The "Amateur" Investor

People often exhibit irrational behaviour, particularly when it comes to things financial.  In particular, I am perplexed that many people spend a tremendous amount of time and money on education in order to acquire the skills/certification to earn a living ... and yet they invest no time or effort in learning how to manage the income gained by exercising those skills.  Instead, they abrogate responsibility for their financial well-being to others.  To my mind, this is astonishing.

Reasons offered for this bizarre behaviour include:

• lack of time
• advertising from the financial sector to the effect that finances are best managed by "experts" 
• the belief that it is too hard
• lack of confidence

My Background

I have no formal training in money management.  My academic background touched on the fine arts, molecular biology and geography where I graduated with a Master's Degree.

I was driven to learn about investing by circumstance: the need to establish a nest egg to retrain and start my own business in the event of a job loss due to downsizing.  As a manager, I laid off 40 percent of my staff ... and there was the distinct possibility that I would be next.  If this happened, I resolved never to work for someone else again, much preferring to be the master of my own destiny.

I started by studying two hours each day, usually during the early morning hours when I could not be distracted.  After 8 years and many mistakes, I started to earn more by investing than from my wages.  It was liberating.

Ten Lost Years

My investing career followed a fairly common path:

• I read the financial pages and "flavour-of-the-month" financial books.
• I subscribed to some money management magazines.
• I subscribed to a variety of investment blogs. 
• As a first step in placing my money, I retained an investment advisor who dealt almost exclusively with mutual funds.  I fired him because performance was sub par.  I also learned that management fees had a very corrosive impact on my portfolio and that most mutual funds fail even to surpass market indices on a sustained basis. 
• I retained a stock broker.  I fired him and her ... ever hear about "churning" and under performance?
• I decided to go it on my own and started by investing in junior companies with the thought that I could make quick profits.  I lost money. 
• I had little tolerance for dips in share prices.  I lost money. 
• I had no real appreciation of why stocks either rose or fell in value.  I got discouraged.  

Those were 10 "lost years" ... or maybe not.  It prepared me for a major event - the distinct possibility that I would lose my job. 

The Awakening

Until threatened with a potential job loss, I essentially "dabbled".  I was now motivated by survival.  

At first I hated the activity, but was driven by a duty to myself and family. I persisted and after six months, became fascinated:

• I loved the constant learning and synthesis and assessment of information from a wide variety of sources. 
• I soon learned that, like golf, a large part of investing involves a knowledge of self and how to manage one's emotions. 
• I also learned that the basis of successful investing, more than anything else, depends on developing a philosophy and a "world view".  This is a key differentiator which is often overlooked.  This is a "work in progress".  
• I learned to accept losses without regret and to learn from the experience. 

Why Amateurs Have an Advantage Over "Professional" Money Managers

The Lot of Professional Money Managers

Supplicants enter the "priesthood" of money management by one or more of the following ways:

• academic credentials
• industry credentials
• association with a business in the money management game (and believe me, many practitioners regard it as a game)
• familial connections

For understandable reasons, both government and industry have to rely on credentialism BUT that is no guarantee of superior performance or that money managers will work in the interest of their customers.  

In fact, an argument could be advanced that "average" is rewarded more than poor performance or superior performance. 

• Running with the herd and not standing out for any reason, means that money managers can play safe.  Most work primarily with the objective of maintaining their jobs.  Travelling outside the herd leaves one open to question, especially if one's investments go south.  
• Underperformance is common, but is often justified by the view/hope that a particular sector will outperform the rest of the market once conditions improve .... precious metals funds, come on down.  
• Out performance is risky.  It is very difficult to maintain outstanding performance metrics.  Fickle investors have no hesitation in abandoning "hot" funds and moving on to the next great thing.   

Investment professionals are often restricted by a number of other factors:

• Investment choices are restricted by the opinions of investment committees or company apparatchiks involved with "risk management".
• Brokerage firms and banks are often biased towards the stocks of companies they finance and money managers are often "encouraged" to push these stocks on unsuspecting clients. 
• Money management is a very "busy" profession.  Most activity is devoted to customer interaction and meeting bureaucratic protocols - NOT the search for profitable investments.  The truth is that most money managers simply do not have the time or mental focus to THINK - this despite the fact that a great number of them are very intelligent.  
• Career risk is always the prime motivator ... also the search for strategies and behaviours to improve one's income.  
• Time frames are limited.  Managers are assessed by short-term performance metrics both by their clients and their bosses.  The constant search for short-term gains is inimical to sound investment strategy ... and clients suffer as a result.  

The Lot of Amateur Investors

My definition of "amateur" is one who engages in an activity on a unpaid basis - no more - no less.  

In comparison with her/his professional counterpart, an amateur has several advantages:

• A dedicated amateur will, inevitably, have more effective time to learn and engage in the productive management of money.  
• An amateur has greater freedom to make his/her own mistakes and to learn. 
• An amateur can expand into new areas of interest without career risk. Being your own boss has real advantages.  
• Amateurs are not restricted by corporate policies and procedures.  
• Amateurs can adopt the "long view" - free from the pressures of short-term metrics which prevail in most institutional settings. 
• Amateurs have the luxury of being able to "do  nothing".  In contrast, it is very difficult for professional investors not to trade: pressures from their institutions and clients make this just about impossible, especially if some investments go south.  The value of this advantage is inestimable as it enables amateurs to minimize trading friction and to refrain from acting on the basis of half-baked ideas.  This said, most amateurs find it very difficult not to fiddle as they simply do not have the mindset to let their investments run.  

