debt, others issuing more debt just to pay for existing debt service payments, and commission-hungry investment bankers cynically selling the stuff to hapless investors while simultaneously shorting it themselves in anticipation of trouble to come. Many companies that don’t deserve to exist have found it easy to get finance in the one-time scramble for yield.
Is the next financial crisis nigh? Could closure of Third Avenue Fund finally explode the post-crisis asset bubble?

There will be blood.

Never has the need for pristine balance sheets in the oil patch been greater.  Ditto for many other resource sectors.  The casualty list will be long.  Here are some companies which are very close to the lee shore.

http://www.investorvillage.com/uploads/77263/files/OXFORD19CODEBTHITLIST.pdf

In the event that oil and gas prices remain depressed, many companies will be in a very precarious position once their hedges expire.  Much of the oil patch will likely go the way of the Spanish Armada ... but with the thankful result that there will be no oil slick.
Expect more North American oil, gas companies to default if price slump continues: Moody’s

My view is that gas and oil prices will rebound ... when and how much is anyone's guess.  This presents some great opportunities for those with courage and the long view.

Private equity is starting to circle the weakened companies.  I am now looking for listed companies with strong hands.

Fairfax India Holdings Corp. FIH.U

Fairfax India will be added to the Financial Log Book ... eventually.

Background

For several years, I have looked for investment opportunities in India.  In my view, it is one of the most dynamic countries in the world and will, over time, likely outperform China for a variety of reasons:

• the legacy of British institutions such as a formalized legal system which is endorsed by the populace and has the potential to be more functional (this as opposed to being re-invented);
• a democratic political system which has been nothing short of amazing in accommodating the diversity of demands from a very large and culturally diverse population;
• an educational system (some of the best universities in the world) and a respect for learning;
•  an outlook which is gradually giving more recognition to entrepreneurship;
• a more favourable population structure with many young cohorts as opposed to the socially engineered problems caused by China's one-child-per-family stricture; 
• my sense that the country has a greater range of flexibility in addressing problems and opportunities; and,
• my sense that India's institutions are adapting more organically to charting the country's way through domestic and international waters. 

Difficulty in Investing in India

For all of this, I have found it difficult to find a way to invest meaningfully and knowingly in India.  I don't have the skills and knowledge to invest directly in Indian equites.  I don't want to invest by way of mutual funds due to their outrageous fees and general lack of performance.  I would like to get better performance than investing by way of an India-based ETF.  There are a few Canadian-listed companies with substantial operations in India but I did not find them all that attractive.  The other option is American Depository Receipts (ADRs).  While the ADRs are tempting I have concluded that people who are involved directly in India's financial community are more able to uncover opportunities for growth. 

Fairfax India Holdings Corp. attracted my attention.

Fairfax India Holdings Corporation is an investment holding company publicly traded on the Toronto Stock Exchange whose investment objective is to achieve long-term capital appreciation, while preserving capital, by investing in public and private equity securities and debt instruments in India and Indian businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent on, India. Generally, Indian investments will be made with a view to acquiring control or significant influence positions.

Fairfax India takes a long-term value approach towards acquisitions and investments in the Indian region. We focus on long-term capital appreciation through a flexible and value-oriented approach, underpinned by our guiding principles, including integrity, transparency and responsiveness in all our dealings. Our permanent capital base enables us to execute a unique set of transactions; by taking a very long-term view, combined with the ability to execute highly flexible and creative deal structures.
http://www.fairfaxindia.ca/corporate/Company-Profile/default.aspx

 I decided not to buy when the IPO was first presented to the market, figuring that the price would settle down once the initial enthusiasm abated.  In my view, subsequent investor reaction has been affected by the state of the broader market and fears for the future.  Today (December 15/15) the share price dipped below the issue price of $10 US.

Some people may wait until most of FIH's funds are invested and put to work.  It may be akin to trying to time the market.  However, perhaps it does not make sense to try and time the market for an optimal entry point.  Bottom line: there's no "right" choice.  

Why I Invested

Prem Watsa is one of the most astute investment managers in Canada.  His track record is impeccable.  He is honest.  I have had a good experience with Fairfax Financial Holdings Limited (FFH), a member of the Financial Log Book.

He has recruited some of the best minds in the business.  He and his team are well equipped for the task.  They have:

• an educational outlook shaped top-notch skills acquired by attendance at India's and Canada's best educational institutions;
• years of investment experience in India and elsewhere; and,
• a cultural awareness that can only be achieved by living in India - no need for hired consultants and like. 

He and his team are well embedded in the Indian investment community and know how to navigate in those waters.  

He is a value investor with the long view and is not averse to sailing upwind when others head to port.  

All said and done, the investing premise comes down to:

• the quality of management
• the opportunity presented by India

Some Caveats

I made the investment with an awareness that there are some challenges for Watsa and his team:

• endemic corruption
• an impoverished infrastructure which barely can sustain the demands placed upon it - makes it more challenging to establish facilities-based new enterprises but also presents opportunities
• a mostly moribund civil service, rife with corruption and with a vested interest in maintaining a "red tape empire"
• the latent barriers of a caste society 
• an educational system which is highly uneven in its quality and accessibility
• competition for resources with countries in Asia and elsewhere and a reliance on energy from the Middle East 

The following references provide more detail:

2015 Index of Economic Freedom
Subcontinent stagnation: How India botched its economic miracle

World Bank - India

India is undergoing tremendous change.  From the time of its independence, when it had one of the lowest per capita incomes in the world, it has made tremendous economic strides.  It has been a bumpy ride.  I am prepared to take the long view and accept the volatility which accompanies economic transformations.  I fully expect that this will be reflected in the price history of FIH.U.  It will not be comfortable at times.  On the plus side, it appears that the new government is far more business friendly than its predecessor and is making efforts to improve the climate for business.  It will be a long slog as it will have to confront the inertia of powerful groups intent on maintaining the status quo e.g a bloated and inefficient civil service, corrupt politicians with a long-formed habit of demanding/accepting bribes and laundering the proceeds to avoid taxation, etc.

There is also the issue of management fees (see Investor Presentation below).  I am prepared to accept them, noting that different fees are applied to invested capital and resting capital (e.g. bonds).

