Financial Insight Investment Letter

Financial Insight, an on-line investment letter is a publication of Insight Financial Corporation, a member of The Heinze Group of Companies. A Canadian letter written in plain English for any investor

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Dave's Rule of the Month

Index of Rules

Click on an individual rule to jump to its commentary, or scroll down through all the rules and their commentaries.

Guaranteed, the worlds greatest false sense of security.

Profit is not a four-letter word, but loss is.

Momentum Investing is about the same as the Greater Fool Theory.

I like some concept stocks too. The concept that I like best is the one where the company has a long history of earnings with steady earnings per share growth.

It is better to over pay for a great company than to get a lousy one for free.

If You Have a Plan, and it is a Good Plan, Then Stick to Your Plan

Those short-term considerations can kill you in the long run.

History repeats itself, then again, times change.

Buy Lower, Sell Higher

Just because you told your dog to sit, as he was about to sit, does not mean he is obedient.

I do not buy stocks or invest in the stock market. I invest in companies.

Patience Is A Virtue

When you are sure you know what is going on, you are probably wrong.

Companies are like a campfire. If they are poorly constructed they will eventually fizzle out. If they are well constructed, they will burn under even the most adverse conditions.

Buying low will make you money. Selling Low will cost you money.

I'm not sure who THEY are, but it seems to me that THEY are usually wrong.

Before you buy a dead cat, maybe you should check its health.

If you average down, it is time to check your philosophy.

Old rules never die, they just become unpopular.

It is a mistake to buy crap, but it is also a mistake to dump quality.

When it seems that everyone is doing it: It is probably wrong.

What goes up may come down, but not necessarily all the way.

Buy quality, then do not pay too much attention.

Don't Panic

It is very easy to jump from last year's poor performer to last year's winner, only to find that your new investment is next year's poor performer and the investment you sold is next year's winner.

Sound investing should not be considered a competitive thing, the more people that do it, the better off everyone will be.

If your financial advisor really knew everything, then they probably would not be a financial advisor.

If you grab hold of something really hot, be prepared to get burned.

Avoid gimmicks, buy the real thing.

Beware of red herrings. Your goal is to increase your overall wealth, not reduce taxes or invest abroad.

If the petroleum industry does not figure out that it is in the energy business, rather than the oil and gas business, then sooner or later, it will find itself in trouble.

Do not beat yourself up over your mistakes. Even if you follow a sound investment approach, you are almost certain to pick some losers and to sell some winners.

More often than not, the best course of action is to do nothing.

Good Things come to those who wait.

Don't Let the proverbial tax tail wag the dog.

The best way to get rich quick is to put together a get rich quick scheme and sell it to people.

When people start telling you that something has never happened before, it may mean that it is about to happen.

If you want to succeed, you have to be prepared to lose.

There is no such thing as a perfectly safe investment, there are only investments with varying degrees of risk.

It is your money, not the Banks, Trust Companies, Insurance Companies or the Mutual Fund Companies.

Just because someone uses a lot of big words, it does not mean that they know something.

Actions speak louder than words.

Nothing changes, but then again, nothing stays the same either.

If it were not for deadlines, nothing would ever happen.

If you do not know what you are doing, you will probably do it wrong.

Making money makes me happy.

When all the experts agree, they are usually wrong.

Always expect the unexpected.

When you are having fun making money, remember that it will not be as much fun when you are losing.

Your overall objective should be to accumulate wealth.

When reviewing your investments, ignore your actual costs, as they are irrelevant to decision making.

When in Doubt, tell the truth.

You can ride a wave if you like, but sooner or later, you will be thrown off.

Buy on Bad news, sell on good.

The hardest part of a market correction is deciding what to buy.

The market is irrelevant.

Those who really want to be, should never be bosses.

Trading is a negative sum gain

Dave's Commentary on Fishing and Style


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Guaranteed, the worlds greatest false sense of security.

Published November 1994; republished July 2, 1998

In my opinion the word guaranteed is the most overused and abused word in the investment and insurance industries. When someone tells you that something is guaranteed, you should ask by whom and for what. After all, guarantees are usually limited in some manner, and they are only as good as the person or organization making them.

I recommend you take all verbal guarantees with a grain of salt and carefully evaluate all factors affecting your investments, including any applicable guarantees. Better yet, always follow our basic investment principles and steer away from people who are constantly using the word guaranteed.

