The
Financial Passage Maker
January 2015 Edition
The
Voyage
I have been involved with things
other than investing in recent months, hence the abnormally long
interval between issues of The Financial Passage Maker.
However, with the advent of winter, I've started to focus more
attention on research and background reading. You will see the
results of that work in this and future issues.
1.
The Financial Log Book
I took profits with many of the
holdings. Why? Because I sense that the world's energy scene is
changing – that while some stalwarts will remain as worthy
components of my portfolios, the profits can be allocated to other
sectors for better returns. As you will see, I am slowly moving my
fleet to “more protected harbours” as I expect a fair degree of
financial turmoil within the next few years. At the same time, I'll
explore opportunities for gains, primarily in smaller companies which
are overlooked by analysts and which are not within the sights of
larger institutional investor for reasons of scale.
2.
View From the Masthead
Sometimes, a “little event”
can lead one to re-evaluate a long-held position ... in this case it
was some research into recharging the batteries of my trawler.
3.
View From the Gun Port
At present, I have a lot of cash
on hand. Some of the stash will be reserved for exploiting
opportunities once the market corrects (it could be months/years). A
smaller portion will be allocated to small cap companies which are
under the radar of most analysts. I ploughed a small amount into a
tiny farm equipment developer.
4.
Recommended Reading for the Moorings
Once in a long while, a good book
will come along at the “right time” and galvanize one's thought
processes. I was lucky indeed in that lightening struck twice: two
books which should be on the bookshelves and in the minds of all
investors.
5.
In the Wake
Thoughts
on slow travel.
1.
The Financial Log Book
| Entity |
Initial Price/ Purchase
Date
|
Price
2015-01-09 |
Gain/Loss
since Jan 1/15
% |
Gain/Loss
Since Purchase
% |
Central
Fund of Canada (CEF.A)
|
9.77
2007-09-04
|
14.37
|
not
relevant at this time
|
47.1
|
Silver
Wheaton
(SLW)
|
12.37
2007-09-04
|
25.76
|
|
108.3
|
| Polaris Materials
Corporation (PLS)** |
10.70
2007-06-01
|
2.24
|
|
-79.1
|
| Cenovus (CVE) |
32.39
2010-07-27
|
23.77
|
|
-26.6
|
| Canadian National Railway
(CN) * |
48.88
2009-04-14
|
79.38
|
|
229
|
| North West Company (NWF) |
16.23
2009-05-07
|
25.45
|
|
56.8
|
Oceaneering International
(OII-N) |
52.95
2012-12-13
|
55.6
|
|
5
|
| Deere & Company (DE)
|
88.07
2013-01-03
|
85.65
|
|
-2.8
|
| Rocky Mountain Dealerships
(RME)
|
11.89
2013-01-03
|
8.87
|
|
-25.4
|
| HollyFrontier (HFC) |
47.95
2013-01-28
|
35.7
|
|
-25.5
|
| Titan Logix (TLA) |
1.25
2013-09-11
|
2014-08-20
sold
1. 35
|
|
|
| Kelso Technologies Inc.
(KLS) |
2.20
2013-09-11
|
2014-08-15
sold 6.32
|
|
|
| U.S. Silica Holdings
(SLCA) |
25.15
2013-09-11
|
2014.10.08
sold 46.35
|
|
|
| Oak Tree Capital Group
(OAK) |
56.45
2013-10-28
|
52.51
|
|
-7
|
| High North Resources (HN) |
0.62
2014-03-06
|
0.1
|
|
-83.3
|
| Fairfax Financial Holdings
(FFH) |
477.98
2014-3-25
|
603.01
|
|
26.2
|
| Clean Seed Capital (CSX) |
.51
2015-01-07
|
0.55
|
|
7.8
|
*CN
split 2 for 1 on 2013.12.02
**
does not reflect impact of follow-on investment @ $.67 per share
Precious
Metals
The
“safe haven” value of gold and silver continues to have currency
(pardon the pun) in these days of financial uncertainty and
geopolitical upheaval. Even with depressed silver prices SLW
continues to be profitable. On the other hand, marginal operations
and junior companies are finding it difficult to secure financing
for mine development. And the majors are now paying the price of
unwise decision-making by testosterone addled executives who simply
found themselves unable to imagine that the yellow brick road might
lead over canyons spanned by rickety bridges. At some point, the
cycle will repeat, hence my willingness to continue with a very high
quality holding where operational risks have been minimized.