Here are a few references for FIH.U

Investor Presentation for IPO - Note the characteristics of the fund which, in my view, are investor friendly.  

Corner of Berkshire and Fairfax - This is THE go-to source for commentary.  Many of the posts are thoughtful and knowledgeable - a nice change from many other investor forums

http://www.valueinvestorsclub.com/idea/FAIRFAX_INDIA_HLDGS_CORP/136280

http://www.business-standard.com/article/companies/india-calling-moment-for-prem-watsa-as-his-funds-get-aggressive-115081201522_1.html

https://en.wikipedia.org/wiki/Fairfax_Financial

http://www.fool.ca/2015/03/12/fairfaxs-prem-watsa-continues-to-bet-on-a-coming-crash/

Criteria for Speculating in Gold and Silver Mining Companies - Refined

In an earlier post I set out my criteria for speculating in precious metals mining companies: 

I have started to speculate. When placing my bets, I look at companies with the following characteristics:

• seasoned management with proven track records
• good balance sheets (reasonable amounts of cash on hand and minimal debt loads) and a demonstrated ability to secure financing
• production underway or to begin shortly
• low costs of production and profitable operations in the face of low metals prices
• mines in geopolitically stable jurisdictions and good relationships with local residents
• mines within established mining camps (benefits of infrastructure, established labour pool etc.)
• a “good story” which is understandable

I do not involve myself with major companies at this stage in the mining cycle as the upside is generally not as great as more junior members of the community when gold prices increase notably. I ignore exploration companies and other ventures which have yet to reach production status as the risks are too high. Many of them are finding it very difficult to obtain financing. Later on in the mining cycle, I may look at such beasts, but not now.

I regularly visit Mine Web.  It's a promotional vehicle for mining companies.  Nevertheless, it is very useful in taking the pulse of the industry.  Occasionally, there are some great nuggets.  In this case, 

Rob McEwen has some advice for mining executives From a man that practices what he preaches.

McEwan's investment criteria make sense.  Here are a few:

First, I listen to management’s pitch and if it sounds interesting; second, I ask about their share ownership and if I find they are talking a big story without having a large investment in their firm, then my interest starts to fade. But, third, I look at how the market is pricing the company. If its shares appear to be selling at a large discount my interest can return. I tend to take large positions in explorers and small producers that I feel have big upside potential.

The location of a resource is very important. There are definitely countries that are unattractive to me, especially where there is no rule of law, high crime rates and greedy governments. Experience has narrowed my focus to the Americas and perhaps Europe. I have no interest in putting my staff’s lives at risk. In addition, I wish to avoid exposure to regions where corrupt practices are commonplace and the potential for us to get ensnared inadvertently in the new foreign corrupt practice laws that have been enacted here at home.

The market has spoken loud and clear; investors don’t want to buy a producer that has sold a good part of its future revenue. The impact of streams and royalties has been particularly painful during this period of low metal prices, as these instruments have hammered operating margins. A number of mining CEOs say it’s the only reasonable source of financing they can secure now, but to my mind their actions appear to be a Faustian bargain. They are selling their shareowners’ future profit to the devil and he has come to collect it.

I had not paid sufficient attention to the preceding consideration.  I will now.  As always, it literally pays to read. 

I like to be a long-term investor rather than a trader. During the 19 years that I ran Goldcorp, I was comfortable to hold my shares for the long term despite the ups and downs in the market. Perhaps because I was a large shareholder and the CEO that I believed that management and I could and would build greater share value over time. Another reason for my long-term view is market driven—shareowners don’t like to see management selling.

As to the general state of the market:

When you observe an inordinate number of new issues or secondary issues coming out in a short period of time and the media is full of stories of ever higher prices, that is usually a good indication that you’re nearing a top.

The bottom is usually close when there is tiny trading volume, no one is doing any financings and the media is full of stories about ever lower prices. Today feels like we are very near the bottom.

.... and that's why I am so interesting in speculating at this time ... but with the proviso that I take measures to try and select the best horses for the race.  

And in reading the article, one might be led to explore the benefits of investing in streaming companies.  Silver Wheaton has been a stalwart in my portfolios - added a few months after the company was established. The field is getting more competitive these days as there are now more participants.  The goode olde days are over, but profits are still there to be made, especially as mining companies are hungry for cash and willing to take extraordinary measures to stay solvent. 

Gold - Some Thoughts about Reasons for Buying Gold - and Jesse Livermore - his approach may be applicable to many aspects of life

Here is a succinct compilations of the reasons for owning gold. It is well worth reading: Gold - The Big Picture

This essay rounds up arguments for looking at gold as a reasonable investment: 1) The dollar; 2) China; 3) declining production; 4) inflation; 5) deflation; 6) global short-term interest rates; 7) uncertainty and distrust in government; and 8) flight to safety.

Many dismiss gold and silver as relics of the past (not my wife).  If you look at the backgrounds of the sceptics, you will see a common pattern: they come from comfortable societies which have not recently experienced the ravages of war, rapacious governments, and the chaos of lawlessness.  A substantial segment of humanity has a different perspective and good reason to take measures to address insecurity of all types.  The flight to safety is the driving force for my investments in gold and its pursuit has been profitable.

The above-cite article is offered by Washington's Blog, a regularly updated commentary on American life.  I sometimes wander through the URL's on the side bar - informative ... and the authors are not shy about expressing their opinions.

So far, my speculation in gold has been profitable.  It's the usual story:

1. hanging on for greater gains when I should have been content in taking modest profits (at one point I was up 20 percent with Asanko but have seen the gain decline to about 5 percent ... I've decided to wait until the catalyst event of first production early next year) 
2. getting lucky (St Andrew Gold Fields was purchased by a neighbouring mining company and I recorded a 27 percent gain)
3. watching other bets move only slightly forward from the starting gate (no losses fortunately ... so far)

In speculating short-term, one always has to contend with a bevy of pushes and pulls:

• fear of loss, especially when declines are short and sharp
• greed: holding in the hope for greater gains
• thoughts that other "safer" types of investments hold the prospect of greater gains over the long term with less risk.