There are disadvantages:

• Professionals may have access to timely information not readily available to those "outside the loop".   Unless one is inclined to time the market, this advantage is not all that important as I regard investing in equities as a slow moving process, especially if one is a value investor.  
• The best professionals are not inclined to panic.  Instead, they look for opportunity when most others are fearful.  
• The best professionals are less inclined to follow the latest investment fads. From experience, I have learned that this can be injurious to one's financial well-being.  

Summary

Self-directed investing is not for everybody.  However, for those with an independent mindset, it can be very rewarding from many points of view: the joy of constant learning, the satisfaction derived from taking personal responsibility for one's financial well-being ...  I wouldn't have it any other way.  

The Financial Log Book - Performance of Investments

The performance of equities discussed in previous posts is noted below.

Entity	Wt	Initial Price/ Purchase * Date	Price * June 9/17	Gain/Loss since Jan 1/17 %	Gain/Loss Since Purchase %
Wheaton Precious Metals (WPM) (formerly Silver Wheaton)	H	12.37 2007-09-04	27.04	5	118.6
Polaris Materials Corporation (PLS)	L	10.70 ** 2007-06-01	1.0	-17.4	-90.6
Cenovus (CVE)	M	32.39 2010-07-27	11.10	-45.2	-65.7
North West Company (NWF)	H	16.23 2009-05-07	31.74	17.4	95.6
Deere & Company (DE)	H	88.07 2013-01-03	125.95	23.5	43
Rocky Mountain Dealerships (RME)	H	11.89 2013-01-03	10.20	6.5	-14.3
Oaktree Capital Group (OAK)	M	56.45 2013-10-28	47.50	30.6	-15.5
Fairfax Financial Holdings (FFH)	H	477.98 2014-3-25	sold 624.10
Clean Seed Capital (CSX)	L	.51 2015-01-07	0.40	10.5	-22.6
Abitibi Royalties (RZZ)	M	2.57 2015-11-20	9.3	6.5	261.9
Input Capital (INP)	L	1.86 2015-11-20	2.02	3.1	8.6
Fairfax India Holdings Corp (FIH.U)	H	10.42 2015-12-16	14.75	27.7	41.6
CRH Medical Corp (CRH)	M	4.43 2105-12-29	7.84	9.3	77

*    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.
**   Gain/Loss not inclusive of dividends
*** does not reflect impact of a large follow-on investment @ $.67 per share

Relative weightings of holdings in the portfolio:
H = >9%
M = 5-9%
L  = <5%

A few observations:

Polaris Materials had great promise; however, it was plagued by poor management:

• the original assessment of potential markets was never realized
• there was poor execution of the unloading facility in California - a financial fiasco
• arrangements for marine transportation were poorly executed and the company suffered as a result of high costs
• most important - it seems as if the company has lost direction and focus as its efforts are split between getting its primary resource up and running and securing other potential sources of material: you can't do both in nascent enterprises
• there is no stability in management 
• most egregious was the dilution of shares as a result of the company's need to make up shortfalls in revenue - this in a climate of record low interest rates!

All in all, this has been a painful lesson in how not to operate a company.  I keep it as a crew member as a reminder of a failure in judgement on my part.  In any event, my original position was very modest - the thought being that I would add to my position as the company achieved various milestones.  

Cenovus and other oil sands producers are out of favour.  Low oil prices coupled with expectations for lower fossil fuel demand as a result of cost efficient renewable energy sources and greater efficiency in energy consumption has soured investors on the oil sands patch.  Other producers have much lower costs of production and transportation.  Unless supplies in the Middle East are compromised through socio/political unrest, the short-term future of oil sands producers is not all that promising.  

Fairfax Financial Holdings was sold for a nice profit.  Why?  I figure that Prem Watsa's new vehicle, Fairfax India Holdings Corp, is a much better prospect:

• it is managed by a very well respected crew
• I have misgivings about the short-term future of the insurance industry as it adjusts to the "new normal" of major weather events associated with climate change
• the business model of FIH.U is powerful and has used successfully by Watsa and other investors of his ilk 
• India is a very dynamic country and it has prospects of superior economic performance over the next 20 years or more

So far, my thesis has resulted in some rather nice gains.  I had a large position with FFH and simply allocated the proceeds of the sale in establishing a position with FIH.U.  Note that FIH.U does not pay a dividend.  Given the nature of its business model, profits are better applied to purchasing interests in promising companies in a growth mode.  My time horizon for this investment is in the nature of decades.  

Abitibi Royalties has outperformed most of its peers by a large margin.  It is a core holding.  I have great respect for the acumen of Ian Ball, its president and CEO.  His recent Annual Letter to Shareholders is, in my opinion, a masterpiece. Mr. Ball has a very clear sense of direction and communicates it clearly - a nice departure from the crap composed by communications hacks associated with many listed companies.  I plan to add to my position.  