(Curious readers might be interested in going to SLW's annual
reports in order to check up on staffing levels – not much room
for deadwood in this lean operation.)
Polaris
Materials Corporation
Polaris
Minerals Corporation was renamed as Polaris Materials
Corporation effective January 1, 2015.
The
company continues to make progress with its terminal facilities in
California, a rather slow process which has taken several twists and
turns over the past five years.
Investing
in fledgling enterprises is not for the faint of heart. Polaris is
a case in point. The precipitous crash in the share price was a
reflection of nervousness in the market. Nevertheless, the
fundamentals of the company remained:
a fabulous
resource with quality materials and large reserves
a strategic
ocean-side location whereby materials could be shipped at low cost
to a variety of markets
increased
difficulty in permitting new quarries within a reasonable distance
from major urban areas along the west coast of the U.S.
good
management which has the skills and mindset to negotiate the
challenges of building a new company e.g. signing agreements with
First Nations at a time when many resource companies ignored the
wisdom of doing so; minimizing costs during economically
challenging times; being resilient in the face of setbacks to the
development of unloading facilities in California.
With this in mind,
I doubled my stake in Polaris when the share price reached $.67. It
was not a comfortable time but I saw no reason to change my view
about the fundamentals of the company. I am now comfortably above
water.
It is easy to
review the periodic financial reports of Polaris. They are clearly
written and management appears to be quite forthcoming. Looking
forward, I see a few catalysts which could move the share prices
upward:
completion of
the unloading facilities in California
improvements
to land-based transportation linkages in California as they are
currently insufficient to cope with the movement of products in/out
of the U.S.
a resurgence
in construction activity and a possible mega project or two along
the coast
The balance sheet
of the company is free of debt and it would appear that it is now
profitable. In the future, there will likely be more turmoil, but
the fundamentals of the company remain. I may yet add to my
position.
Oil
and Gas
I
am not a market timer (usually) but I decided to take some profits
with US Silica Holdings, Kelso Technologies and Titan Logix. That
it took place before the decline in oil prices was pure luck. I
will still keep an eye on these companies as they are well run and
have nice balance sheets.
I
was less prescient with High North Resources. Junior companies are
risky at the best of times and I managed my risk by limiting the
size of my position. Likely as not, the holding will be absorbed by
a more well-heeled company. Unlike Polaris, there are many
competitors in the field which have deeper pockets. Lesson learned:
only hold companies with strong fundamentals (i.e. ability to secure
financing during bad times) and a strong competitive position a la
Polaris. Polaris is a company you could take home to see mother –
High North ... not so much.
I
decided to maintain my position with Oceaneering International as it
is a well run company which is active in many geographic areas. In
my search for services companies, I considered that marine operators
would be somewhat more protected from land-based strife than their
terrestrial cousins ... one of my strategies for addressing
geopolitical uncertainty.
North
West Company
While
it's easy to get buried by quarterly/annual financial reports and
the like, the “details” often confuse the reasons for investing
in an enterprise. In the case of NWF, I was satisfied that its
financials were quite fine. However, my reasons for investing in
the company concerned the intrinsic qualitative attributes of the
enterprise:
it has a
competitive “moat” in the remote communities which it serves
time and time
again, company management has demonstrated its ability to learn
from its mistakes viz the recent improvements in its expanded
operations in Alaska and the Caribbean.
It is a core
holding. My reasons for continuing to hold it?
