A Few Stalwart Performers in the Financial Log Book: Fairfax India, Questor Technology

A few crew members have acquitted themselves quite nicely since the onset of 2018.

Questor Technology Inc. has registered gains of 64 percent.  It is one of my largest positions.  I established a position in June 2015, attracted by the robust financials and management acumen - also by its technology which addresses a real need in the oil patch.

In the intervening years, the company has demonstrated an ability to adjust to the market and to add a complementary new product line with the potential to exploit new market opportunities.  To my mind, each "advance" increased my confidence and led me to increase my position.

I have learned to "ride the winners" even when gains lead to what some might consider an overweight position.

In my view, the company is in a "sweet spot" and blessed with the key ingredients which should contribute to a bright future: strong financials, great management which is well connected to the oil patch and which has "muddy boots", a superior technology which is offered to the marketplace in a variety of user friendly arrangements and which meets a real need.

Fairfax India Holdings Corp 15 percent.  This is a long term investment based on the economic promise of India, a country with:

• a political awakening to the concept that a more company friendly socio-political environment will lead to better prospects for the well-being of the country
• an attractive demographic (as opposed to China where government family planning policies will pose major challenges within the next 20 years)
• unmet needs for infrastructure and goods and service to meet the demands of an expanding middle class
• a legal system, while not "perfect", that provides a level of respect for property and social/economic interactions which is rare in the region
• a vibrant and growing culture of entrepreneurship, coupled with a more educated work force (some of India's centres of higher learning have marched quickly up international ratings and many Indians have repatriated back to India to exploit what they consider are better opportunities than in the US and elsewhere

Fairfax India is well managed by people who have deep roots in India and who know the intricacies of doing business in this complicated place.  The model of investing is adroit, taking pages from the playbook of Herr Buffett.  

I have added to my position on five occasions.  To my mind, this company has staying power and will remain as a core holding.  While its performance this year is not among the best in my portfolios, I highlight it for the reason that I consider it as one which holds the most promise for outsized gains over time.

Riding the Winners

I've learned that most of my significant gains have been realized by very few stocks.  Many financial advisors recommend against being "overweight" in any one position - whatever that means.  Usually the recommendation is the result of backcasting academic studies which have the benefit of hindsight - something that investors do not have.

My approach is to ride the winners.  Why?

• I take pains to look at "sustainable" elements of a company, and if I am satisfied, I will retain and sometimes, even add to my position.  These elements could include: excellent management, great strategic positioning with the prospect of growth in existing markets and the potential for expansion to new markets etc. 
• I have the mindset that I'm prepared to accept minor gyrations in the stock price provided that I have confidence in management.  Usually this confidence is generated when I see concrete evidence of management's ability to make changes successfully in the face of corporate challenges.  
• I realize that my portfolio has grown largely through profits generated by a very few investments.  For example, I was heavily into gold and silver (almost 70 percent) of the value of my portfolios a few decades ago and the results of that foray provided our family with a comfortable level of financial freedom - to the point where job security and the income therefrom was reduced significantly as an incentive to continue working at a day job. 
• Much has been written on riding one's winners.  Here is but one example: Tails You Win
• I think that outsized winners are largely a matter of luck.  They are rare and completely unpredictable.  When "handed" one of these, it makes sense to exploit them to the full. 
• As to when to take profits, I have no set formula.  At times I may take money off the table for other purposes.  At others I may see a development which has the potential to make the investment less profitable e.g. erosion of a competitive moat, adverse changes in management or the regulatory environment etc.   It is more of an art than a science.  

Cost of Acquiring New Customers - An Important Metric for Evaluating Potential Investments - applicability to Input Capital

The cost of acquiring customers is an important metric.  All things equal, companies which can acquire customers more efficiently than their competitors are likely to outperform them in the long run.

There are several dimensions to consider:

• market saturation (harder to expand when markets are saturated)
• cost of acquiring new customers
• method used to acquire new customers (some methods depend on paying other agents to attract people and those new customers may not be as "sticky" as those acquired by other methods)
• the amount and quality of customer data acquired through the selling and retention process (detailed information of this nature is invaluable)

The following post outlines this in more detail - also provides leads to sources of more information:

https://mail.google.com/mail/u/0/?tab=jm#inbox/163c0db895af9cef

This is one of the reasons why I like Input Capital, a crew member of the Financial Log Book.  In recent weeks, its price has dropped significantly for two reasons:

• depressed commodity prices
• difficulties in moving crops due to capacity issues in the Canadian rail system.