I was pleased with the performance of agricultural holdings.  Farm incomes have dropped significantly over the past three years as a result of low commodity prices and high input costs.  Burned by the last downturn in the farm economy, farmers have adopted a very conservative approach to expenditures, including the purchase of new farm equipment.  However, it is inevitable that commodity prices will recover and that the pent-up demand for replacement equipment will have a very positive impact on companies such as Input Capital, Deere, Rocky Mountain Equipment, and Clean Seed Capital.  

Note re Dividends

Some of the holdings pay very respectable dividends.  

My primary reason for investing in the Northwest Company was that it is well managed and occupies a commanding competitive position in its market area and that the demand for its products and services is subject only to fairly minor fluctuations.  Its reliable cash flow enables it to pay an annual dividend of approximately 4 percent.  While the company has expanded its operations in markets roughly akin to the far north, its recent effort to reduce transportation costs has involved the purchase of North Star Air which is based in Thunder Bay.  While the company has successfully absorbed retail stores, it remains to be seen how this new venture will function in its new environment. 

Oaktree was purchased for its dividends (5 percent plus) and the quality of its management.  The field of alternative/novel investments is crowded but I figure that Oaktree has capacity and staying power.  The market seems to have recognized this on the basis of a recent increase in its share price. 

Rocky Mountain is another core holding.  It pays a hefty dividend, a bonus for investors anticipating an upturn in the agricultural cycle.  Other equipment distributors have sought to diversify the range of their offerings by expanding into new areas of business - this to make up for poor returns from the agricultural sector.  This comes at a cost: the diminution of focus, and added debt (and we all know that interest rates will increase inevitably).  RME has focused on adapting through a variety of strategies to reduce internal costs.  It has been through tough times before and in my view, the company is well positioned for a recovery in the sector.  

Unique Places to Stay in Great Britain - The Landmark Trust - Report on a Recent Visit

On a recent trip to England, we stayed at four places managed by The Landmark Trust.  In brief, this charitable organization rescues and restores historical buildings of note and then rents them out to cover the cost of maintenance and operation.  Its holdings consist of almost 200 buildings ranging from very humble medieval cottages to several small castles.

We were so impressed by our experience that we plan to return soon with the idea of organizing our trip around these iconic buildings.

We were attracted to stay at Landmark Trust buildings for a variety of reasons:

• They provide unique accommodation and an experience which is rooted directly in the history of the nation.  Imagine opening the door in a Cornwall cottage and taking an early morning walk through fields with walls dating back more than 2000 years old ... or sitting by the window of a folly with a spectacular view over England's green and pleasant land, a glass of scotch in hand, a fire glowing in the hearth ... 
• The buildings are usually sited in outstanding situations.  
• The restorations have been done with great care and sensitivity in order to maintain historical character of the buildings.  At the same time, modern bathrooms and very well equipped kitchens have been incorporated in a way that is respectful of the original qualities of the structures. 
• The cost is comparable to mid-range quality hotels when one considers that you can make your own meals.  (We usually bought lunch while touring during the day.)
• The housekeeping standards are exceptional and the places are very comfortable.  
•  You have access to comprehensive libraries on local attractions and history contemporary to the buildings.  Visitor log books provide useful hints on points of local interest - something which you cannot often find in guidebooks.  

As a matter of policy, the properties do not offer WiFi.  This was no issue for us as we purchased monthly cellular data plans for our iPads.  

Rental periods vary.  You can rent properties weekly or for shorter periods of three or four days.  The practice is to make reservations on-line.  It is advisable to do this months in advance of your planned trip as some popular properties (e.g. John Fowles' house in Cornwall) are snapped up quickly.  

Report on Four Places (click on names to learn more)

The China Tower ca. 1839

The Tower has a romantic story: a young wife built the tower on the sly as a birthday gift for her elderly husband.  As the story goes, Lord Rolle was carried to the top of the tower by servants who hefted the chair up a narrow and winding stairway.  

The building is very private, situated on a hilltop and surrounded for the most part, by plantation forests.  The view from the roof is stupendous.  Before the scourge of old-style mono culture plantations, it would have been even better as the site was far more open when the belvedere was constructed. 

There is one room per floor: the sitting room on the fourth floor and the third floor bedrooms are flooded with light.  Deer and pheasant are common and we read in the log book that a pair of crows had an inordinate interest in pecking at the side mirrors on visitors' cars.

It was a delightful introduction to England ... and after four days, our legs were in great shape as a result of numerous trips up and down the staircase.  Thank you, Lady Rolle. 

The Whiteford Temple ca. 1800

This place is enchanting.  The "folly" was built by a local lad who made his fortune in India and returned to Cornwall to pursue a variety of commercial interests.  While the manor house was demolished following a decline in the family fortunes, the Temple remains, although before its rescue by the Landmark Trust, it served as a cattle shed for a brief period.  

Thankfully, this granite building has been restored.  It consists of a single room fronted by three immense Georgian-style windows which present a sublime view of the rural landscape.

The place is literally hopping with rabbits and the sky is full of mobs of crows - your only neighbours in several hundred metres.  