Contrarian
Investors
The
minds behind Fairfax Financial and Oak Tree are first rate. They
look for opportunities and take risks (wisely) where others fear to
tread. My sense is that they will perform well when the markets
“correct”. In fact, I have added significantly to my positions
in recent weeks for this reason. Both pay nice dividends,
especially OAK. In the latter part of this newsletter, I will
comment on a recent book by Howard Marks, the Chair of Oaktree
Capital Group.
2.
View From the Masthead
Sometimes
a small “event” can lead one to reappraise a long-held view. In
this case, it was a back-of-the-envelope calculation concerning
various technologies for recharging the battery banks on my trawler.
A few years ago, I purchased a portable gas-powered generator for
this purpose at a cost of US$650. At the time, the $Canadian was
above the $US so we decided to buy the unit in Chicago for less than
50% of the cost it would have been had we purchased it in Canada.
(The savings paid for the trip and we discovered some wonderful art
museums in Cleveland and Chicago ... also the houses of Frank Lloyd
Wright in Oak Park ... abodes which are quite unlivable in my
opinion ... but beautiful to look at ... trophy houses.)
Since we spend a lot of time at
anchor in the reaches of northern Georgian Bay and the North Channel
(the best freshwater cruising grounds in the world), I decided to
review our options for power management. Normally, the on-board
alternator will be sufficient for recharging battery while the boat
is under way, provided that we travel for a minimum of three to four
hours in a two day period. However, for longer stays at anchor,
other power sources are necessary. In our case, we use a gas-powered
generator and run it for a few hours each day. The noise and
inconvenience were bothersome.
I explored a variety of options.
I decided to reduce electrical power consumption through more energy
efficient lighting and by using propane for things such as on-demand
hot water for showers and cooking.
I
also explored solar energy and found that costs have dropped very
significantly over the past five years – to the point where I can
install a solar-powered system capable of meeting our needs for
electricity at less than the cost of a new generator. The benefits:
greater reliability; negligible operating costs; no noise. The
technology is robust and mature.
Given
low oil and gas prices, there is not much incentive for consumers to
switch to technologies such as solar power and geothermal energy.
However, things change. “Alternative” technologies will become
cost competitive and the technologies will gradually make inroads to
the building industry, a beast which is notoriously conservative
(slow moving regulations and risk adverse investors and builders
contribute to slowing the rate of uptake of new technologies).
There
will still be opportunities in the oil and gas sector but I am now
looking for opportunities in other sectors. More on this in later
editions.
3.
View From the Gun Port
Agriculture
My
holdings in Rocky Mountain and John Deere were established as long
term positions. Agriculture is becoming even more mechanized and
there is an imperative for farmers to be more efficient for a
variety of reasons: securing a better return per unit area in order
to maintain a competitive position in the marketplace, the high cost
of labour, etc.
In
recent weeks, I discovered an interesting venture, Clean Seed
Capital (CSX) which is listed on the TSX Venture Exchange. I found
it by reading trade magazines. I have established a position and
will record it in the Financial Log Book.
In
brief, a bright farmer has invested a tremendous amount of time,
effort and money in developing a technology which was originated by
his father. The CX6 Smart Seeder is a seed drill (introduces seeds
into the soil) that can be controlled precisely to deliver nutrients
and seeds to maximize returns by adjusting application rates in
response to variations in field conditions. Farmers have voted with
their pocketbooks by investing in the company. Field trials were
completed successfully last year and a contract has been signed with
an advanced equipment manufacturer to produce the machinery.
You
can start your own research by visiting the following sites:
While
CSX has germinated and started to sprout, there are some hurdles to
overcome before it can flower fully:
More
time will be required to verify the reliability of the machinery.
While the equipment has been tested in a variety of field
conditions, more time is needed to ascertain the reliability and
performance of the drill in the hands of many operators whose
levels of knowledge and skill will vary.