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Profit is not a four-letter word, but loss is.

> Published March 30, 1997; republished February 8, 2000

I think that this is both a rule and a political statement. Regardless, it is one that is near and dear to my heart. Whether we are talking about business profits, or government surpluses, it seems that there are those who think that losing money is a good thing and making it is bad. Lately, governments have been taking heat for having surpluses, and investors are shunning profitable companies and rewarding those that are losing money. It almost seems that the more a company loses, and the more unforeseeable profits are, the more the company is rewarded by the stock market. I find this attitude hard to phantom, but nonetheless there seems to be a lot of investors who harbor it.

If I offered you a chance to invest a large sum of money in a private company, whose business plan called for spending on projects that would capture market share but would not make money, in some cases offer the services for free and further, there was no plan to ever make a profit, would you invest? Of course not! You would demand to see some sort of plan to eventually turn a profit, it would have to be made before the companies resources ran out (that is the company goes bust), it would have to be large enough to justify the risk plus have some degree of credibility. I would expect this requirement from most investors. So why is it that if I turn this company into a public company, add the name "dot com" and indicate that I am not worried about making money, just about being a market leader, no mater what the cost, that investors cannot get their cheque books out fast enough? This makes no sense to me!

So let me make my position perfectly clear. Whether in government or business, LOSS is a four-letter word. When left unchecked, losses will ruin both businesses and economies. Maybe not right away, but eventually. In the end, loss means increased debt, loss of wealth or a combination of the two. This leaves little or no money for other things and can bring on bankruptcy. This in turn creates a loss of wealth to others, which ripples through the economy and ultimately reduces the affluence of all society. So when you think about it, losses, when left unchecked, create lose-lose situations, and there are few if any winners in the long run.

So as you can see, profits are necessary for prosperity and growth, while losses eventually spell disaster. So which do you consider a four letter word; the one that is, or the one that is not?

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Momentum Investing is about the same as the Greater Fool Theory.

Published March 12 2000

For those who are not familiar with the greater fool theory, it goes something like this: No matter how high or foolish the price for something gets, you can still buy it, as sooner or later there will be an even greater fool who will be prepared to pay even more. If applied to stocks, investors who follow this theory, would pay ever increasing prices for stocks, even though the prices were in no way justifiable, because sooner or later, probably sooner, another even greater fool will come along, probably one following the same philosophy. This theory can and has driven markets to greater and greater heights and lasted for long periods of time. Eventually though, like any scheme built on hot air instead of substance, the theory bursts, and all the cards come tumbling down, leaving nothing but disaster in its wake. Yes there are a few that get out early and reap the rewards, but usually they are the minority.

Many of those who follow this approach start out having successes, then they start to believe in themselves and continue at the game. The more successful they are, the more overconfident they become and the greater the risks they are willing to take. Then, when they are so overconfident that they have bet the farm on their skills, finally the house of cards comes tumbling down on top of them, and they lose big.

Now I am sorry, but will someone please explain to me how the above differs from today's very popular momentum investor. We seem to have day trader's popping up all over the place. These people did not spend years (or decades) learning about investments, fundamentals and technical analysis, yet they believe that they can make their living watching the screen and riding trends, with blind disrespect to what they are investing in. Further, many of the most popular mutual fund managers (professional's yet) have started ignoring their fundamentals and riding the momentum wave. Justifying it with statements like; "this is a new economy," or "why concentrate on fundamentals when you can easily ride these momentum plays," or even worse, "any manager would be a fool not to play this game, if they do not, there performance will lag their competition and they will be out of work." What is even scarier is that funds are taking on names that include the word Momentum. No matter how you cut it, I do not believe that momentum investing can be included with terms like growth or value, or for that mater even sector rotating, which most of our readers know we do not like either.

Let us start with growth investing. Of course this term can mean a lot of things, however, in general, at least for me the term refers to looking for companies with solid fundamentals, that are steadily growing their earnings and likely to do so for a long time. In these cases, the price might get a little ahead of itself from time to time, but there is still some foundation for the stocks activity. Value investing can also mean a lot of things, but in general, to me it means using some form of analysis to find undervalued stocks, then to purchase those stocks in the belief that sooner or later the market will take note of these values and when it does the price will rise. The value investor needs the most patience, especially in times like now, however, many of the most successful investors employed some sort of value approach. I am sure that is not going to change. Value investors also tend to out-perform during weaker markets, and under-perform during the best markets. Finally, there is the sector rotator. While I do not recommend this approach, it can still have a sound basis. Here, the investor tries to determine what sectors will move next then increase their holdings in that sector. If we presume that they have done some reasonable analysis of the economy, selected quality stocks and overall stayed fairly diversified, then this can still be a sound approach. In truth, I believe that the most successful investors follow a combination approach.

