March 2016
The Financial Passage Maker
The Voyage
1. The Financial Log Book
The table now shows the relative weightings of holdings in the portfolio.
2. View From the Masthead
I figure that it is time for caution: the first rule of investing according to Herr Buffet is “not to lose money” ... ditto for the 2nd and 3rd rules. Prem Watsa has penned a cautionary outlook in his annual letter to shareholders.
3. View From the Gun Port
No new purchases with the exception of short-term speculative ventures in gold companies. I have increased my stake in a few companies.
4. Recommended Reading for the Moorings
The Big Book of Endurance Training and Racing by Dr. Philip Maffetone is well worth reading, especially by people who are interested in functional bodies.
5. In the Wake
A substantial review of my portfolios is underway in preparation for what I consider will be “interesting times” ahead. (See also View From the Masthead.)
Investments are only an enabler for the most important things in life: family, friends, health, travel, music (more on that in a future newsletter) and all manner of learning and exploration.
1. The Financial Log Book
| Entity |
Wt
|
Initial Price/ Purchase *
Date
|
Price *
March 24/16 |
Gain/Loss
since Jan 1/16
% |
Gain/Loss
Since Purchase
% |
Silver
Wheaton
(SLW)
|
H
|
12.37
2007-09-04
|
22.82
|
32.7
|
84.5
|
| Polaris Materials
Corporation (PLS) |
L
|
10.70 **
2007-06-01
|
1.5
|
-2.6
|
-85.9
|
| Cenovus (CVE) |
M
|
32.39
2010-07-27
|
16.89
|
-3.5
|
-47.8
|
| North West Company (NWF) |
H
|
16.23
2009-05-07
|
29.26
|
3.2
|
80.3
|
| Deere & Company (DE)
|
M
|
88.07
2013-01-03
|
80.24
|
6
|
-8.9
|
| Rocky Mountain Dealerships
(RME)
|
M
|
11.89
2013-01-03
|
5.81
|
-6.9
|
-51.2
|
| HollyFrontier (HFC) |
M
|
47.95
2013-01-28
|
35.33
|
-10.6
|
-26.3
|
| Oak Tree Capital Group
(OAK) |
M
|
56.45
2013-10-28
|
46.93
|
-0.7
|
-16.8
|
| Fairfax Financial Holdings
(FFH) |
H
|
477.98
2014-3-25
|
715.9
|
11.2
|
49.8
|
| Clean Seed Capital (CSX) |
L
|
.51
2015-01-07
|
0.49
|
-21.9
|
-3.9
|
| Abitibi Royalties (RZZ) |
M
|
2.57
2015-11-20
|
3.65
|
8.8
|
42
|
| Input Capital (INP) |
L
|
1.86
2015-11-20
|
1.63
|
-8.4
|
-12.4
|
| Marquee Energy (MQL) |
L
|
.49
2015-11-23
|
0.39
|
0
|
-21.3
|
| Fairfax India Holdings
Corp (FIH.U) |
M
|
10.42
2015-12-16
|
10.59
|
4.9
|
1.6
|
| CRH Medical Corp (CRH) |
L
|
4.43
2105-12-29
|
4.18
|
1.9
|
-5.6
|
* Prices are quoted in the currency of the exchanges where equities are listed. As a result the gain/loss is not an accurate measure of the performance of the portfolio as the $US has risen significantly against the $=Cdn since many US positions were established.
** does not reflect impact of a large follow-on investment @ $.67 per share
A new feature is an indication of the relative weightings of holdings in the portfolio:
H = >10%
M = 5-10%
L = <5%
In general, my strategy is to invest relatively small amounts in small, fledgling enterprises and then to increase/decrease my stake on the basis of performance.
Not shown on the chart is an old favourite, Questor Technology Inc, my first ten bagger. I sold it off for a great profit but have renewed and gradually increased my position. I am hopeful for a nice profit as the company's new offering makes its way into the market. It's always nice to see a company able to finance acquisitions and product development without recourse to debt. The stock was crushed when oil prices declined but its value is now being recognized by the market. Questor's recent performance has been gratifying. I figure that the good times will roll once again. Read more about it here:
http://www.questortech.com/
Agriculture
The depressed $Cdn has increased the effective cost of American-made equipment prices for Canadians. This, coupled with farmers' reluctance to spend cash for new equipment in the face of challenging commodity markets, has had an impact on new equipment sales. The share prices of Deere and Rocky Mountain Dealerships have been affected negatively. In my view, the current state of pessimism represents an opportunity to secure additional shares on the part of investors with the longer view. Both companies are very well managed and have been through the peaks and valleys of the agricultural commodity cycle before. Analysts with shorter time horizons seem to ignore this history ... and market “talking heads” are even worse ... seems as if ADD is a requirement for market commentators.