While
the company has made major strides in developing its technology,
more money will be required for further technological improvements,
manufacturing, distribution and servicing. The likely cost: a
further dilution of shares as financiers will undoubtedly insist on
a share of the action – a more profitable strategy than term
payments for cash in the event that the company is successful.
Distribution
networks have to be established. The Board of the company has some
expertise in this regard.
Companies
with larger resources will develop competing technologies and may
have the wherewithal to undercut CSX's pricing structure.
The
venture is speculative but I believe that it has “good bones”:
skilled and dedicated management, a technology which has been well
received at farm shows by people with mud on their boots, and an
ability to secure funding consistently to meets the needs of the
fledgling enterprise.
One
other possible outcome: the company is absorbed by a larger entity.
I am always mindful that ventures like this are risky and limit my
investment accordingly. I am also prepared to accept that stock
prices may fluctuate significantly with new enterprises like CSX.
4. Readings
for the Moorings
In
October, I decided to review the underpinnings of my approach to
investing. By way of preparation, I started to practice on the piano
in earnest – the English Suites by Bach – in order to tune up my
mind. (The Suites are hard and demand a level of technique which is
slightly beyond me at present ... but I persist as Bach's stuff is
deeply satisfying.)
After
I few weeks, I started to read and read ... many books and articles
... most too long for what they had to say ... most too narrowly
focussed to be of much use to an investor like me.
I
finally realized that I needed to broaden my perspective on
investing – this as opposed to improving my knowledge of technique.
It
is reasonably easy to learn the technical side of investing. That is
where most analysts arrest their development ... and for that reason,
I don't read 'em as most of them produce pro forma reports as
required by their superiors. And as for most of the financial press
... streams of fluff to fill air time and pages.
It
is much harder to develop a philosophical approach to investing and
to acquire the wisdom to fully implement one's craft i.e. to
develop a “style” and be able to employ technique from a range of
possibilities in order to realize an intended result. That is what
makes Herr Buffet so great: a master of approach ... and a technical
virtuoso. So, now to the books.
The
Most Important Thing Illuminated
I have mentioned the writing of
Howard Marks on several occasions. Letters From the Chairman
(of Oak Tree Capital Management) are treasures to be savoured. Now
the essence of these missives has been consolidated into a wonderful
book.
A
slight diversion: I have learned never to adhere slavishly to
methodologies promulgated by “gurus” who have been lucky enough
to make money when circumstances favoured their method. Often as
not, they crash and burn when luck turns against them. In my view,
the essence of successful investing rests in a few things:
how to think: how and when to
select the most appropriate arrow from one's quiver of analytical
tools to best fit the situation at hand; and, most important, how to
think more deeply about the fundamentals which influence the
trajectory of a company's future
how to manage risk
Howard Marks addresses these issues in
a masterful way. His prose is elegant and direct and accessible to
most every reader. Further, his insights are based on the experience
of almost 40 years as an investor. (He also received an excellent
academic education many years ago.)
I'll not comment further on his plot
line save to offer the following reviews of his book which have been
penned by two “older” practitioners and a newbie:
In contrast to one of the reviewers, I
really appreciated the “war stories” in the book. To my mind,
story telling is one of the most effective ways to convey the full
essence of an author's thesis.
Another noteworthy feature of the book
are periodic commentaries on various paragraphs which are made by a
few legends in the investing community. They are akin to marginal
notes. Some agree or expand upon Marks' writing whereas others
present divergent opinions.
This is a book to be savoured and
revisited. It is one of four or five top reads on my investing
bookshelf. Yes, I decided to buy the book after first borrowing it
from our municipal library.
Another recent addition to the shelf
is:
The Manual of
Ideas: The Proven Framework for Finding the Best Value Investments
John Mihaljevic's book complements The
Most Important Thing in that it presents a review of some highly
successful investment methodologies e.g. the deep value approach
(Graham style), investing in companies with excess or hidden values,
under-followed small and micro cap stocks, etc. At the risk of
simplifying things too much, most of the approaches are based on
discovering unrealized value.