If you are a long time reader of mine, then you know that I follow a little of each of these approaches. I tend to gravitate to growing companies, however, I like to purchase my companies for a reasonable price. Some managers are starting to use the phrase; "Growth at a reasonable price." Well, I would say that summarizes the style that I have followed for a long time. I even must admit that I do some closet rotating, in that when I see a portfolio getting under weighted in an area, or I believe that a certain sector is under-valued, or some combination of the two, I will look to beefing up those sectors. But please, I said PLEASE, do not ever accuse me of following the "Greater fool theory," or of "Momentum Investing".

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I like some concept stocks too. The concept that I like best is the one where the company has a long history of earnings with steady earnings per share growth.

Published April 18, 2000

I came up with this rule, and then I was at a loss for words. What more is there to say? Over the last year, concepts have been all the rage. However, these concepts have somehow missed the most important factor, earnings. This is something we have been harping about for a while. Lately, however, it appears that the validity of these warnings is starting to be realized. Hopefully we are now seeing a shift from what we consider junk, to quality companies; the companies that have more than just a good idea, but a history of turning those ideas into profits, then coming up with new ideas and doing it again and increasing those profits.

So while I do not like concept stocks as such, I do like the concept of buying companies that have a long history of earnings and of steadily increasing their earnings per share. No matter what the business is, these are the companies that will make us money in the long run.

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It is better to over pay for a great company than to get a lousy one for free.

Published June 8, 2000

This may seem like a funny thing for an investor with a bit of a value bias to say, but after all has been said and done, it is a very important rule. High quality companies that have long histories of earnings, and growing those earnings usually go up over the long term. Sure there will be times when they get ahead of themselves, stagnate for a year or two and even lose between 20 and 40 percent of their value. However, if they are quality companies, in the long run (5 to 10 years or more) the trend will be up, and very often at a much better long-term rate than the market as a whole. While we like to buy these companies when they are cheap, in some cases, waiting for a bargain may mean waiting forever, or watching the price double, then drop back by 25% giving you a bargain at a price 50 percent higher than the original high price. In the long run, what you paid may be of little consequence. What is most important is that you owned a great company and kept it for a very long period of time. More often than not, these high quality companies will give you a solid investment with a very handsome return. Or, you could buy a lousy company at a bargain.

I guess if someone offered me one (a lousy company) for free, I would likely accept. The question is, did they really give me something worth having. The stock might go up, it might even make me a fortune. That is, if I dump it in time. Or maybe I will get lucky and it will be one of the few that turns into something, or it will get taken over. All these things can and do happen. However, I would much rather hold quality companies, where my future is relatively secure and in the long run, I am likely to get the best returns. Not to mention that it is much easier to successfully pick high quality growth companies than it is to figure out what will be the next hot investment.

So, while it may not be what the stock promoters and some brokers want to hear, I must insist, "It is better to overpay for a great company than to get a lousy one for free." After all, with a great company I am reasonably assured that I will wind up with something. That is not something I can say for a lousy one. And, it is what you wind up with that counts. Right?

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If You Have a Plan, and it is a Good Plan, Then Stick to Your Plan

Published July 14, 2000

This is something I find myself saying on a fairly regular basis. This should not be surprising, as it is only human to want to adjust your plan according to how you perceive current markets. However, if you accept our argument that in the short term it is very difficult to predict the markets, then it stands to reason that adjusting your plan based on short-term fluctuations is likely to do more harm than good. Here is a real example of where this advise paid off.

Several years ago, we devised a plan for a client who had recently come into a fair sum of money. The plan was to average into the market over two years. At the end of the period, he would have a balance suitable to him. About a month or so into the plan, he called me and said, "I understand the benefit of averaging in, but since the market is going up and likely to continue to go up, wouldn't it make sense to speed up the plan?" I replied that he had a plan, it was a good plan and he should stick to the plan. He agreed and stuck to the plan. As it turned out, the market corrected the next year, so he got into the market cheaper (actually got more for the same money) than he would have had he diverted from the plan. Then, later the next year, during the correction, the client called me again, wondering if we should delay the plan, as the market was correcting. I replied that he had a plan, it was a good plan and he should stick to the plan. He agreed again, and commented that I had to reassure him about once every six months. As it turned out, the next year was good for the markets, so it is good that he stuck to the plan.