I've learned to deal with the fear of loss by betting funds that I am prepared to lose in the event that I am wrong.  With this mental outlook I can withstand dips with equanimity.  I often establish notional selling points but test them against the investment thesis which led to the purchase in the first place.  Sometimes, it's a matter of getting the timing right ... and this is largely a matter of chance as in the case of St Andrew Gold Fields. 

I've learned to deal with the "greed" factor by setting an exit price with the rationale that the cumulative impact of small gains can be appreciable even within the space of a year.  I will cast this caution aside if I sense a powerful upward trend in pricing.  I was lucky to catch this when gold and silver soared to great heights many years ago.  

I never fret about thoughts of reallocating my speculative funds to other types of investments.  Losses will not compromise the bulk of my portfolios and sometimes, the gains can be impressive indeed - that's the nature of speculation.  

Every two years, I settle back for a few days with  Reminiscences of a Stock Operator.

First published in 1923, Reminiscences is a fictionalized account of the life of the securities trader Jesse Livermore. Despite the book's age, it continues to offer insights into the art of trading and speculation. In Jack Schwagers Market Wizards, Reminiscences was quoted as a major source of stock trading learning material for experienced and new traders by many of the traders who Schwager interviewed.

It is one of the five best books I have ever read on things financial. When reading it recently, the thought occurred to me that Livermore's approach might have potential for other facets of life. I am reading it currently and will look at its application for life on the golf course .... "will I go for it and take a risk or lay up and play safe?"  And I still cannot spel "reminis ... never my strong point. 

Arotech - Some Thoughts to Consider When Assessing a Potential Investment

I have a small position in Arotech http://www.arotech.com

It is was a speculative bet.  At the time of purchase my view was that the company had some assets of value; however, they were compromised by management. The share price declined, but I held on in the hope that the company would eventually see sunshine.

It appears that a deep-pocketed investor is proposing to shake things up.

Ephraim Fields of Echo Lake Capital today sent a letter announcing his intention to nominate an alternate slate of directors to the Board of Arotech Corporation ("ARTX" or the "Company") (NasdaqGM: ARTX). Mr. Fields is ARTX's largest single shareholder, owning 8.1% of the Company's shares (which includes shares underlying sold-short put options exercisable within 60 days hereof). The alternate slate seeks to replace three directors, including the current Executive Chairman and President/CEO. Mr. Fields believes that after years of shareholder value being destroyed, while insiders have personally benefitted from excessive compensation packages and questionable related party transactions, that changes at the Company are urgently needed.

The full text of the letter can be found here: http://www.baystreet.ca/viewarticle.aspx?id=434551

Field's letter is instructive.  How often have you considered some of the issues raised in his letter during your assessment of a potential investment?

It will be interesting to follow the course of this challenge.

As always, it is useful to conduct a Google search for the names of executives and other details about any company on one's list of prospective buys.

http://www1.salary.com/Steven-Esses-Salary-Bonus-Stock-Options-for-AROTECH-CORP.html - ouch ... and about that bonus

Dunkin Donuts - Esses' performance in Israel

http://finance.sun-sentinel.com/who-are-robert-s-ehrlichs-connections/artx/executive/robert-s-ehrlich/robert-s-ehrlich.htm

http://classactiondefense.jmbm.com/2009/04/pslra_class_action_defense_cas_22.html

I've experienced a turnaround previously when outsiders took control and shook up complacent management.  I made a profit.

For more information on active investing, you can access the following URL and daisy chain therefrom:
http://activistinvesting.blogspot.ca/search?updated-min=2015-01-01T00:00:00-05:00&updated-max=2016-01-01T00:00:00-05:00&max-results=37

This is also interesting:
Shareholder Activism on the Rise: How to Benefit
...When values are high, those that remain usually have some obstacle to their realization, typically management.

Reading - Sometimes the Path to New Investments is Non-Linear

I was prompted to pen this article while browsing The Investor's Field Guide  http://investorfieldguide.com/

Patrick O’Shaughnessy, author of Millenial Money: How Young Investors Can Build A Fortune, reports regularly on his reading.  It is eclectic.  He describes the site as follows:

If you are interested in beating the market—but understand that doing so will always be very difficult—then you have come to the right place. This site in an ongoing investigation into stocks, markets, investing strategies, and ways of thinking.

Almost all of my best ideas have emerged as a result of parallel thinking aided by another process that is described in the next paragraph.

While at university, I used to work part-time in the library.  My job was to return books to the stacks.  Often, my productivity would slow to a snail's pace as I would be sidetracked by scanning titles adjacent to newly returned books.  It was amazing what one could find on adjacent shelves – how seemingly unrelated books could open new insights.

I took this experience to heart and almost never used a library catalogue when conducting research for essays and the like – except for establishing some waypoints to start my voyage.  With a few references in hand, I would head to the stacks and then search outward from those references. Looking for nothing specific opened my mind to seeing new possibilities.

I use a similar approach while looking for investments.  One link leads to another and another and so on.

I often start my search by reading regional newspapers and trade journals.  Sometimes reading unearths the glint of an idea. Sometimes my pursuit of the idea leads to a dead end.  At other times, I strike gold.

The “discovery” of Questor Technologies is a case in point.  I started reading about oil companies and, somehow, came across Alberta Venture http://albertaventure.com/ .  I eventually found the Alberta Fast Growth 50 on the site and started exploring the list.  It yielded Questor and Rocky Mountain Equipment.  I checked it recently and have decided to explore some potential investments.

The list will function only as a starting point.  Where it might lead will be the function of my acuity and persistence and, above all, chance.  And if I don't find a mother load, I will have gained experience and insights which might, just might, build the capacity to recognize the potential of new forks in the road.  It's all great fun.

It literally pays to read.  I get very few ideas in the financial press: it's the stuff of investor relations flacks and columnists desperate to get stuff to meet their deadlines ... and dare I suggest it, editors' awareness of the need for revenues.  It's always best to chart one's own voyage.

Oh, and I bought a copy of Millenial Money as a Christmas present for my son.