Also, read this account of a recent court case about a farmer who did not deliver on a streaming contract:

https://www.agcanada.com/daily/court-rips-streaming-canola-contracts-as-unconscionable

My sense is that Input will alter its business practices as it has in the past.  I tend to regard the statement by Tony Mechant, the farmer's lawyer for what it is - a proclamation by a person whose business depends on promoting class action cases ... and there have been many of them.  Use Google to find things like:
http://www.canadianlawyermag.com/legalfeeds/author/glenn-kauth/tony-merchant-appealing-three-month-suspension-media-report-4606/

https://www.macleans.ca/news/canada/white-mans-windfall-a-profile-of-tony-merchant/

I reviewed comments about the court case on a few discussion boards in the farming community and the general sense is that there is little sympathy for the plaintiff who seemingly either did not read the contract or when he found himself unable to meet the conditions of the agreement, tried to take the legal route to avoid his obligations.  There were other takes as well.

Note: With new companies, I tend to ignore quarterly financial reports.  There have been some disappointing financials in the most recent report but nothing, in my opinion, to worry about ... unless the trend persists.  It can pay to tolerate fluctuations in a company's early going.  It is a normal part of business development.  The path to success is never without issues.

Things will change.  In my view, the present pricing of Input's stock represents a potential entry point and/or an opportunity to add to one's holdings.  I have increased my position.  

One of things I will monitor is customer retention.  That will tell me about the acceptance of streaming in the farming community.  Word of mouth is extremely important in these communities.  Also, repeat customers will reduce the costs of operation for Input.  I will also monitor the number and value of financing deals.

The following interview is well worth reading as it provides information not readily available in the company's canned presentations:

https://ceo.ca/@Newton/7800-words-with-brad-farquhar-input-capital-inp

The company has proven its ability to learn and adjust to changing conditions.  I like this attribute - also the fact that the company has no debt. 

Check this out - the company now offers mortgage streaming as a source of cash for farmers:

The Mortgage Stream

In the longer run, this may prove more successful than the canola streaming contracts which are expensive for farmers.  Land prices have increased significantly.  Many farmers are planning exit strategies (i.e. selling their farms to fund their retirements) which do not involve children taking over their farms.  In a sense, the mortgage streams are akin to reverse mortgages.  Can Input compete with the banks in this regard?  Time will tell.  

Investing - Considering The Cost of Inequality

The "trickle down" theory, often used to justify income inequality must be questioned.  A compelling argument can be made that inequality exerts real costs on society and that more equal societies perform much better when assessed by a wide range of metrics, especially those related to the quality of life.

A recent book entitled, The Inner Level - How More Equal Societies Reduce Stress, Restore Sanity and Improve Everyone's Wellbeing, advances just this argument. 

I was drawn to the book by reading the following article in The Guardian, Is rising inequality responsible for greater stress, anxiety and mental illness?

Here are a few extracts:

In 2009, when the world was still absorbing the shock of the previous year’s financial crisis, a book called The Spirit Level was published. Written by a couple of social epidemiologists, it argued that a whole raft of data conclusively showed that societies with greater inequality also had a range of more pronounced social problems, including higher rates of violence, murder, drug abuse, imprisonment, obesity and teenage pregnancies.

Given that naked profit motive had just taken the world to the brink of economic collapse, it was a good moment to take stock and reflect on where rising inequality was leading us. For the previous 30 years a broad consensus had operated in politics, particularly in the US and Britain, that as long as those at the bottom were being lifted by the rising tide of wealth, then it didn’t much matter that those at the top were rising much faster...

But then the crash came, it turned out that the boom and bust years were not over, and we found ourselves as ordinary taxpayers in the unjust position of bailing out the banks that had been guilty of the greatest excesses of greed and social irresponsibility. As a result austerity followed and those who suffered most from its effects were the poorest members of society...

The new book, as the subtitle suggests, focuses on the psychological or mental costs of inequality, which, they argue, are many and varied. The basic premise is that inequality creates greater social competition and divisions, which in turn foster increased social anxiety and higher stress, and thus greater incidence of mental illness, dissatisfaction and resentment. And that leads to coping strategies – drugs, alcohol, and addictive behaviours like shopping and gambling – which themselves generate further stress and anxiety.

As noted in the previous post, economic prosperity confers tremendous benefits on the 9.9 percent.  The Inner Level re-enforces this observation and cites numerous studies that show comparative outcomes of people living at varying socio-economic strata.  

Most alarming from my perspective as an investor, is that observation that children from poor families perform more poorly in school ... by a wide margin.  This loss of potential has several implications:

• the inability to lift one's self out of poverty places a continuing and self-perpetuating burden on support programs - this is accentuated by the demands imposed by poorer physical and mental health, increased crime etc.
• the "foregone" opportunity for achievement means that children from poorer families as less able to make a contribution and add to the wealth of the nation - also to adjust to the fast-moving nature of the workplace

In the longer term, one has to question the sustainability of models which lead to these outcomes and the relative ability of nations to compete in the global marketplace.  