It is only natural to want to second-guess your plan. Sometimes we want to increase a holding in something because it is dropping. This is okay if it is a good investment and it makes sense to increase that holding, but not if you already have an appropriate amount of it. On the other hand, you might want to sell something because it is dropping. However, if it is a good investment that makes sense in your portfolio, then selling might be the wrong thing to do. Conversely, if something is going up, we might be inclined to either sell or to buy more depending on our point of view. But, if that reaction is a knee jerk reaction, rather than part of a carefully laid out strategy, it is more likely to do harm, than good.

So, develop a good long-term plan. Then adjust it gradually as circumstances change, but in the short run, remember; if you have a plan, and it is a good plan, then stick to the plan.

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Those short-term considerations can kill you in the long run.

Published September 7, 2000

There are always lots of examples of this, but it seems that lately I am noticing it more than normal. Most notably was a recent case when a phony news release hit the wires indicating that a company was in trouble. Now the company had cleared up the issue and made it clear that it was a fraudulent release within hours, but not before the stock dropped 40 percent. This is not a stock that I follow, but I did notice that the stock returned to close to its original price very quickly. So, a hot investor who prides themselve on being on the cutting edge and dumped the stock immediately at a 40 percent discount must be feeling pretty bad about now. While this is a very glaring case, a couple others come to mind.

About three years ago I remember when one small division (which produces about 10% of total revenue) of a favorite company of mine reported disappointing earnings while the rest of the company was going great guns. The share price promptly dropped almost 20%, even though this division accounted for only 10% of the company. I also remember that a friend of mine was considering buying the stock. However, since they thought that the same division might have some more troubles, they waited for an even better opportunity. As it turns out, there never was a better opportunity and since then the stock has increased in value by almost 4 times. A lot of people missed out on an opportunity to increase their money by almost 4 times in 3 years because of short-term considerations. I guess I should not complain though, since I used that opportunity to increase my holdings in a favorite stock.

Another more recent example comes to mind. Another favorite company of mine has recently dropped about 30% even though they are a leader in a business with a terrific outlook. This seems to be because the market believes that a recent takeover by this company will hurt short-term earnings. While this may be true, in the long run it is more likely to improve the company's earnings, which is why the company's management acquired the company in the first place. Of course time will tell, but I believe that over the long run this company will do very well and those who sold due to this short term concern will be missing out on some good long-term opportunities.

So it is important to be careful not to be too quick to react to short-term considerations, as quite often those short-term considerations will hurt you in the long run.

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History repeats itself, then again, times change.

Published March 2, 1997; republished October 15, 2000

This somewhat contradictory statement could mean the difference between successful investing and failure. There is no doubt that with investments, history keeps repeating itself. Equities keep going up and over the long term they significantly out-perform fixed income investments. However, the ride has never been smooth. Many people lose money in equities because they invest when markets are hot, only to see a major correction, so they sell and stay out until the next hot market. Cyclical sectors keep cycling, going in and out of favor as their commodities go in and out of demand. Markets seem to move in waves and every now and then one of the hottest companies on the market, collapses. History has taught us that these trends continually repeat themselves and we can almost guarantee that they will continue to repeat themselves.

On the other hand, history has also taught us that times change, usually driven by technology. Companies that adapt and use these changes usually do well. Those that do not change, change too slowly, change for the sake of change alone or just try to ride the wave of change, usually get into trouble, sooner or later. So while companies that do not use technology effectively will find themselves uncompetitive and unable to compete, it is also worth noting that using technology just because it exists, to be first or cool, can be as inefficient as not using it at all. The other thing that history keeps proving is that the technology related businesses are very risky, as things change very fast, so what looks like a sure winner can turn bad almost overnight, as new technology replaces the old.

For an investor, or any business-person for that matter, the above may seem like a scary scenario. It does not have to be. If you look for quality investments in businesses with good management, that recognize change and uses it effectively, in the long run, you should do well. Will you pick the odd loser? Count on it, but that is why we diversify. Isn't it?