The Captain's House ca 1840

The house is situated in a very ancient landscape - celtic fields demarcated by walls which date back more than 2000 years.  It is vintage Cornwall: rolling hills topped by moorlands, fields full of sheep and cattle, public footpaths leading to a magnificent coastline ... and lots of wind which can be ferocious at times.  I went on a very early morning walk, just as the sky was starting to brighten.  It was easy to imagine tin being loaded onto a Phoenician boat pulled up to a jetty in the cove shown below.  (At least that's what a local farmer told me.)  This is the perfect place to tour the scenic backdrop of Poldark, a quite wonderful BBC series set in the era of tin mining on the coast.

Beamsley Hospital ca 1593

Hidden into a fold of Beamsley Hill in the southern Yorkshire Dales, Beamsley Hospital was built as an almshouse, a place for indigent older women to live out their days, provided they were of good character ... and Protestant.  In her wisdom, the Countess of Cumberland (see picture below) funded the operation with the annual proceeds of the rent from two farms.  Amazingly, the Hospital continued in its original function until the early 1970's when its facilities were considered outdated.

The building consists of seven rooms which radiate out from a central chapel which has remained unchanged from the original.  Three of the bedrooms have been changed to a kitchen, bathroom and a sitting room.  There are doors everywhere as the bedrooms are accessed via the central chapel plus a few connected passages.  Even after four days, we sometimes found ourselves opening doors to rooms that were not the object of our intentions.

This is one of the most interesting places we have ever stayed - and it's close to a wealth of interesting local attractions, ranging from the glories of York to great walks on the moorlands.  And sometimes, it makes sense to stay put: to read on the patio in the shade of trees while enjoying the bucolic countryside or lounging by the glow of a small fireplace in the sitting room in the evening.  Perfection.

Postscript

The National Trust, another UK organization focused on the preservation of noteworthy historic sites and buildings, also offers a wide range of accommodation.  If we are ever in Cornwall again, we will definitely consider staying at one of the properties, Cotehele, a medieval manor house and estate. We were captivated by this place.

English Heritage is also well worth considering as it offers accommodation at several iconic properties.

Interesting Article About Investing in Agricultural Innovation

I have a rather large position in Clean Seed Capital, a Canadian start-up which has developed a very effective seeder: farmer-friendly and with the capacity to deliver four separate products at variable rates depending on field and seed requirements.  The company has no debt.  It has refined its technology and progressed to the point of having production facilities, distributors in the U.S. and Canada and a rather impressive set of test results.  Its management is honest, responsive and has "muddy boots" and strong connections to the community of working farmers.

Originally, I thought that the exit strategy would consist of being bought out by a larger enterprise with well established product lines and marketing/distribution networks.  My thinking is gradually changing.  In my view, this company has the potential to expand and prosper through strategic alliances with distributors such as Rocky Mountain Equipment.  You can check the company's progress by visiting its web site.

The following article is only one of many which has changed my thinking about CSE's future.

There’s a real risk that the biggest agricultural companies in the world right now might not be the same in 10 years’ time. That doesn’t have to be the case, but if you look at the data, it’s not hard to imagine it happening.

While a number of forward-thinking agricultural corporates are investing big money in technology, there’s a significant majority who are not. They are waiting on the sidelines, perhaps understandably thinking that it makes sense to follow a “wait-and-see” strategy.

“Wait-and-see” almost never works in technology. The big agricultural corporates need to start taking genuine risks in agtech, which means making acquisitions that move the needle. Buying up smaller players alone won’t cut it. Neither will in-house innovation. Only bold moves and visionary tech acquisitions will help the big agricultural firms avoid disruption, and in some cases even become the disrupters themselves.
Agricultural Giants Risk Being Left Behind in Agtech Boom

Investing in this beast is not for the those who are impatient or faint of heart:

• Today's environment of low crop prices and high input costs have had a major impact on farm finances.  Equipment sales have suffered as a result. The climate for the introduction of new products is not benevolent.   
• Farmers are very much from the "show me" crowd.  It will take time for the benefits of CSE's technology to be demonstrated and appreciated in the broader market place.  However, word-of-mouth is an especially potent tool and to date, the equipment has received a positive reception at farm shows and demonstrations have shown its ability to seed a variety of crop types in a variety of field settings.  
• There will always be competition; however, Clean Seed has been diligent about protecting its intellectual property. 

I made this investment with an initial 5 year time horizon.  My reasons:

• competent, experienced, responsive management with "muddy boots"
• the company's record of steady progress in development, manufacturing, and distribution
• zero debt and apparently, no difficulty in securing financing (with substantial funds from within the farming community)
• the need for cost effective machinery designed for precision agriculture
• the thought that the "farm cycle" will rebound over time (as it always has) and that will present a more attractive market for the company's product and services

Looking for Investment Ideas - How to Expand Your View

Many investors use stock screeners.  Why?

• The prevailing practice is to search for potential investments on the basis of commonly-used metrics such as P/E, debt to equity etc.  These metrics have been studied intensively by academics for a variety of reasons: the raw material is easily accessible, amenable to statistical manipulation (economics likes to pretend it is a "science"), and the results are easily published in a large number journals (meaning that the articles are the solution to the "publish or perish" working environment endured by academic researchers).  
• Stock screeners "save" time on the part of analysts and investors.  
• The results are "acceptable" or sanctioned because they fall within the orthodoxy of investment professionals.  It is much harder and dangerous to depart from the herd by introducing original ideas which depart from orthodoxy.  