It will pay to wait for the cycle to repeat itself.
- There are more mouths to feed in the world.
- The demand for grains will increase as a result of growing global prosperity and the role of grains in the diets of affluent societies.
- The spectre of greater variability in crop performance in the future due to climate change will probably be beneficial to farmers in most of Canada's producing areas – this in comparison to other parts of the world where droughts and floods are likely to be more severe.
- In some parts of the world, such as India and California, the mismanagement of water supplies and competition for water presents substantive challenges to the viability of traditional agriculture, thus opening the possibility of new opportunities for Canadian farmers.
- Socio-political strife and massive corruption in places such as Brazil has the potential to disrupt the movement of agricultural products to world markets.
I have increased my stake in Input Capital (INP). Read the following third quarter report to see why:
http://s1.q4cdn.com/784243260/files/doc_news/Input-Capital-Corp-Announces-Fiscal-2016-Third-Quarter-Results.pdf
Investors in new companies must be prepared for inevitable up's and down's in performance. Sometimes, people over-react to setbacks. A few months ago, the price dropped due to concerns about a few streaming contracts which had gone south. The company adjusted its practices very quickly and achieved some positive results thereafter as noted in the third quarter report.
In my view, the most significant challenge ahead for INP is how it develops a strategy to sell its streams into an “interesting” commodities market.
The Oil Patch
The following commentary by Leonardo Maugeri provides a sobering perspective on the current state of the oil industry. The Global Oil Market:
No Safe Haven for Prices
Despite the decline in price, actual production of oil seemed to defy the laws of gravity and economics as it continued to grow. Once again, the main reason for this apparent contradiction is that while many companies and countries announced cuts to their spending budgets, very few actually halted investments already under way in the upstream sector. Many are just beginning to register production from recently completed investments, while others are completing their investments, after having spent the bulk of their capital budgets. The result: production capacity and the supply of oil will continue to grow.
... the conclusion?
... unless demand growth actually explodes—which seems unlikely—the fundamentals remain the same: in spite of some erosion of production here and there, global oil output, production capacity, and inventories will remain too high versus the level of consumption growth. This implies that the downward pressure on oil prices will remain the dominant force in 2016, with the first real inflection point for the market, which could probably materialize only in 2017.
I think Maugeri may have underestimated the potential for geopolitical uncertainty to destabilize oil production and transport, especially in the Middle East. To my mind, it remains as the wild card.
Also, the industry is cyclical.
I don't believe for a moment that the world will wean itself off oil any time soon.
- The infrastructure for discovery, extraction, transportation, distribution and use is very well developed. Competing sources of energy lack this infrastructure and it will only be developed at the considerable expenditure of time and money. The fossil fuel system is reliable – the product of over a century of trial and error.
- Businesses and other energy consumers are by nature conservative: risk adverse to new technologies, set in their ways and generally with no compelling reason to change.
- Other than the possible exception of solar-generated electricity, other non-fossil fuel technologies generally have had major challenges: higher than anticipated all-in costs, confusion caused by a plethora of competing emerging technologies without any clear leader.
The shift in the mix of power sources will be evolutionary rather than revolutionary. There are still rewards ahead for investors who recognize this circumstance.
Precious Metals
Speculative activity has been very profitable in the face of an increase in the price of gold and silver in recent months. I've learned to take profits of 3 to 20 percent as opposed to hanging on for more. As a result, I have made a nice series of “base hits” by making short-term bets in several companies:
Dalradain Resources
Goldquest Mining
Asanko Gold
Premier Gold Mines
McEwen Mining
Oceana Gold
The market action has been fairly choppy, a circumstance which presents opportunities for short-term speculation.
http://www.kitco.com/charts/popup/au0365nyb.html
The long-term trend for gold is somewhat ambiguous. I believe that its price is a barometer of fear and an indicator of the value people place on its utility as a safe haven in the face of geopolitical uncertainty and misgivings about the “true” worth of fiat currencies.
http://www.kitco.com/charts/popup/au3650nyb.html
History tends to repeat itself. In light of this, and as a form of “speculative insurance”, I have maintained some long-term core holdings, mainly in streaming companies:
Silver Wheaton
Franco-Nevada Corp.