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Buy Lower, Sell Higher

Published December 12, 2000

Yea yea, I know what you are thinking. "How profound, he has had two months to think about it, you would think he could have come up with something more original than that. At least he could of come up with a Santa cliché, or something." Well I agree, however, there are a couple of points about this rule that I would like to make.

First, human nature is to do the opposite of this rule, even though we know better. After all, that is what makes the market so volatile. Everybody, even the professionals (sometimes they are the worst) want to join the crowd. Sometimes we refer to the herd mentality of investors. When gold was hot they all had to get in, the same for Japan, the Pacific Rim, resources and technology to name a few. Then on a dime they all had to get out. This attitude leads to buying high and selling low. Then doing it over and over again. An approach that is sure to make your broker rich. Now there are noises about whether it is time to get back into technology, or if resources are ripe and so on. Here we go again. This month's rule is so obvious that the harder you try to follow it, the more you are likely to break it. Which leads me to my second point.

You will notice that my rule is slightly different than the one you are used to. I did not say buy low, sell high, I said, buy lower, sell higher. The point is that we will rarely succeed in picking tops and bottoms. And even if we are just trying to pick the current trend, we are bound to be wrong half the time. However, what we can do correctly most of the time, is identify great companies with good long-term prospects. If we pick these companies, concentrate on the long term while ignoring short term issues, then hold on to them for a long time, perhaps decades, we are bound to do well. We can further improve these results by using new money to beef up the areas where our portfolio is lacking, increasing our positions when companies are out of favor and rebalancing our portfolio when we are over weighted in a category or individual stock. While this will often mean lightening the load of what is hot to increase it in what is not, over the long run, it is likely to improve the amount that we buy lower and sell higher, as long as we do not over do it. The important thing is that we pick these great companies and hold them for a long time. Then over time we will find that we bought lower and sold higher. Now, how profound is that?

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Just because you told your dog to sit, as he was about to sit, does not mean he is obedient.

Published March 15, 2003; republished January 5, 2009

A friend once told me that the trick to training a dog is to tell them what to do just as they are about to do it on their own. Then you can feel like you are in control. Thanks Alex. So you are probably wondering what that has to do with investing. Well, I must admit it took some thought. You see, I was thinking of this and thinking, what a great rule, I must use it. Then I tried to think of a way to relate it to investments. Then it came to me, like a flash of lightning, a profound message from the sky, like the ultimate …… well okay, it just came to me, but it really is relevant.

It seems investors are always looking for that one special piece of information that will lead to success. Further, it seems that there is no end to advisors and writers who are only too happy to oblige by giving them the shortcut they desire. Those supporting the theories, strategies, rules or whatever, always seem to have some historically proven approach. Their analysis shows that over a specified period of time, whenever a specific condition was met, a certain result happened, or it happened with a very high consistency. So it seems, or is apparently statistically proven that there is a correlation, so as an investor all you need to do is put the approach to work. The road to riches is free and clear. But then maybe you should ask yourself, if it is so easy, why are they telling me or anyone else about it? Would it not be smarter to just quietly profit by applying it? Or is the real money in the approach to be made by the person promoting it, rather than by the one applying it?

You see, it has been my experience that it is never that easy and that these schemes usually result in a parting of the ways between the investor and their money. It also seems that the more guaranteed the scheme, the more sure you can be that it will fail. While it is true that an outcome is a result of certain events. In investing, it is even truer that a result is the sum of numerous events, and rarely does one single event determine the outcome. So the fact that an outcome followed a specific event, no matter how regularly, does not prove the result will follow the event in the future. Put another way, if I am very good at knowing when my dog is going to sit and I only tell it to sit just before it sits, you might assume that it sat because I told it to. Therefore, it would seem logical that if I say sit, the dog will sit. It might even be statistically proven. However, if it was not sitting because I told it to but because it was going to anyway, then it is not reasonable to expect the dog to sit just because I said sit. As a side note, with some dogs, I think it is easier to determine when they will sit than to get them to do as they are told. And there lies the dilemma.

I do not believe there are simple answers and there certainly are not guarantees. A lot of factors effect your investments, and to take any of them in isolation is to ignore that very important fact. I do believe that with a reasonable amount of homework, it is not that difficult to build a sound well diversified portfolio of high quality companies that as a whole, over the long term will provide you with a respectable return, while accepting a reasonable level of risk. However, this requires patience, and the knowledge that some of your decisions will not turn out the way you hoped, but in balance, in the long run, the good will outweigh the bad.