I could go on.  I have found that my best ideas have originated by reading widely and then thinking.  Many times, the ideas have been generated by following leads discovered during my reading.  For that reason, I read trade journals and regional news sources because they deal largely with the business of making a living - not investing.  

Recently, I had another idea - the concept of reviewing slide presentations on a diverse range of subjects.  Why?

• They are usually information dense and short - meaning that you can rattle through them very quickly and expose yourself to many ideas very quickly.
• Most present information using graphics - something which I process easily.
• The ideas are usually fairly refined and constitute an organization's attempt to put its best foot forward in the public eye.  
• Some of them contain overviews of the general state of affairs in the subject area before focussing on the message of the moment.  The overviews may be slanted in favour of the presenter's message but nevertheless, they are usually very cogent and comprehensive.  

With this in mind, I started searching for compilations of slide decks. I hit a gold mine with SlideShare.  The organization describes itself as follows:

Founded in 2006 with the goal of making knowledge sharing easy, Slideshare joined the LinkedIn family in 2012 and has since grown into a top destination for professional content. With over 18 million uploads in 40 content categories, it is today one of the top 100 most-visited websites in the world.

The material spans a variety of subjects including topics such as real estate, life style, technology, business, spirituality, science, social media etc.  

Give it a test run with the viewpoint of looking for potential investment ideas. For example, here is an informative post on the future of agriculture:

https://www.slideshare.net/AnteaGroupUSA/agfunder-news-presents-the-impact-of-technology-on-the-food-beverage-industry

The presentation was made by a representative of AgFunder, a company that I mentioned in an earlier post.  You can subscribe to its informative newsletter free of charge.   

Taking the Pulse of the Farming Community

The Financial Log Book has several holdings related to the agricultural sector:

Input Capital (INP), a streaming company with a focus on canola

John Deere (DE), an equipment/services company

Rocky Mountain Equipment (RME), a dealer network specializing in Case farming and construction equipment

Clean Seed Capital (CSX), a start-up company in the early stages of producing and distributing a revolutionary (farmer friendly) seeder

The positions are being held for the long term and have been discussed in earlier parts of this blog.

All of the companies are characterized by the following:

• able management with a demonstrated ability to learn and adapt to changing circumstances 
• sound financials
• "muddy boots" with close links to the agricultural community
• ethical behaviour 
• resilience

Agricultural stocks are generally out of favour for short-term investors as farm incomes in Canada and the US have fallen markedly as a result of depressed commodity prices.  This is a cyclical phenomenon:

• favourable climatic conditions in North America and in competitor countries have resulted in bountiful harvests and abundant supplies
• competitors such as Argentina and Brazil have ramped up production in response to attractive market prices in recent years and are, in a sense, "trapped" by the need to realize a return on investment associated with this growth
• a global slowdown has the portent to reduce demand

This said, the long-term drivers which underpin the prospects for these companies remain:

• demand will increase as there are more mouths to feed 
• increased affluence will result in a increased demand for corn, grain etc. either as a direct food source for humans or a feed for livestock and poultry

I believe also, that North America is generally in a more favourable position than South America and parts of Asia:

• climate change is likely to have a disproportionate impact on growing regions outside of North America (incidence of drought and inimical events such as severe storms etc.).  I am still researching this thesis.  
• the transportation infrastructure in North America is robust and less likely to experience disruption as a result of social unrest than in regions such as Argentina and Brazil

Potential changes (%) in national cereal yields for the 2020s and 2050s relative to 1990, with climate change projected by the HadCM3 model under the A1FI scenario (a) with and (b) without CO2 fertilization

http://rstb.royalsocietypublishing.org/content/365/1554/2973

This said, farmers have a tough row to hoe.  I monitor this closely.  To this end, I have found it most informative to read agricultural trade publications and to subscribe to their newsletters.  

The following paragraphs characterize the state of agriculture in the US:

It’s not a secret or surprising that farmers first look at reducing or totally eliminating purchases of equipment when they need to cut costs. This reality was further reinforced by a recent survey of more than 500 farmers by Farm Journal Media and posted on its AgWeb.com website on April 7. The media company has conducted the farmer cost cutting survey annually since 2012.

The list of the ways farmers economize during down times like the industry is currently undergoing include the following actions. (Note: respondents were able to offer more than one answer.)

Reduce farm equipment purchases (67%)

Delay non-equipment capital purchases (46%)

Employ no-till or low-till farming practices (43%)

Purchase less traited seed to reduce seed costs (29%)

Negotiate lower land rents with landlords (26%)

Increase variable-rate application of fertilizer and crop protection inputs (26%)

Reduce energy consumption (through better equipment maintenance and/or power generation (20%)

https://www.farm-equipment.com/articles/14063-deu

For the "big picture" and the "hard facts", I usually consult:

Agriculture and Agri-Food Canada
The US Department of Agriculture

The best source of information to take the "pulse" of the agricultural community is to be found in regional newspapers and trade journals.  Here are a few that I consult on a regular basis:

AgWeb
Farm Equipment
Successful Farming

I NEVER read reports produced by financial analysts.  Their focus is too limited. As I have learned, (read the earlier post about McKinsey & Company) the most important contributor to the long-term success of a company rests in the quality of its management and the market reaction to its products and services.  These are the things which drive the bottom line.  I much prefer to focus on these considerations when making an investment.