Sea Lanes and Maritime Security, Globalization, and A Great Source of Information About Think Tanks

I often read about military strategy.  I find it fascinating as war is one of the most complex and demanding dimensions of human activity.  Further, it attracts some of the best minds and for that reason alone, it's well worth reading their writing.

In an earlier edition, I wrote about The_Influence_of_Sea_Power_upon_History 1660 - 1783 by Alfred_Thayer_Mahan.  Published in 1890, it has had a profound influence on strategic thinking throughout the world. After reading this book, I understood why China and India are going to great lengths to strengthen their navies and are now projecting their power beyond the littoral.  The strategic imperatives for national security are basically the same then as now.

I highly recommend this book.  It is beautifully written, exemplifies scholarship at its best, and most important, is extremely relevant. Simply put, it is one of the best treatises on military strategy ever written.

My reason for returning to the topic of sea power is related to the strategic importance of sea lanes for the movement of oil and global trade in general.  It is tempting to be side-tracked by advances in technology which some people contend are game changers e.g. http://thediplomat.com/2015/12/new-wrinkles-in-maritime-warfare/.

Technological advances, while titillating, confer temporary advantages for short periods of time.  However, history has constantly shown that higher order currents dictate the outcome of military engagement, namely: overarching political/military strategy and enabling factors such as cultural institutions and outlook, economic infrastructure in its broadest sense, and so on.

Forecasts about future energy prices have changed markedly from previous years where higher prices were the menu du jour.  Two main drivers were usually cited: increased demand for fossil fuels; and, higher extraction costs now that the days of "easy oil" are winding down.

The outlook is now different.  Lower prices are now the mantra: supply now outstrips demand, especially as Saudi Arabia seems intent on gaining market share at the expense of its competitors; and, demand appears to be declining as a result of a slowdown in the global economy and the prospect that agreements to limit greenhouse gases will finally take effect.

Is it different this time?  Having been through price declines previously, I have observed that the "end of oil" scenarios generally prevail when oil prices are depressed.  As always, it pays to take the long view.  Any significant change in consumption and production above/below the "norm" will take far more time than many writers are prepared to anticipate.  As always, one should heed the "agenda" hidden behind various scenarios of future supply and demand.

We've been there before.  Check out this link and cast your mind back to prognostications at various times about future oil prices. This link is well worth exploring in depth.
http://www.eia.gov/finance/markets/balance.cfm

Just about every forecast gives short shrift to geopolitical risk.  And for a good reason: it is very difficult to predict the time, form and impact of potential disruptions to the flow of oil.  The following link provides an overview of sea routes, choke points and the disposition of military resources to protect those routes.
http://ckrhmt2008.weebly.com/transportation-routes.html

In my reading, I was especially impressed by the depth of a paper entitled, The Influence of Sea Power in the 21st Century.  It provides an excellent synopsis of the assumptions behind American military strategy and a "view" on maritime strategy.  No wonder that so many nations are now making significant efforts to build their navies.  The paper provides an excellent basis for exploring aspects of naval strategy at greater length.
http://web.mit.edu/ssp/publications/working_papers/wp_00-4.pdf

You can visit websites which give the views of military strategists from all of the major military powers.  They are very forthcoming.

In assessing potential investments, particularly in the area of commodities which are dependent on maritime transportation, I make it a point to study geopolitics and geography.  This has been especially relevant during my research in agriculture.  The following section provides a few of the better sources of information - this in addition to the usual bevy of national departments of agriculture and the like.

Some Go-To Sources for a Better Understanding of International Relations

Many organizations offer portals into the thinking of actors on the international stage.  Here are some of the ones I visit with during my reading hours.

International Security

It is published by the MIT Press for the Belfer Center for Science and International Affairs, Harvard University.

International Security publishes lucid, well-documented essays on the full range of contemporary security issues. Its articles address traditional topics such as war and peace, as well as more recent dimensions of security, including the growing importance of environmental, demographic, and humanitarian issues, and the rise of global terrorist networks.
International Security has defined the debate on US national security policy and set the agenda for scholarship on international security affairs for more than thirty years. For many years, International Security has been consistently at or near the top of the Thomson Reuters Impact Factor rankings of all international relations journals. It also ranks #1 among journals of military studies according to Google Scholar. Readers of IS discover new developments in: 

• The causes and prevention of war 
• Ethnic conflict and peacekeeping
• Terrorism and homeland security 
• European, Asian, and regional security
• U.S. foreign policy
• Arms control and weapons proliferation
• International relations theory
• Diplomatic and military history

I recommend that you also visit the Belfer Center (see link above).

Chatham House is excellent and has been cited previously in an earlier edition.

Chatham House carries out independent and rigorous analysis of critical global, regional and country-specific challenges and opportunities. It consistently ranks highly in the University of Pennsylvania’s annual Global Go To Think Tank Index, where it has been assessed by its peers as the No. 1 think tank outside the US for seven consecutive years and No. 2 worldwide for the past four years.  

You can access some of the best think tanks by visiting:
http://gotothinktank.com/

This paper provides an excellent discussion of think tanks and rates them by country and subject.
Think Tanks & Civil Societies Program

It is a great resource: my go-to source when I start researching investment themes. 

Oil and Gas - New Investment - Marquee Energy

I established a position with Marquee Energy Ltd. (MQL)

http://www.marquee-energy.com/

Marquee Energy Ltd. is a Calgary based, junior energy company focused on high rate of return oil development and production. Marquee is committed to growing the company through exploitation of existing opportunities and continued consolidation within its core area at Michichi.

Background

Gloomy times prevail in Canada's oil patch.  In today's regime of low oil and gas prices, a great many companies are now unprofitable.  Many are being challenged by heavy debt loads. Many, especially the juniors, are finding it difficult to obtain financing on reasonable terms, if at all.  There is a general atmosphere of pessimism: concern about the impact of a new regulatory climate in Alberta associated with a change in the provincial government, worry about the intermediate to long-term outlook for energy prices and the impact of competition from other parts of the world, a readjustment in expectations for export now that the Keystone XL Pipeline has been sidelined (for the time being) and the prospect that chances for the approval the Northern Gateway Pipeline are next to nil as the federal Liberal government has been on record as opposing it.

