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"If it don’t make dollars, it won’t make ¢ents"

This is one of my favourite quotes from a mentor of mine when making a point to me when we’ve sat down to discuss finances. Charles is a patient I had back in my first year of nursing school and through our interactions over that time and since returning for visits we formed a lasting friendship. He’s more than 50 years my senior, yet for the longest time he has taken an interest in my business background and always enjoyed conversations on that topic. He’s a Canadian veteran who made a simple life after returning from Europe post-WWII and never lived a lavish lifestyle. He is among three people who have had the most influential impact on my investing techniques.One day he sat down with me for one of our now notoriously known “investing BCT’s.” A BCT for anyone who’s not familiar with military lingo stands for “Basic Combat Training.” It’s an education session where I sit & listen, he gives out vague advice or some type of cryptic riddle on the market, a sector or a stock, and I then go home in the hopes of solving it on my own and come back with my attempt at the answer during our next visit. Notice I say “hope” because quite frequently I’ll come back more confused then when I left. For a man without any formal training in investing, his approach is one that over his lifetime has provided substantial results in comparison to other approaches; and in term strongly influenced mine.Although many of the veterans in the hospital call me his “rook”, I find that his common sense approach to investing is one of the most valuable teachings I’ve ever been exposed to. For everything I ever paid to learn in business school, his approach, outlook and patience in teaching me has been more valuable than any four year BBA ever could be.Chuck’s investment philosophy since his early thirties has always been to “Invest in companies that never lose money.” He has a fully diversified portfolio of stocks that all pay dividends (over 80% of the companies have increased those dividends on a yearly basis) and he’s only ever sold a handful of companies from the original holdings when something fundamentally changed in a negative way to its business operations.

When we first met, I was quite puzzled by his approach of “Invest in companies that never lose money.” Being young, ambitious and slightly cocky, I felt that an investor should focus on companies that always make money rather than companies that never lose money. His explanation was quite simple: making money is never the hard part; its learning how not to lose it that makes a fundamental difference. A company can have a great product, but if it’s not managed properly the company can falter, trip or stumble in profitability.

Recently I was reading comments by one of my admired professional value managers who referenced a quote by Wilbur Ross…

…Money has been far too easy to come by. When I first came to Wall Street, an old man gave me very wise advice. He said, “young fellow, do you know what shape money is?” I said, “Well sure, it’s rectangular.” He said, “No, money is round, it can roll away from you just as fast as it rolls towards you.”…
Some people might wonder how to interpret that quote in reference to investing, but to me it’s quite simple. During the good times, we frequently forget how difficult it can be to invest during the bad. Developing a disciplined approach to investing, no matter the strategy you choose, can go a long way in helping you manage the risk you’re exposing your capital to.Chuck loved this quote when I shared it with him, taking the moment to reflect back on one of our earliest conversations about investing:I was about twenty-two at the time of the conversation and just beginning to get a feel of wanting to venture into the world of DIY investing. At the time I was with a financial advisor and I knew I still had a lot to learn, but I was eager to acquire as much information as I could in the shortest period of time. When Chuck first asked me to sit down one afternoon for lunch after my morning clinical, he shared with me his investing philosophy of selecting companies that never lost money. My first reaction was this simple farmer from Ontario possibly knew little of investing or had little to offer me in comparison to the young business grad I had become. Yet I quickly learnt that the education I had received and spent thousands of dollars on would help me very little in comparison to the lifetime of experience this gentleman had been exposed to.His first task was to ask me to name a company from his portfolio that wasn’t a smart investment (i.e.: lost money). I didn’t really know where to start, so I picked the obvious: an insurance company. Insurance companies lose money from natural disasters, car accidents and a host of other unfortunate incidents. I sat smugly in my chair, confident I had just proved him wrong until he asked me if I was sure. I replied “of course” and he proceeded to ask me what happens after I get into an accident. “Well, my rates would go up” followed with his reply of “Exactly, no matter how much they pay out in premiums, they always cover their bottom line. It’s their margin of safety. From the time you start paying for a policy until you make a claim, more often than not you’ve likely paid out the needed funds to cover the damages through the past premiums paid. What will happen now is the company will simply raise your premiums even further as justification for what they’ve paid out in order to make even more money.” And so my education began.

Next were banks: At this time CIBC and TD had exposure to the Enron fallout and were being named in lawsuits for damages from their activities with the energy giant. But even with these bad behaviours, a bank almost always covers their margin of safety well above the prime lending rate. Even when they offer a more competitive rate, they’re most likely doing so with leverage on assets or providing a spread on the money they’ll use from other products. Chuck’s example was giving someone a GIC rate of 3.75% and offering a mortgage at 6.25%. He said that quite frequently a bank can return 10-16% from the money you lend them in the long-term. The bank simply borrows your money at 3.75% and hands it to a mortgage lender who they charge 6.25% or higher. (This is also the gentleman who told me to invest aggressively into banks whenever their P/E is 60-70% of their relative index)

He proceeded another day during a BCT to tell me in great detail everything he did from the moment he woke up until I met him for lunch that day. He told me the exact model of bed he woke up in, what type of underwear he put on, what razor, shaving cream, denture cleaner, mouth rinse & hair gel he used. He then shared what he had for breakfast. By this time I was confused, I wondering if he had taken all of his medication that morning as prescribed. But when he asked me what things in life had barely changed over the last 10, 25 or 50 years I was stumped. The world was always changing as new products, technologies or things in our lives improved. I already knew that banks & insurance companies had been around as long as most people can remember, but I was convinced there were very few businesses that had. When I looked over his portfolio with a perplexed look, he asked me if people had changed how they eat out, where they go for groceries, what the majority of our clothes were made of, the composition of tires, etc. He let me sit there for a moment, sitting back in a chair smiling and then finally asked, “Do you get it yet young man?

What he was doing was explaining what I would later learn to be one of Buffett’s fundamental investing strategies that very few people capture in their own discipline: predictability. The company, product or service through which you invest in will not change today, tomorrow or at any time in the near future. The company may sell more, produce more, change a few non-core products or services along the way, but the fundamentals of what the company does won’t.

What Chuck was offering me for the first time in my life was a different way to look at investing in contrast to the strict numbers that I had learnt in business school. Here was a man who had never picked up a quantitative book on financial analysis, designed elaborate S.A.’s or ever performed a professional case study on a problem facing a multinational corporation. Yet he understood the qualitative qualities that any business needed to understand in order to be successful. If he knew that the cash flow of a specific company was maintained & predictable, if the product/service was protected by quality management & consumer desire, then he never had a problem investing into it. He would wait for a downturn in the market (often in the midst of a recession) and bulk up positions in key holdings of his portfolio to take advantage of negative market sentiment.

When investors today look to the market in times of increasing uncertainty, I often look back to the lessons I’ve learnt from Chuck & others. It helps me to re-focus back onto my investing strategy, the fundamentals I’ve designed & incorporated into my practice and where to look for value when everyone else is focused on something else. The vision of a contrarian is now infused into my business instincts and often I’m zigging well before the rest of the market has even thought to zag.

I’m young and and I’ve made mistakes. But once I began to learn the classic mistakes that most investors make and how large of an impact those mistakes have on your ability to generate returns over a long period of time, I made a promise to myself to develop a discipline that would enable me to avoid or at least minimize mistakes.

Those, as many know, are my Value Rules. From those I’ve designed portfolios, investing strategies & a common sense approach to investing that helps me lower my exposure to risk. It’s important that readers understand that they will never completely eliminate risk from my investing activities, but by increasing my MoS and reducing exposure to risk I stand a much better chance of generating consistent compounding returns over the long-term.

That is the key and beauty to financial freedom.
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