So next time someone shows you a simple way to wealth with an exceptional track record, remember: Just because you told your dog to sit, as he was about to sit, does not mean he is obedient.

You see, there really was a point.

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I do not buy stocks or invest in the stock market. I invest in companies.

Published January 15, 2001

Well this is mostly true from a technical point of view. While I do buy stocks, I do not invest in the stock market, as technically that would mean owning an exchange. The point is more about a state of mind. Many people think of their investments as playing the market and hoping to trade their way to profits. While this may work for a few, I believe that for most people this approach would result in trading their way to losses. However, over the years I have done very well, and to a large extent I attribute it to an attitude.

When I make an investment, it is in a company that I really like and that I want to own for a very long time. If the company does not meet this criterion, then I am not interested. Do I always get it right? No. However, more often than not I do pick long term winners, and over the long haul I have found that being an owner of very high quality companies, ones that I want and like to own has paid off. Getting in at a good price and selling high does help, however, that is really the smallest part. What makes the biggest difference is that I own great companies and that I own them for a long time. The stock market is really nothing more than the store where I go to buy my companies and occasionally trade in all or part of a company for another.

So while it may be a moot point, the state of mind that: “I do not buy stocks or invest in the stock market. I invest in companies,” is no minor point at all.

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Patience Is A Virtue

Published March 9, 2001

It seems to me this was something that my mother was always saying to me while I was growing up. I wonder if that suggests that in my younger days I lacked patience. Marian, (my wife), tells me that nothing has changed. I guess that is the story of the women in my life. Personally, I believe that I have developed great patience over the years, at least in business and financial matters. And on that, I think they would both agree.

When I review our biggest successes over the years, I would say that patience has been a very important factor. Building a business has required great patience and perseverance. However, in the long run we can be very happy with what we have built over the last 15 years. Patience has also been important in building personal wealth. Most of what we have today is a result of what we did without in our younger years. We have always taken a long-term outlook and we are now beginning to reap the benefits both in lifestyle and in personal financial security. This is also true of our investment portfolio, be it ever so humble. It is becoming clear, after over 20 years of investing that the first few thousand dollars invested now makes up the majority of our portfolio, and that it will probably be the most important part of our retirement. Needless to say it has grown over the years, but it took patience. Finally, there are our individual investments. We hold many stocks that are worth more than double what we paid for them, some several times. In many cases we bought and hung on to cheap stocks of what we knew were great companies. It took patience, and sometimes you had to wonder if they would ever be noticed. But consider this. If you hold a stock for three or four years and nothing happens, your patience will be tested. However, if in the fifth year it doubles, you will have made about a 15% per year return on investment, not counting dividends. You cannot knock a 15% return, and it happens like that more often than you might think. Unfortunately, most investors do not have that kind of patience.

So while I do not always have the patience that my wife would like me to have, I think that I have it where it counts, and in business and investing, I do not think there is any doubt. "Patience is a virtue."

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When you are sure you know what is going on, you are probably wrong.

Published April 29, 2001

This one of those perverted things about investing. We all spend a lot of time trying to predict the future, however, until it has happened, the future is unknown, and over time it becomes evident that you had better not get too cocky. The thing is, the future is affected by an infinite number of factors. Everything from the easy things like climate (and who totally trusts the weather forecasters), to geological movements to the most difficult things like what are billions of people going to do. Put these unknown factors and probably a bunch more in a hat, shake it up and dump out the future. Sounds simple enough. Actually, when you think about it, we do amazingly well, but one thing is for certain, unless you are psychic (for those that believe in that sort of thing), you really do not know the future, and when you think you have it pegged, the future is bound to jump out and bit you.

This is why we continually stress a balanced approach. So next time you are absolutely certain about something, remember: When you are sure you know what is going on, you are probably wrong. Then go back and reread our four IFC Investment Principles.

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Companies are like a campfire. If they are poorly constructed they will eventually fizzle out. If they are well constructed, they will burn under even the most adverse conditions.

Published June 3, 1998; republished December 1, 1999 & July 12, 2001

One night some time ago at our summer hideaway, after starting our evening fire, I noticed that it burned nicely for a while, then it burned down a little, so I added a couple of logs. This started to smother the fire and it looked like it might fizzle out. However, I was not concerned, as I knew there was a good bed of hot coals underneath and if I gave it a few minutes, it would burn. So I did nothing. Sure enough, after a few minutes the fire was burning better than ever. OKAY, so I am a little strange, but after watching the fire I got to thinking how interesting it is that my strategy with this camp fire is similar to my strategy with my investments.