Layoffs are the menu de jour in the industry.  Capital expenditures have been reduced significantly and many projects have been put on hold.  In brief, many companies are in survival mode.

It's the usual story: those with "weak hands" will either fall by the wayside or be swallowed up by other actors with deeper pockets.  

All is not doom and gloom.  The new Alberta government is consulting with industry and environmental groups and it appears that reasonable minds have started to reach some common ground:
http://calgaryherald.com/business/energy/albertas-climate-strategy-a-step-in-the-right-direction

Meanwhile, some environmentalists refuse to be embarrassed by inane remarks:

When a clip was played of Saskatchewan Premier Brad Wall cautioning leaders to take into account the impact of climate change goals on jobs and the energy sector, “which is already suffering massive layoffs in our country,” Suzuki invoked the comparison to slavery.

“You know what I say to that clip? It sounds very much to me like the Southern states argued in the 19th century, that to eliminate slavery would destroy their economy. It did. It transformed their economy. They took a big hit. But who would say today that the economy should’ve come before slavery?” Suzuki said.

When Solomon suggested those in the oil industry might take offence to the comparison, Suzuki said, “they’re destroying the very atmosphere that we depend on.”

“I keep telling the fossil fuel industry, whoever will listen to me, which isn’t many, you’re an energy industry. Now surely to God there’s enough imagination to find other ways of extracting that energy.”

“But, boy, to compare it to slavery,” Solomon said.

“You’re damn right I do,” Suzuki said. “We’re talking about the very atmosphere that sustains our lives.”

Suzuki was not available for comment on Tuesday.

http://www.calgaryherald.com/news/national/98it+moral+issue+david+suzuki+compares+oilsands+defenders+slave/11541668/story.html

Shameful ... and not helpful.  This from a jet setter whose airline travel exploits contribute to global warming far more than the average Canadian ground dweller.  

Reversion to the Mean?

Oil prices are at record lows.  Is it different this time?  Will prices ever recover?

The short-term outlook for long-side investors is gloomy - that is, unless you are invested in refiners (e.g. Holly Frontier )
http://www.bloomberg.com/news/articles/2015-11-26/biggest-oil-buyers-pick-themselves-as-winners-from-opec-meeting

Many commentators contend that things are different and that oil prices will remain low for an extended period of time. (I will not comment on the substance of the arguments as one always has to consider the agenda behind them.)  The contentions:

• The world is awash in oil.  New production is coming on line: countries such as Iraq are now more able to sell their oil, many countries (e.g. Saudi Arabia) are not curtailing production in order to maintain social programs etc. to foster social peace on the home front, other one-trick pony states dependant on oil continue production as they are desperate for  petroleum revenues.  Technological innovation has released huge new reserves for exploitation viz. fracking.  Excess supply will persist for the foreseeable future. 
• The nature of global energy consumption is changing: industry is becoming more energy efficient.  This should result in reduced demand for oil and gas. 
•  "Alternative" forms of energy (solar and wind) are becoming more competitive and more favoured by policy makers.  
• Some commentators advance the view that the world economy is in for a protracted period of slow growth, thereby reducing the need for energy. 

I hold a different perspective. 

Global populations are still increasing and affluence is still increasing. Click on the following link for an elegant interactive synopsis of the rise of affluence over time.  (It is well worth exploring the various facets of this wonderful site.)

http://ourworldindata.org/VisualHistoryOf/Poverty.html#/title-slide

On a per capital basis, energy consumption has risen steadily.

http://ourworldindata.org/data/resources-energy/energy-production-and-changing-energy-sources/

Whereas the rate of increasing consumption has slowed in the developed world, it is projected to accelerate in emerging economies.  

  

http://www.hydrogenambassadors.com/background/images/background/world-energy-cons-region.gif

In earlier editions of The Financial Passage Maker, I noted that change in the mix of energy consumption is a gradual evolutionary process for a variety of reasons.  It takes time and money to refine technologies and infrastructure for production, transportation, storage and consumption.  The "human dimension" is just as important: forecasters have a penchant for greatly underestimating the dynamics of attitudinal change regarding the use of energy.  (More about this later on in a discussion of energy markets.)

In my view, some people have conflated the recent decline in fossil fuel prices to the process of changes in the mix of energy sources. If anything, I consider that the low pricing regime has probably slowed the process of transition from petroleum energy sources to other sources as there is no cost-driven reason to change.  Further, I don't think for a minute that developing economies will be willing to "compromise" the prospect of economic development through using more costly "green" energy sources as their manufacturing base increases.  The governments of developing countries are loath to undertake any measure which might reduce the economic prospects of growing, youthful (potentially restive) populations.

Geopolitical risk is a very unpredictable factor.  It has the potential to affect markets very quickly.  The Middle East, in particular, appears to becoming more unstable.  For example, my sense is that the world is becoming rather impatient with Saudi Arabia - no longer will it be prepared to tolerate the inconvenience of Saudi Arabia's export of Wahhabism as it has morphed into a monster:

The issue is less what the Saudis will do than how the US will react to an extremism whose consequences can no longer be denied by strategic considerations. For decades, US administrations have tolerated Saudi Wahhabism and the jihad, instability, and death it has fueled across the globe. Whether President Obama stressed the need for ending such activities during his January visit to Riyadh is unclear. The Saudis seem to think it is business as usual, with the two nations agreeing to disagree about religious extremism as a result of shared interests in energy policy and containing Iranian regional aspirations.

It is well worth reading the entire article from which this quote is extracted: http://www.worldaffairsjournal.org/article/saudi-connection-wahhabism-and-global-jihad

If you read some of the better journals on foreign relations, you will be able to detect a growing sea change in attitudes to Saudi Arabia. It no longer enjoys its former position as the major supplier of oil to North America.  Other options are very viable, including domestic production.  If anything, the U.S. has the agility, funds and tradition to do what is necessary to support major change when its national interests are threatened.  My sense is that it will be joined by the rest of the world, including China and Russia, nations which also feel the threat posed by religious unrest (or the perception thereof). How this may change the oil supply situation remains to be seen, but change of any nature causes reactions on the part of the market, especially when strategic commodities such as petroleum as involved.