International Trade and Investing

It is useful to develop "long view" before investing - to identify long-term trends which influence national economies and the prospects of individual companies.

A recent addition to my reading list is resourcetrade.earth, a site which is maintained by Chatham House, one of my go-to sources of information for "the global view".  You can read about resourcetrade.com here: https://resourcetrade.earth/about#section-5

Resourcetrade.com says of itself:

The volume of natural resources traded globally has increased over 60% since the turn of the century, reflecting and reinforcing new economic and geopolitical realities and bringing new environmental and social challenges – as well as opportunities. Now everyone can explore these fast-evolving dynamics through Chatham House’s comprehensive and accessible data and insights into resource trade.

Via an interactive section of the site, you can explore trade patterns for various commodities, including: export/import sources, destinations, values and volumes; environmental impacts associated with various commodities; national indicators of the importance of exports/imports to national economies; and, other indicators of a country's performance.  It is revealing.  If anything, it effectively demonstrate the interconnectedness of world trade.  

Another feature of the site is its "Stories" section which features insightful articles on resource exploitation and trade.  An inaugural article entitled, Food security, trade and its impacts, introduces the topic with the following paragraph:

Our globalised agricultural system provides cheaper food for all at the same time as it allows countries with a significant agricultural economy to benefit from exports. An outbreak of protectionism affecting the key food commodities – or fertilizers – could lead to price shocks, ecological damage, and the undermining of food security for some of the most vulnerable populations.

This perked my interest.  The article is supported by extensive footnotes for those wishing to pursue the matter in greater depth.  As always, I am on the hunt for investments which could benefit from higher order long-term trends.  These tailwinds, coupled by companies with able management, good financials and products tailored to provide future benefits have the potential to reward investors richly.  

McKinsey & Company - A Great Source for Investment Ideas

I read widely.  About every month, I log into McKinsey & Company to get their take on a wide variety of topics.  I would advise readers to subscribe (free) to their offerings.  They are well presented, cogent and stretch your thinking beyond the confines of conventional thought.

Sometimes, there is a gleaming gem - in this case, an article entitled: McKinsey on Industrials - A Phoenix Ready to Rise Again (January 2017).  The purpose of the report is presented as follows:

This report provides a comprehensive assessment of the sector’s historical performance and outlook. It begins with an analysis of the overall sector’s performance over the past 15 years, including the three distinct economic profit creation cycles that characterize this period. 

The analysis then de-averages performance across the different subsectors and companies to shed light on four key levers that leading Industrials companies have employed to outperform their peers. The report closes with the McKinsey perspective on the sector going forward and the strategies Industrials companies can deploy to reignite value creation.

The Executive Summary

Over the past 15 years, the Industrials sector quietly ranked third among all sectors by economic profit creation.  During this period, the sector also outperformed the S&P 500 on margin improvement and total return to shareholders (TRS).

The past 15 years were not, however, a single period but were instead characterized by three distinct economic profit creation cycles: Rapid growth (2001–07), slump and recovery (2008–10), and flatlining (2011–15).  De-averaging economic profit creation to revenue across subsectors and companies during these cycles revealed significant performance variance within and across cycles. While three  subsectors (test and measurement, building technologies, and multi-application components) excelled, every subsector had companies that consistently created economic profit and far outperformed their peers.

Four distinct company profiles emerged based on economic profit creation through time—Leading, Rising, Declining, and Trailing. Leading and Rising companies held or extended their lead based on the management choices they made rather than their starting point. In particular, four factors separated Leading and Rising companies from their Declining and Trailing peers—the quality of revenue growth they sought, their ability to maximize margins, the soundness of the M&A strategies they pursued, and their ability to optimize resource allocation.

As the sector looks to the future, several macroeconomic trends (demographic, geographic, social, regulatory, technology, and end market) will create tailwinds for the sector. However, the willingness to make the bold management choices that differentiated performance in recent cycles and the ability to get the three “Ns” right— new offerings/business models, new capabilities, new operating models—will determine which companies profit from these tailwinds.

For me, the report was useful from a variety of perspectives:

• It shed light on approaches to assess the sustainability of enterprises over extended periods of time including factors which authors felt were most important.  Financial metrics, while important, are only indicators of the most important ingredient: the sagacity of management in making choices.  
• The report identified subsectors and companies which outperformed their peers within the industrial sector. 
• It presented a global view, reflecting the globalized economy as opposed to a more restricted national/continental view. 
• The presentation of global trends is very useful in establishing a "view" about strategic investment possibilities. 
• The report contained clues about companies able to sustain the profitability of their enterprises (and rewards to share owners) over extended periods. 