Matters of this nature have many and complex dimensions.  To date, much of the treatment in the mainstream media has characterized those who question the status quo as "left wing hand wringers".  However, as the consequences of failures in the present system spread to include a wider cross-section of society, this questioning will become mainstream, viz.

The Latest Blow to Struggling Family Farms - Rising Interest Rates

In recent years, the populist cause aka "the need for change" has been hijacked by right wing ideologues but a strong countercurrent is swirling.  Marxist ideology and it's political incarnation has been a disastrous failure.  Perhaps it's time to give serious consideration to other approaches which provide a better quality of life to people.  

In the meantime, I will continue my search for investments in societies which have a positive socio-economic trajectory.  A hint on how to find them?  Google terms such as "social wellbeing", "economic indices" etc. 

While you and I may disagree with much of the commentary, it always pays (financially and mentally) to challenge one's preconceptions.  

https://www.usip.org/sites/default/files/GP_170-203_Social_Well-Being.pdf

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

https://www.weforum.org/agenda/2017/09/the-most-competitive-countries-are-also-the-most-progressive

The U.S. - Land of Opportunity ... but only for 9.9 percent of the population

Much has be written about the growing inequality of income and associated outcomes such as mental and physical health, family stability, crime, etc.

In my view, the U.S. is being polarized by income and race.  Its social institutions are simply not capable of addressing the major problems which are created by income inequality.  Many Americans believe that the system is not working.  Traditionally this view was confined largely to black Americans, but now it has spread to white America.  In the past thirty years it has become prevalent in agricultural communities affected by "big agriculture" and numerous town and cities that have been hollowed out by the restructuring of America's manufacturing base. 

The following article presents the most penetrating analysis of this syndrome that I have read to date:

The Birth of a New American Aristocracy

The central thesis of the article, while buried in the text, is presented below:

The defining challenge of our time is to renew the promise of American democracy by reversing the calcifying effects of accelerating inequality. As long as inequality rules, reason will be absent from our politics; without reason, none of our other issues can be solved. It’s a world-historical problem. But the solutions that have been put forward so far are, for the most part, shoebox in size.

Matthew Stewart, the author, documents the concentration of wealth in the top 9.9 percent of Americans and advances evidence which shows that it brings a host of associated benefits, including: educational achievement, economic advancement, higher earning, better health, more functional families, etc.  These advantages are not enjoyed by the 90 percent and in fact, the case is made that the potential for ascending to the 9.9 percent is lower than ever.  This, as the preceding quote states, is one of America's greatest challenges.  Unless it is addressed in a meaningful way, it will have a direct impact on the resiliency of America and its ability to compete in the global marketplace over time.  Smaller countries such as Finland, Sweden and the Netherlands seemingly have been able to see their way forward when challenged be bad economic circumstances a few decades ago.  There are lessons to be learned, but is anyone prepared to listen?

In my view, things have not deteriorated to the point where people feel the need for concerted, collective action.  One of America's greatest strengths has been its ability to reinvent itself when faced with major challenges.  So far, the elites have exercised an increasing degree of control over the public agenda, but that may change when people realize that the benefits of "being American" are confined largely to the chosen few. 

This has very significant implications for investors.  For example, U.S. health care costs have skyrocketed.  Why?  

• greater numbers of individuals with chronic health issues: obesity, diabetes, heart issues (poorer people have much higher rates than others and income inequality is one of the major causes)
• higher delivery costs (doctors "unions" insist on much higher rates for services than in other countries; the "drag" of administrative costs imposed by private insurance and health care providers has been estimated to increase costs over other systems by 15 percent, driven largely by the need to generate profits)
• an incoherent policy that frequently is not evidence based. 

As an investor, I worry about these inefficiencies and would rather see money being invested in more productive pursuits such as education, infrastructure - things that would strengthen the economy.  

I am also worried by social stability and the ability of the U.S. to attract the intellectual talent it needs to compete.  Since the Trump era, there is ample evidence that other countries are being regarded as more desirable places to raise a family in safety and to pursue life in a more tolerant society.  

I am also worried that the drift of American society will make it more expensive.  For example, a few decades ago, the organization I worked with was recruiting scientists to staff up a major research facility.  One of the managers was an American.  In response to questions about the lower salaries we offered in comparison to American institutions, he prepared a spread sheet that showed the comparative costs of living in the U.S. and Canada.  When the cost of health care, education for children, taxes, accommodation, transportation etc. were taken into consideration, the balance worked out about even.  He then commented on public safety, the sense of community and other measures of societal well-being and found that it was an easy sell.  

Bottom line:  Investors' money can flow easily to follow opportunity.  I am looking to invest in societies where the "social trajectory" is one of improvement.  India is one such place ... the search continues for others.