This said, here is a different take on the situation.  It suggests that the U.S. and Saudi Arabia are conspiring to keep prices low.
http://www.middleeasteye.net/columns/us-saudi-war-opec-prolong-oil-s-dying-empire-222413845

Whoever controls the price of oil can play god with the global economy - that’s why the US and Saudi Arabia are leading the way to smash OPEC and re-create a new global oil cartel

The Boom and Bust Cycle 

It will not be different this time.  Good times will return.  It's just a question of timing.  

Here is a concise article which describes the cycle.  Note that it is always dangerous to predict future demand and pricing as made in the article since there are simply too many variables.

http://www.ft.com/cms/s/0/7cf27c68-7f6e-11e4-b4f5-00144feabdc0.html#axzz3sNTb3zTc

Here is one seasoned investor's approach to the energy cycle.  It is similar to mine.
http://www.investingdaily.com/23826/turning-an-oil-loss-into-a-tax-win-2/

Efforts to predict future pricing regimes are hampered by the "unreliability" of information.  For example, statistics on supply and demand are often suspect for a variety of reasons: information is often "shaped" for competitive or other strategic reasons; assumptions about supply and demand can change significantly with the advent of new technologies, black swan events can trash previous assumptions, and so on.

The wild card in all of this is the human response to perceived change over time.  The following article is interesting:

Energy markets are, at their cores, made up of people—producers, traders, suppliers, investors, consumers, etc. This means that markets are not only vulnerable to human emotional reactions such as anxiety, confidence and fear, but that they are also shaped by humans’ limited ability to predict what will happen in the future. This article explores how psychological reactions influence pricing in the oil market, and also how fluctuations in pricing are informed by market behavior and speculation. A review of the energy crises and price shocks of the 1970s and the 2000s provides a historical perspective on market and consumer reactions to planned and unplanned events.
http://www.hydrocarbonprocessing.com/Article/3050927/The-psychology-of-energy-pricing-A-look-at-market-behavior-during-oil-shocks.html

I have perused a few theoretical models about the "boom/bust" cycle for petroleum.  None of them have great predictive capacities in my view.  Shell Oil, a company with seemingly limitless resources, has been singularly unable to predict the future.

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10580630/Shells-gas-gamble-has-left-a-sour-taste.html

So what to do?  Muddle Through and Hope 

I believe that there are opportunities for investment in the oil and gas sector.  I have adopted the following approach:

a)  Underlying Assumptions

• Energy prices will rebound at some point and industry profits will increase.
• It is not possible to predict when and how. 
• Investment opportunities will probably be "safer" in the more stable jurisdictions where production can take place without interference by conflict etc. and where products can be moved easily and safely to markets.
• It is possible to identify opportunities for investment i.e. companies which have the ability to survive in today's hard times and yet prosper when the good times return ... as they surely will. 

b)  Desirable Attributes of Companies in order to Minimize Risk

• Great management with a solid track record.  Ethical.  Creative. Flexible. Focussed. Demonstrated record of husbanding resources and using them efficiently.
• Petroleum reserves relatively easy to extract and without great operational risk/cost.  Low geological risk. 
• Good supporting infrastructure which is readily accessible.  
• Sound financial condition with a cash flow capable of sustaining the company in today's low price environment.
• A sound track record of containing costs e.g. invocation of cost efficiencies through the use of more productive technologies - a demonstrated ability to reduce costs e.g. cost of drilling. 
• A sizeable resource base where production can be ramped up quickly in a cost-effective way when conditions improve.  
• An understandable business plan which makes sense in today's environment.  

To date, I have limited my research to the smaller Canadian producers for the following reasons:

• They are generally easier to understand than their larger cousins as their operations are focussed on a few plays.
• I figure that the days of making "extra" money through the increase in the value of the $US are largely over, hence my disregard of US companies for the time being.  
• The number of companies is not all that great so it is not all that difficult to sort through them. 
• I believe that the upside potential is quite significant following oil price recoveries - this as opposed to the larger companies which tend to be somewhat more stable in terms of price movements. 
• The smaller guys are generally out of favour.  The difficulties encountered by some of them are "colouring" investor outlooks on the rest of the community. 

Marquee Energy Ltd. (MQL)

An informative overview of the company is provided here:
Investor Presentation October 2015

... or if you want to see it live, click here:
https://www.youtube.com/watch?v=e6-nFabuBmg

Sometimes it's worth viewing interviews with company presidents.
https://www.youtube.com/watch?v=ZIkZx3MaB1Q

Desirable Attributes 

• The company is led by capable people who have had about 20 years experience in the junior oil and gas sector and who have experienced "hard times". 
• Marquee is focussed: it has assembled a significant, contiguous series of properties and has control of key infrastructure with the result that it can bring wells on stream quickly.  (Frustration with bringing new wells on line was an infrastructure issue which emerged in a few of the companies I investigated.) Further, the properties are readily accessible the year round and landowner attitudes are favourable. 
• MQL has a strong balance sheet and no issue with its lenders.  
• MQL has been able to maintain a positive cash flow even in today's climate of low oil prices.
• The company has a low risk drilling program and has significant experience in working in the Michichi area.  
• It has demonstrated an ability to reduce its drilling costs: partly due to lower servicing costs in the sector and partly due to a greater understanding of the geology and operating conditions at the drill site.  In my estimation, continuing operations such as Marquee will enjoy the benefits of an oil services sector that will go to extraordinary lengths to maintain revenue streams. It's in a sweet spot. 
• I am interested in the potential for a pilot water flood project to increase production.  It could be a catalyst for an increase in the share price regardless of the state of oil market.  In my view, markets will react quickly to good news in this area, particularly as MQL is well covered by analysts. 

Cautions

• I expect that the share price will be volatile.  Sentiment is not good and there is always the potential for the market to over-react to bad news during these hard times in the oil patch. 
• Since the company is so small and depends on a small drilling program, operational difficulties or dry wells will have an impact which is greater than in the case of much larger enterprises.  

I established an initial position with the thought that I would add to it in the event that oil and gas markets showed signs of improvement.  Why?