Abitibi Royalties
The last company, RZZ, has been a very pleasant surprise. Its business model is rather novel and has yielded some nice profits by focusing on an under-serviced niche in the industry. Its focus on spending bits of its grubstake on properties adjacent to active mining operations has parallels to the strategy of McEwen Mining ... no surprise given the work history of Ian Ball (a McEwen protegee) and the significant position McEwan holds in Abitibi. Check out the website of RZZ to see how its net smelter royalty interests are benefitting its bottom line. It's only a matter of time before imitators start to enter the fray. Meanwhile, Abitibi has the advantage as a first entrant. It's all about management – in this case, Ball and McEwen ... nice to see the fusion of olde and newe talent working to realize a new business model.
Abitibi represents a model with two desirable attributes:
a play on the potential development of mining claims adjacent to producing properties
a play on the possibility that gold prices might increase in the future as reflected in the value of net smelter royalties
The odds of encountering an Eldorado are low, but the potential pay-off's could be substantial ... and the cost of Abitibi's individual bets is exceptionally low. All in all, a good business model for this sector, especially at this time.
2. View From the Gun Port
Arotech – The Saga Continues
Activist investor, Ephraim Fields of Lake Capital, continues his quest to change management practices and the composition of the board. On February 23, 2016 he sent a letter to the Board of Directors of Arotech about recent decisions on the part of the company in which he:
- Criticizes selling 5.7% stake at below market prices to "friendly" shareholder
- Criticizes failure to mention Consulting and Voting Agreements in press release
- Questions Board entrenchment nature of the financing
- Believes effective sale price significantly below $1.99 per share
- Questions need to pay up to $375,000 in "consulting fees"
- Pleased with the addition of Jon Kutler to the Board
https://www.accesswire.com/436975/Ephraim-Fields-Criticizes-Recent-Arotech-Financing
The latest salvo follows on the heels of an earlier letter which made the following points:
- Stock has significantly underperformed; down 29% in one year; down 76% over the past 10 years.
- Believes Training/Simulation unit (which generated $9.5 million of LTM EBITDA) alone is worth more than ARTX's entire enterprise value.
- Over the past 15 years the Company has paid Ehrlich and Esses combined compensation of over $25 million, which equates to over 60% of Company's current market cap.
- Believes corporate overhead is too high and can be easily reduced.
- Believes there are many, readily identifiable ways to create long-term shareholder value.
- Believes alternate slate is in best interests of ARTX's shareholders, employees and other stakeholders.
- Notes the price paid for just the UEC and Armour acquisitions exceeds Company's current enterprise value.
http://www.theglobeandmail.com/feeds/press-releases/accesswire/?pr=600-201512100801BAYSTRETCA_DIS_T_NW_434551-1
It will be interesting to follow this story. As the election of Board members is staggered over a 3-year period, it will be difficult for Fields et al to force what I consider would be some useful changes in Arotech's business practices. There have been some recent changes in the Board which may hold some promise for positive change over the longer term (check the company's web site). I am quite prepared to wait as I feel that the company has some noteworthy attributes which have the potential to be reflected in a higher stock price in the future ... provided that senior management approaches life in a manner which respects more fully, the interests of share owners. In the meantime, simply the knowledge that people are looking over one's shoulder sometimes changes behaviours.
The year-to-date performance of Arotech has been gratifying ... perhaps a harbinger of the spring to come?
3. View From the Masthead
I have some misgivings about the future of the global economy and will comment on this at length in a future edition.
The key in investing is not to lose money.
Prem Watsa embraces this approach. Here is what he has to say in the most recent annual Shareholders' Letter for Fairfax Financial Holdings Limited:
Hedging our common equity exposures has been very costly for us over the last five years – particularly in 2013. However, we have warned you many times in our Annual Reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals. These risks may be coming to a head in early 2016, as I write this Annual Report to you – right out of the blue! The most important risk we saw was that the 2008/2009 recession was not like any we had experienced in the last 50 years. The closest comparables were the U.S. in the 1930s and Japan since 1990. Most investors consider the 2008/2009 recession and crash to be a once in a generation event – and it’s over! We differ because we think we escaped the serious adverse consequences of that recession as a result of huge fiscal stimulus from the U.S., even greater fiscal stimulus from China and the reduction in interest rates to 0% with massive monetary stimulus in the U.S., Europe and Japan through QE programs. There is nothing to fall back on now if the U.S. and Europe slip back into recession. Here are some of the risks we discussed in our recent Annual Reports:
I would urge everyone to read the report in its entirety and to pay special attention to pages 17 and onward.
http://s1.q4cdn.com/579586326/files/doc_financials/2016/2015-Shareholders'-Letter.pdf
Two members of the Fairfax family constitute a significant part of my portfolios for two reasons:
My confidence in the acumen of Watsa and his team.