He discusses each approach in the
following way:
brief introduction to the method
why it works
uses and misuses
beyond screening: application of
the method in practice
asking the right questions
key takeaways
For more detail about the contents,
click on the following link:
I liken the book to a treatise on shot
making on the golf course. No golfer with aspirations for a lower
score would even consider venturing forth without a variety of clubs
in the bag. While a putter can be used off the tee box, a driver is
much preferred, especially when long yardages are required.
The same is true for investing. In my
view, a one-size-fits-all approach may not yield the best results
over time. The trick is to ascertain what method best fits the
circumstances. The Manual of Ideas provides a good
introduction to this way of thinking.
Summary
It
is one thing to read these books. It is quite another to absorb the
ideas and put them in practice. A thought in this regard: select a
company you like and subject it to an analysis using a variety of
techniques. In this way, you can save time by reworking the data you
have collected for the purpose. Before doing so, however, write down
your investment thesis (the reason for investing in the company). In
so doing, you will inevitably incorporate your philosophical approach
– the substance of Mr. Marks' book. I have done this with Polaris
Materials and learned a lot. I have also applied it to the new
holding of Clean Seed.
The Graham
Investor: Intelligent Value Investing is a blog maintained
by John Keown. I mentioned him in an earlier edition of The
Financial Passage Maker. Mr.
Keown thinks and writes very well and his periodic (short) missives
are well worth reading. This said, the main value of the site, from
my perspective, lies in the regularly updated stock screens. Take
some time and browse the site's offerings.
5. In
the Wake
Slow
Travel
This
fall, we rented a small house in a tiny hilltop village in Provence.
Within a few days we settled into the rhythm of the village: a trip
to the tabac for croissants and a baguette in the morning; a walk to
the car which usually included a visit to the communal garbage
facility; a tour to see the sights of the regions; a bottle of wine
on the patio which overlooked miles of vineyards against the
backdrop of some low mountains; a simple dinner; some reading. Over
time, we tired of seeing the “must see” sights in places such as
Avignon and Arles. And we soon gave up on the “natural
attractions” which were so highly rated by the Guide Michelin.
The French get quite excited by heights and any suggestion of
“nature”. On more than a few occasions, our eyes rolled at the
crowds and the rather mediocre surroundings of a few highly touted
natural areas. We are indeed spoiled in Canada. The sound of
wolves at night, the sight of a black bear or moose, geese and
eagles overhead and the like ... these are precious.
We
shelved the Guide Michelin and, instead, started to visit the local
villages and towns on their market days. As a result, we saw and
experienced far more. With travel, it's generally the details of
place and the people you meet which leave the deepest and most
lasting impressions. This was certainly the case with the markets
of Provence: friendly and relaxed people in the pace of established
routines; a tremendous variety of high quality foodstuffs and
merchandise which is a feast for the eyes; the leisure to have a
long and hearty lunch on a square in order to fuel up and people
watch ...
If
I were to revisit the region, I would stay in Saint-Remy-de-Provence
about a dozen kilometres south of Avignon. It is a graceful place
replete with a wide selection of restaurants and interesting shops.
It also enjoys a very central location which provides quick and easy
access to reaches of Provence. For more information, start with
this link:
Some
highlights of the trip:
the
friendliness of the inhabitants: everywhere and always
the courteous
drivers ... a real surprise
the
ready-to-eat foods in the markets: exceptional quality and
reasonably priced
the
monasteries and vestiges of Roman civilization, plus “les
borries”
our inability
to find a really good wine in the Luberon despite a dedicated
effort
a real
appreciation for the cyclists in the Tour de France: the ascent of
the dreaded Mont Ventoux is vertiginous and extended; however, the
descent is what left me in wonderment: we never got over 45 kph in
the car whereas on some stretches, the cyclists hit speeds in
excess of 75 kph or more, a testament to their tremendous bike
handling abilities and courage.
I wish
everyone a prosperous and fulfilling New Year. “Follow your
heart.”
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?