• There is nothing like having cash in the game to focus one's attentions on company activity and the state of western Canada's oil patch. 
• Limiting the initial stake is one measure to address an investment with a fair amount of risk.  Speaking personally, I am very tolerant of major fluctuations in the value of my holdings in small companies once I have established a position. For example, I waited several years for Questor to take off.  
• The market for MQL shares is liquid meaning that it will be possible to add to the position without too much difficulty. 

My search continues

I am researching royalty companies in Canada and U.S.  I may comment on them at greater length in the event that I select one or more for my portfolios.

Another Investment in Agriculture - Input Capital Corp.

This week I established a position with Input Capital Corp. (INP)
http://inputcapital.com/

Here is what INP does:

Input Capital is a brand new company based on the prairies that helps farmers with their working capital needs. We buy canola from farmers using multi-year contracts where we pay the majority of the cash upfront.

It claims to be the world's first agricultural streaming company.

Background

I have started to invest in Canada's agricultural sector for a variety of reasons:

1. Increased Global Demand

I expect that the demand for agricultural foodstuffs will increase as a result of population growth and a remarkable increase in global standards of living.  I will not address this at greater length as there are many studies readily available on the subject.

2. Most Countries Rely on Imports

In today's context, most countries are not self sufficient i.e. they do not produce enough food to meet national needs and must rely on imports to meet demand.

There are many research papers which address this matter.  It is complex.  For example, if concerted efforts (and sacrifices) are made, countries can increase food production dramatically viz. the tremendous increase in production and productivity achieved by Great Britain during WW II.  However, many countries are unable to do this for a variety of reasons: unsuitable land for expansion, lack of infrastructure, lack of knowledge, cultural institutions/practices which are resistant to change and so on.  It is also possible that the nature of demand can change over time e.g. changes in sources of protein in national diets.  Also, technological innovation has the potential to change production and distribution patterns e.g. the rise of "engineered food" in non-farm settings.

The following research paper is well worth reading as it attempts to integrate a variety of perspectives.

Spatial decoupling of agricultural production and consumption: quantifying dependences of countries on food imports due to domestic land and water constraints
http://iopscience.iop.org/article/10.1088/1748-9326/8/1/014046/pdf

Abstract

In our globalizing world, the geographical locations of food production and consumption are becoming

increasingly disconnected, which increases reliance on external resources and their trade. We quantified to

what extent water and land constraints limit countries’ capacities, at present and by 2050, to produce on
their own territory the crop products that they currently import from other countries. Scenarios of increased
crop productivity and water use, cropland expansion (excluding areas prioritized for other uses) and
population change are accounted for.

We found that currently 16% of the world population use the opportunities of international trade to
cover their demand for agricultural products. Population change may strongly increase the number of people
depending on ex situ land and water resources up to about 5.2 billion (51% of world population) in the
SRES A2r scenario. International trade will thus have to intensify if population growth is not accompanied
by dietary change towards less resource-intensive products, by cropland expansion, or by productivity
improvements, mainly in Africa and the Middle East. Up to 1.3 billion people may be at risk of food
insecurity in 2050 in present low-income economies (mainly in Africa), if their economic development does
not allow them to afford productivity increases, cropland expansion and/or imports from other countries.

3.  The Asymmetric Impact of Climate Change

The impact of climate change will not be expressed evenly across the world.  There will be "winners" and "losers".  An understanding of impacts must take into account a variety of considerations:

• "Developed" societies have a greater capacity to deal with climate change (e.g. major events such as drought, floods, heat waves, the emergence of new pests and diseases) than less developed societies.  It is easier to adapt to change when the following elements are in place: societies which are flexible and have the social, political and economic institutions to innovate and adapt.  
• Geopolitical turmoil can cause countries not to reach their potential even when traditional agricultural practices are present.  
• Some regions are already "stretched" to the point where any additional stress will cause major disruptions to agricultural production.  Desertification is spreading and the availability of water for agriculture is a major constraint in many of the most densely populated parts of the world.  In other words, agriculture is being conducted within very "thin ecological margins".  

Overall, the global outlook is not promising.  

https://en.wikipedia.org/wiki/Climate_change_and_agriculture#Food_security

A Few Conclusions about the Strategic Implications for Canadian Agriculture

1. Canada is self-sufficient and has the capacity to export some crops, especially canola and grains, to global markets.
2. Canada has some advantages: the likelihood that the amount arable land will generally increase over time as a result of climate change; the capacity to adapt to challenges caused by warmer weather, drought and new pests and diseases; institutions which can provide financing to farmers for innovation; a well-developed infrastructure (e.g. transportation, marketing, education, etc.) to support agriculture, etc. 
3. Canada has a long tradition of exporting western agricultural products to foreign markets.  The value of this is sometimes underestimated.  It is also important to note that exports can take on a variety of forms: commercial trade, and food aid (which I figure will grow in importance in order to foster stability in geopolitically unstable areas of the world).  
4. My estimate is that the demand for Canadian agricultural products will increase over time.  
5. Canada must compete with other countries such as the U.S., Brazil and others.  There will be bumps along the export road.  https://www.blogger.com/blogger.g?blogID=4060705938490392352#editor/target=post;postID=1214078820676151995
6. The "agricultural cycle" is at a low point.  

Where to From Here?

I have discussed two Canadian agricultural companies in previous editions of The Financial Passage Maker:

Rocky Mountain Equipment (RME)

Clean Seed Capital Group (CSX)

CSX has made significant progress in bringing a new technology to marketplace.  Since my initial investment in 2015/01/12 and subsequent follow-on purchases, the value of my holdings is up about 30 percent. The strategic play is the need for technology which is labour-efficient and which allows farmers to get the maximum returns per area unit (square meter scale) through adapting to variations in field conditions.  Likely as not, I will continue to increase my stake as the company makes further progress.  It may be a take-over target.  

RME has had a rockier path.  The sale of farm equipment is influenced greatly by crop prices and growing conditions.  I am down by about 30 percent.  However, company management has experienced "down times" before and has the institutional memory to survive tough markets for its goods and services.  Visit the company's website to see how it has adapted.