The long-term promise of India.
4. Readings for the Moorings
The Big Book of Endurance Training and Racing by Dr. Philip Maffetone
https://www.amazon.ca/The-Book-Endurance-Training-Racing/dp/1616080655
I have always led a very active life. In my teens, it revolved around getting to the end of the swimming pool before all others. However, there was more to life than endless hours of bouncing off walls and churning through the water. And so, I moved on to other things, most of which entailed sustained physical effort over prolonged periods of time: extended wilderness canoe trips, long bicycle rides including a transcontinental ride which incorporated the Mormon Trail, walking trips, one of which involved the length of the Camino de Santiago de Compostela (soon to be repeated), and skiing and snowboarding (the transition from one plank to two took place this year.)
During this activity, I sustained joint and muscle injuries. I learned to listen to my body, and in many instances, was able to make adjustments on the fly. In part, this was done by moving exceptionally slowly and paying attention to the most minute feedback as I went through the motions of walking and cycling. At one point on the Camino, I changed my gait completely and was far more comfortable thereafter.
By chance, I encountered Maffetone's book. I'm glad I did as it opened a new window of understanding. Finally, there is was ... an explanation of some of the theory behind why's and how's of sustaining physical effort over long periods of time. Most important, Maffetone's work is supported by the expression of results in actual practice.
The book is comprehensive. Check out the Table of Contents here:
https://books.google.ca/books?id=itA3WWidJ9wC&printsec=frontcover#v=onepage&q&f=false
The book's main weakness lies in the lack of references – a major flaw for readers seeking to acquire more detailed information and understanding.
The field of diet and exercise is populated by many born-again messiahs – people who overcame physical challenges by adopting new dietary and life style regimes. Many refuse to acknowledge competing points of view. Many approaches are not justified and modified through extensive and prolonged application by many individuals in different circumstances. Some approaches are rather extreme and have the potential to do major damage to naive disciples. It is a mine field.
I believe that Maffetone's approach is solid His book resonated with my years of personal experience. I am now exploring new avenues of learning – to the point where I now wear a heart monitor and am training to build up my cardio-vascular fitness. Maffetone advocates a “gentle approach” - a marked contrast to the “no pain – no gain” attitude which characterizes much of today's fitness regimes.
This book is well worth a look, especially by people who are interested in building functional, healthy bodies.
5. In the Wake
I will concentrate on reviewing my portfolios over the next month or two. The examination is motivated by a concern about the future direction of the market and my interest in holding only very sound companies with the finest, seasoned management and strong balance sheets. I plan to take profits, cut out losing positions which I feel do not have the best of future prospects. I plan to hold a substantial cash position. In other words, I'm battening down the hatches.
On the other hand, I will renew my short-term speculative activity, especially with precious metals. I am also investigating the use of leveraged ETFs and other vehicles to exploit short-term movements in the markets.
My thoughts are gradually being dominated by non-financial matters: a recent trip to Whistler with the family for some snowboarding and skiing (we had an epic powder day which will be remembered for some time to come); a two week very laid back vacation in Eleuthera, a place where the people are very welcoming and relaxed. The boating season is approaching and the end of a long stint at renovating and old trawler is in sight. I've learned that it is cheap to convert to solar power to meet our needs while on the hook or tied to shore for extended periods – this as opposed to relying on a gas-powered generator which I'll keep in reserve. We also use propane for cooking and for powering an instant-on shower which draws water directly from the Bay – what luxury to have almost unlimited warm showers!
Here are a few shots of places which populate my dream time.
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. For the most part, it addresses investments which are in the “growth” part of the portfolios I manage. 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?
The Financial Passage Maker is issued more or less quarterly; however, I make more frequent postings on a blog by the same name. It can be accessed here: http://finanacialpassagemaker.blogspot.ca/
Some of those postings are included in the e-mail version while others are not.