A few conclusions:

• Many of the companies noted in the report are not listed on North American exchanges and, therefore, are not generally included in reports of American analysts.  (This said, many of the companies are listed as ADR's.)
• In visiting the web sites of most of the companies, I was impressed by the international scope of their operations and the economies of scale achieved in the rollout of products and services developed through the companies' R&D activities.  This has several other aspects of interest to investors: a) some "insulation" from protectionist measures which appear to be gaining ground in reaction to "globalization" (hard to implement when companies have significant operations in a diversity of areas); geographic diversification which may offset to some extent, differences in regional economic performance.  
• The trends to automation, more effective analysis and decision-making (read artificial intelligence) and inter-connectedness through the Internet of things are well-established and represent a fertile "hunting ground" for investors.  
• The report confirmed my belief that the quality of management and its decisions are crucial to the long-term performance of a company.  These are things which are difficult to assess through the use of standard parametric measures.  Since I invest on the basis of the "long view", I place a greater reliance on identifying long-term trends and the associated demand for products and services and then searching for companies which are positioned strategically to meet those needs.  Only then will I use parametric metrics to assess the strength of a company, especially its "financial fitness". 

The report led me to investigate a few companies in more detail.  Included are:

FANUC

DUERR AG

WATERS CORP
KEYENCE CORP
THE MIDDLEBY CORP

Most of them are listed on exchanges outside of North America; however, most of them can be purchased as ADR's with the disadvantage that some of them trade thinly.  However, for those willing to take the "long view" this need not be a major disadvantage.  

Again: read the article both to appreciate the thinking process and the identification of some possibilities for investment.  

Note:  You will have to register (free) with McKinsey to access the report which can be downloaded as a PDF.  You can also register to receive periodic e-mails which address a variety of topics.  Highly recommended.  

The Changing Face of Indian Society - a few investment themes

India is a dynamic country.  Despite its reputation for corruption, over-regulation and government inefficiency, a persistent caste system, and other impediments to growth, the country is in a sense, a miracle of human co-operation.

Imagine ... a country with 1,652 languages (according to the 1961 census), more than 2000 ethnic groups, the second largest (soon to be the largest) population in the world ...  Despite these challenges, the country is held together by a few traditions which I consider are resilient to internal and external challenges.  Here are a few of the ties which bind:

• the legacy of a British legal system which is shared throughout the country (It is often plagued by corruption, inefficiency and other sins of commission, but despite this, it provides an aspirational and legal framework for societal processes.)
• an extensive rail network which connects the regions (Under tremendous pressure, it nevertheless manages to work)
• English as the lingua franca (This facilitates communication within India and with the rest of the world.)
• geography: a more or less clearly identifiable geographical unit bounded by coastlines to the east, south and west and by high mountains to the north. 

Some Investment Themes

In an effort to narrow the search, I have identified a few themes which: a) interest me personally, and b) appear to be developing trends with investment potential.

Infrastructure

Transportation: roads, bridges, rail, air - all in need of upgrading and expansion to service a growing economy

Energy: renewables, electricity distribution, efficiency, energy security (read self-sufficiency in the face of potential disruptions in the supply of fossil fuels from places such as the Middle East)

Here is a selective listing of current infrastructure projects which are currently underway.  (Note the substantial involvement of multi-national companies.)

https://www.ibef.org/industry/infrastructure-sector-india.aspx

I am exploring various ways to invest in this area: 

• multinationals that manage projects in India
• domestic companies

My sense is that domestic companies may have an edge provided that they have the financial resources and technical and managerial skills.  With this in mind, I invested in Fairfax India Holdings Corporation as soon as it was listed on the TSX.   

Fairfax India Holdings Corporation is an investment holding company whose objective is to achieve long term capital appreciation, while preserving capital, by investing, either directly or through one of its wholly-owned subsidiaries, 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 (‘‘Indian Investments’’).

For the most part, Fairfax appears to invest in companies which enable the development of infrastructure by providing financial services, chemicals, freight logistics, and the storage of agricultural commodities.  I like this thoughtful approach as it exposes Fairfax to opportunities in broad swaths of the India economy.  I wrote about this stock in an earlier post.  Here are the most important reasons for my investment:

• seasoned management with a sustained successful track record and a reputation for honesty 
• management which has cultural roots in India and is embedded in the country's business community
• the opportunity presented by a dynamic country with a growing economy and excellent prospects for the future
• diversification beyond North America and direct ownership in Indian companies (this as opposed to multinationals with interests in India) 

The Domestic Consumer

In my recent reading, I was impressed by a cogent article in The Diplomat (this publication should be must reading for investors seeking the "wide view").  It is entitled: 

India's Consumer Caste System. 

Here are a few excerpts: 

In other words, material wealth serves a purpose beyond financial security and prosperity — it’s also a prominent social marker. While that may not be surprising, it does seem that the instrumental value attached to affluence in India is particularly notable. According to the 2013 Ipsos Global Trends Survey, 58 percent of Indians measure success on the basis of what they own — the global average was 34 percent.

Until the 1990s, India was largely an isolated nation. Successive state leaders preferred an inward focus on economy, culture, and security. It was only when Prime Minster Narashimha Rao’s government in 1991 adopted liberalization policies — which deregulated the private sector and lowered trade and investment barriers — that India truly announced itself on the world stage.

That transformation was meteoric. For measure, the stock of foreign direct investment in India rose from just below $1.7 billion in 1991 to $206.4 billion in 2011, according to UNCTAD data. With the new funds — and global business activity, growing Internet access, and international media penetration alongside it — Indian society became increasingly exposed to new brands, cultures, and ideals.