The dividend yield has alleviated some of the pain.  I have faith that the company will prosper when the agricultural cycle turns ... and it surely will.  Read this but note that forecasts are just as apt to be wrong as correct: https://www.fcc-fac.ca/en/about-fcc/media-newsroom/news-releases/2014/canadian-agriculture-in-strong-position-going-into-two-thousand-and-fifteen.html

I had a reservation about RME when I checked glassdoor.  

https://www.glassdoor.ca/Reviews/index.htm?&countryRedirect=true

The company appears to have a high employee turnover rate. Many former employees have bitched about the company: insensitive and incompetent management, the failure to act in accordance with espoused company values and so on.  On the other hand, they generally liked their fellow workmates.  I checked the reputation of other related companies and found similar complaints.  Is it a phenomenon associated with the sector or is it a product of the sociology of this type of industry?  Having worked as an employee at a drug store distribution centre for two summers while putting myself through university, I can understand the gulf between management and the shop floor.  We had many of the same complaints and reacted strongly when laid off with little notice, only to be rehired back within a few weeks.  Imagine how that affected our collective attitude toward the company!  

I contacted the company about this (gently) but have yet to receive a response some two weeks later.  This is in contrast to a response I had from the President and CEO of Clean Seed.  He responded fully to my request within hours!  I'll try again.  

Observations about Investing in Innovative Companies

I have a soft spot for innovative companies.  Many of the companies featured previously in The Financial Passage Maker are founded on new technologies and business models. Input Capital is yet another example.

A caution regarding investments in innovative (small) companies:

• Management generally does "not get it right" the first time around and results are often inconsistent in the early going.
• Many new companies have a very high "burn rate" (expenditures) as they develop their technologies, marketing channels and so on.  The demand for cash is infrequently met by internal earnings so management has to secure outside financing.  Very often, this leads to share dilution (extreme example is Polaris Materials) to the detriment of early-in share owners.   
• Small companies lacking a "moat" can be out competed by other rivals with deeper pockets and more developed distribution channels.  
• Smaller enterprises are generally more susceptible to a variety of risks: increases in financing costs, disruption of their businesses from internal factors such as staffing difficulties, problems with developing technologies, regulatory issues, and so on. 
• The "market" is notoriously fickle: falls in love quickly and is just as quick to spurn a company at the slightest hick-up.  
•  The "value" of small companies can often take a long time to be recognized by the market, especially when they are under the radar of analysts.  (This can be an advantage for the small investor who is prepared to be patient e.g. Questor Technology Inc. was in the doldrums before the market awoke to its potential.)
• The companies are not attractive to large institutional investment entities which can "set the tone" for copy cat retails investors.  They are not attractive to income seekers as they most often do not pay dividends. 

The Plus Side of the Equation

• Investing can be very profitable, especially in comparison with larger, more well-established companies.  My first ten-bagger was with Silver Wheaton, an early entrant into the precious metals streaming business.  (I still keep this beauty around as an "old pet" and think that it yet has life in its bones.  The major profits were taken several years ago near the height of the market - lucky timing for which I take no credit.) 
• It is often easier to "follow" smaller entities as they are less complicated than their larger brethren.  Further, senior management is generally more accessible and forthcoming than in larger companies where they are sheltered by the wall of investor relations departments. I am often pleased by the extent to which senior management is willing to "tell the story" and provide supporting material.  
• It is amazing what one can learn about these companies from investor discussion boards.  If you are lucky/astute, you can tap the experience of "old hands", some of whom are intimately involved in the sector.   
• I get a feeling of satisfaction in providing support by investing in innovative companies - the wealth creators and agents of increasing productivity and/or solving problems.  

Input Capital Corp. (INP) http://inputcapital.com/

Check out the company's investor presentation for an initial orientation.
http://s1.q4cdn.com/784243260/files/doc_presentations/2015/151116-InvestorDeck-F16-Q2-Ops-Update-v1.pdf

Here is how the model works.
http://s1.q4cdn.com/784243260/files/doc_downloads/global/agricultural-streaming-infographic.pdf

Reasons for Investing in INP

• The business model is attractive in that it is scalable, generates cash early on in the investment cycle, and produces reasonably predictable returns.  It holds the possibility of being extended to other crops.  Also, it is relatively "insulated" from the downside of commodity pricing events. 
• Management is seasoned, well embedded in the agricultural community (it understands its customers and the world of farm finance) and has a track record of past success.  I also like the company's "muddy boots" approach in establishing relationships with its customers.  
• I was impressed by the resumes of the regional account managers.  They are well educated, have varied life experience and are no strangers to the farm field.  While looking at their pictures, the thought arose that they would be welcomed at the kitchen table ... an intangible that would never be included in standard analytical reports.  Take a look and make your own judgement: Account Managers
• No debt. 
• The company has been able to raise additional capital on a consistent basis in order to expand its business.  Further, its internal earnings are very significant.  
• It has an enviable profile in the investment community: well regarded by a significant number of analysts and rated generally as a "buy".

Cautions

• It is a competitive world.  Will other entities modify their businesses to offer similar services?  Reputation counts for a lot in farm communities and it appears that INP has a nice head start in the field.  
• Untoward weather events such as hail, flooding and drought may affect the ability of farmers to meet their contractual obligations, thereby interrupting anticipated revenues on the part of INP.  To some extent, this can be mitigated over time by revising contractual agreements.  (It is not in the interest of farmers or INP to experience failure.) 
• The company has experienced tremendous growth in the number of its streaming contracts.  However, it recently reported the loss of three contracts.  The market reacted strongly and negatively to this news.  Here is the company's take on the loss. I am not bothered by it.  Instead I used the decline in share price as an entry point to purchasing shares. http://s1.q4cdn.com/784243260/files/doc_news/Input-Capital-Corp-provides-update-on-streaming-contracts.pdf
• The initial rate of company growth has been impressive.  I wonder about its sustainability and the extent to which the market has priced expectations of high growth into the share price. The share price is vulnerable to changes in sentiment as investors are quite risk averse these days, especially as it will take time for innovative business models of this nature to stand the test of time in the agricultural community.  

If this positive take on the company makes me look like Alfred E. Newman, then fine.  

or how about this?

I have few worries about including INP in the Financial Log Book.