Since we hold high quality well-managed companies, I do not panic when I hear bad news. Actually, often after the bad news hits and a share's price drops, I increase our holdings. Also, even in a strong bull market, I have seen prices of shares that I wanted drop due to something that temporarily disappointed the market and finally picked up the shares for a bargain. Marian (my spouse) often laughs at me because I seem to get more interested in a company that has recently dropped in price than when prices rise. Interestingly enough though, this approach has served us well.

Sooner or later every company, no matter how well managed and no matter how strong, is going to hit rough waters. Inevitably, this will result in bad news, which will send many investors running for cover. However, in a quality company, this news is rarely serious, it is just one of the challenges that management must overcome. If there were never any real challenges, companies would not need good managers. So the bad news hits, something that is bound to happen sooner or later. Many investors run for cover to avoid losses. This temporarily drives down share prices, and either increases their losses or reduces their gains. This provides the value investor with an opportunity to do one of two things. Since they know that it is a quality company with a good bed of coals underneath, they are confident that sooner or later the stock's price will rise again. So if they already own the stock they can sit back and wait. If they do not own the stock but would like to, or own it but would like to own more, they can buy shares at a discount, then sit back and wait. Those who panic will likely lose, much to the delight of quality value investors who can take advantage of the temporary panics.

So as you can see, companies are like a campfire. If they are of high quality with a good bed of coals underneath, then chances are that they will burn under even the most adverse conditions.

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Buying low will make you money. Selling Low will cost you money.

Published October 28, 2001

I have to admit that I had some difficulty coming up with an appropriate rule this time. Not that there is not a lot to talk about, but I wanted something appropriate for the time. There was a temptation to come up with something humorous, something we all need about now. However, some might think that I was not taking current events seriously or was poking fun in bad taste. Well, believe me, like all North Americans, I take these things seriously and am deeply saddened by the events of September 11. So I decided that serious was better for now.

Obviously, the events of September will have a profound effect on us for a long time. This, along with the market sell off they caused will make people want to sell their stocks. However, this would be a mistake. If you own solid companies with solid businesses, then it stands to reason that most of them will continue to prosper in the future. Sure their profits and share price may take a short-term hit, however, life will go on, the economy will turn around and these companies will prosper. When they do, in a few months, or years (only time will tell which) today's prices will look like exceptional bargains. As a result, those who held on to or bought (or both) quality companies during times of depressed prices will make above average returns, while those who sold will make below average returns. So as you can see, buying low will make you money while selling low will cost you money.

A Note on Investment ethics: To some it may seem that by taking advantage of this buying opportunity we are benefiting by someone else's misfortune. To some extent this is true, however, so is a rescue worker who makes overtime or extra income working because of the misfortune of others. For that matter, many make their living providing services to those in need. While our efforts will not relieve any of the pain caused by a disaster, it does help to ease the damage. It creates a demand that will slow down and reduce the market damage, which will reduce the emotional and economic impact. Not to mention that the more demand created for these falling stocks, the less they will fall and less that those who panic will lose. So while I am not suggesting that we should feel good about profiting from the misfortune of others, or compare ourselves to the rescue workers who are putting their lives at risk, I am suggesting that we should not feel bad either, as our actions are actually doing some good. And let's face it; those who caused the disaster caused the harm. So please join me in being comfortable with our actions while at the same time feeling very bad about what happened, condemning those who did the damage and sending our sincere condolences to all those that suffer as a result.

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I'm not sure who THEY are, but it seems to me that THEY are usually wrong.

Published January 20, 2002

I'm not sure if this especially applies to investments, is really a rule, or is just a personal irritation, but here goes.

People often make the statement that; "They say that," followed by some supposedly profound words of wisdom that must be correct, after all "THEY" said it. I guess it is really a personal idiosyncrasy, but this drives me up the wall. I often respond with what I consider the obvious question: Who are they? After all, if I am going to accept their wisdom, I should at least be allowed to know who THEY are. I think this drives my wife a little crazy, not that she is the one making the statement, I think I've cured her of that, but because I will not leave well enough alone.

So will someone tell me, who are these mystical they's. Why is it that we have to accept their wisdom, and by the way, has anyone been keeping score. