Investment Philosophy

Spreading a wide net to capture as many great ideas as possible.

​We source our investment ideas broadly:

• Friends and colleagues in the industry as well as several very high quality analysts we follow closely

• Analyst-specific social media

• Investment blogs

• Insider trading trends:

• SEDI (Canada)

• SEC Form 4 filings

• Activist Investor filings (SEC 13D/13G)

• Financial Publications

• Trade/industrial journals

• Leads generated by investment holdings we already own or have owned in the past (i.e. spin-offs from companies we know well or great managers we know starting something new)

• Screens using value metrics (surprisingly, this is the least productive source!)

We put aside over 90% of the contents in the Funnel very early in the vetting process for the following reasons:

• Terrible industry economics (secular, not cyclical, adverse trends

• Businesses that require continuous access to capital markets in order to operate and survive 

• Lack of a margin of safety:

• In the market price compared to our rough estimate of intrinsic value

• In the strength of the balance sheet

• In the trends concerning short-term liquidity and longer-term operating cash flows versus liabilities

• “Melting Ice-cube” assets:  usually these are businesses that appear cheap looking at historical financial data but instead have escalating liabilities and rapidly diminishing (or absent) cash flows

• Companies that have extreme customer concentration (i.e. supplier of military gear to a single country) and no prospects of that situation changing

• Any business we would not be prepared to commit to holding for at least 3 years, even if the share price dropped by 50% or more from our adjusted cost basis

• Suspicion of fraud or use of aggressive accounting methods

• Unreliable or inscrutable financial data (many emerging or frontier market companies, unfortunately)

• Unreliable, promotional, unqualified or self-dealing management

• Managements that have a control position (either through a majority holding or super-voting class of shares) and a track record of hostility towards minority shareholders

• Controlling shareholders who have misaligned incentives or a track record of hostility towards minority shareholders

• Businesses that are perpetually in politicians crosshairs.

• Absent rule-of-law in the business operating geography (i.e. Russian Federation, Venezuela)

• Binary outcome situations (many biotech companies)

• A business plan that we cannot understand because:

• It outside our circle of competence

• It is unnecessarily complex

• Limited upside:  if we can’t see at least a potential internal rate of return of at least 15% per annum for common shares and 7.5% p.a. for preferred equity or fixed income securities, it’s most likely not worth our time.

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Note that none of the above points necessarily disqualify a particular investment on its own. There almost no types of businesses or industrial sectors that we view as ‘un-investable’ at the right price and under the right set of attractive circumstances.

The deep dive.
 
We start by reading publicly available information that we deem relevant which may include:

• Public filings

• Presentations

• Conference calls transcripts

• Trade Journals

• Employee confidential reviews (ie. Glassdoor.com)

• Due diligence on managers and key shareholders

• Buy-side analyst opinions

• Sell-side analyst opinions

• Channel checks 

Our next step is to carefully analyze the financial data in order to establish a margin of safety in terms of:

• Balance sheet strength

• Current or near-term free cash flow generation 

• Discount offered by the market price compared to a range of estimated intrinsic values using (as appropriate):

• Both traditional and reverse discounted cash flow models

• Traditional value metrics such as P/E, EV/EBIDTA, P/Book, P/NAV and FCF yield, on both an absolute and relative basis

• Estimated Private Market Value

• Seeking and valuing “hidden assets” (often large net operating losses or real estate held on the books at historical very low cost basis according to GAAP rules)

Our analysis may include qualitative characteristics of the company and its business plan such as:

• ​Its current or prospective competitive advantage and the durability of those advantages.

• A sense of the total addressable market, its market share and the runway for growth.

• We look for management decision-making that is characteristic of owners/founders rather than agents.

• Prospects for micro-economic tailwinds

 
Macro-economic factors are briefly considered, although these are the least important inputs.
Finally, the idea is then presented to the Investment Committee:  Lorne and Tim.  The committee members who are not presenting are assigned the task of ‘killing the idea’.  If they are unable to create a cogent counter-thesis, the idea is deemed robust.

Prudent weighting of risk and reward.
 
We allocate an idea as follows:

• Our best ideas with the largest margin of safety are allocated 5-10% of AUM.

• Ideas that require more development but have promise are allocated 2-4% of AUM

• Ideas that have highly asymmetric reward-to-risk profiles but do not have the financial margin of safety we would normally insist on are allocated only 1%, as we will treat them as call options.

 
We have adopted Brookfield Asset Management’s concept of ‘relentless incrementalism’ for many ideas.  This means that a small position can eventually become a large one over time as we become more comfortable with the underpinnings of its margin of safety, along with the competence and incentives of the operators.
 
We will be careful not to allow allocation to any specific industrial sector to exceed 30% of AUM.

Getting it right
 
Trading execution will be performed by an assigned brokerage firm that understands the natural trade flows of the market and individual equities.  We will closely monitor the execution of trade by the brokerage firm.  Position sizing and target price range of the bid or ask will be determined by the Portfolio Manager.   RBC Investor Services is our Custodian and will hold all the assets.  RBC Investor Services will no disburse funds on a trade unless they receive the shares.

Keeping our finger on the pulse
 

Bayesian thinking:  Initial reason for investing plus continually monitoring new evidence and its statistical impact to the investment thesis.  This involves reading annual and quarterly reports, management presentations and listening to conference calls. 

Knowing when to cut and run
 

Selling a stake usually involves one or more of the following developments:

• ​Market price exceeds our updated estimate of the range of intrinsic value

• We have a better idea in the same industrial sector

• Our original thesis has been disproved

• Suspicious accounting methods

• Deteriorating fundamental performance that isn’t likely to be temporary

• Cash management requirements

• Position exceeds 20% AUM

• Industrial sector exceeds 30% AUM

Rinse and repeat​