The effects were almost immediate. India’s nouveau riche began to adopt a more cosmopolitan, and Western, tinge to their food, clothing, and lifestyle appetites. Fast-food has become a billion dollar industry, while the number of shopping malls has grown exponentially, from just a handful in the early 2000s to well over 500 today. Bollywood film plots — a bellwether for societal trends — now lead with more liberal and youth-based storylines, ahead of the conservative and family-centric plots of the early 1990s.

I would urge readers to explore the links internal to the above-noted article - absolutely fascinating.  In recent months, I have started to focus on perspectives of the artistic community as they are often more sensitive to societal change than investment apparachicks.  They have a real strength: they not only identify change - they also import meaning to that change and context.  

At present, I am exploring opportunities associated with this trend:

• branded consumer goods (beauty products, products associated with conspicuous consumption e.g. eyewear, clothing) with an international cache
• domestic brands which have status internally and cater to a growing sense of the "modern Indian self."

To this end, I've started to read national and local Indian newspapers and delve into Indian trade publications.  What a vibrant milieu: entertaining, salacious, sometimes thoughtful, always opinionated ... and a welcome diversion from the partisanship of US news outlets and the timidity of many mainstream rags in Canada which usually focus on what a neighbour of mine labels as "first world problems" e.g. triggering words and safe places for university students, the plague of rising house prices etc.  - problems which people in most of the world would love to have.  

In future posts, I will record my findings. 

John Deere - Right to Repair - Corporations versus Farmers - A Possible Solution

A case of corporate greed ... or an evolving context?  John Deere contends that it has the exclusive right to repair its tractors, citing provisions of the Digital Millennium Copyright Act (1998).  If followed to the limit, this means that farmers would have to engage a Deere service representative to make repairs to any part of the tractor system which is regulated in some way by software i.e just about everything in today's new models.

Farmers have challenged this notion and have used good old American (Ukranian) ingenuity as a workaround:

https://motherboard.vice.com/en_us/article/why-american-farmers-are-hacking-their-tractors-with-ukrainian-firmware

To avoid the draconian locks that John Deere puts on the tractors they buy, farmers throughout America's heartland have started hacking their equipment with firmware that's cracked in Eastern Europe and traded on invite-only, paid online forums.

Tractor hacking is growing increasingly popular because John Deere and other manufacturers have made it impossible to perform "unauthorized" repair on farm equipment, which farmers see as an attack on their sovereignty and quite possibly an existential threat to their livelihood if their tractor breaks at an inopportune time.

"When crunch time comes and we break down, chances are we don't have time to wait for a dealership employee to show up and fix it," Danny Kluthe, a hog farmer in Nebraska, told his state legislature earlier this month. "Most all the new equipment [requires] a download [to fix]."

Here is a link to the license agreement for embedded software that farmers are required to sign as part of their purchase agreement:
https://www.deere.com/privacy_and_data/docs/agreement_pdfs/english/2016-10-28-Embedded-Software-EULA.pdf

In addition to restrictive covenants on rights to use the software, the company has absolved itself of any substantial liability for damages caused by the licensed materials (software) - see article 9 Limitation of Liability.

Tractors and other agricultural equipment are increasingly being controlled by software.  I would argue that software is the differentiator between brands: manufacturers are in a race to develop machines which are faster, smarter and more productive.  In essence, the mechanicals have become commoditized. Parts can be bolted on - it's all about co-ordination of the moving parts.

An Inherent Risk to Deere's Corporate Policy

My belief is that Deere has fallen into the pit of having its corporate outlook shaped by MBA's and lawyers.  They seem to have ignored the perspective of their customers, the people who pay to keep them in business.  When did "muddy boots" last grace Deere's boardrooms?

An agile competitor could quickly gain a market share by adopting a different policy; namely, taking a more relaxed attitude to intellectual property.  In short order, this could generate a lot of goodwill and capture disgruntled farmers who have long memories.

Some aspects of a more enlightened policy for intellectual property could include:

• measures to prevent the appropriation of intellectual property by competitors (this is already done)
• provisions for owners to make repairs using company software (this would include feedback loops to the company so that it could identify shortcomings and improve its software)
• "rewards" for farmers and others who make improvements in software and its application
• software training for farmers (to make them more competent and generate goodwill) - this would be part of the purchase agreement and would enhance machine performance and indirectly, company reputation
• company-moderated forums (on line or otherwise) whereby farmers could share their experience

In my search for investments in agricultural equipment manufacturers, I will be mindful of more enlightened intellectual property agreements.  While Deere may win in the courtroom and legislatures in the short term, they have much to loose over the longer term, especially when confronted with more customer-oriented competitors.  

Deere's massive distribution network is often held up as a barrier to competitors, but the market is evolving to one of fewer and bigger customers, an outcome of consolidation in the the farming business.  Customers are smarter, more driven by business outcomes and less driven by loyalty.  Well funded innovators have the potential to upset what has worked for Deere and others for more than a century.  

I am on an alert to this possibility.

I am invested in Deere and Rocky Mountain Equipment, a Canadian distributor for CASE  which has a similar policy.  Both are good companies: well managed with the experience of having successfully negotiated troughs in the agricultural cycle.  In my view, they will do very well once things recover ... but ... innovation and "creative destruction" are forces which cannot be ignored.  My hope is that Deere and Case will adopt more customer-friendly policies.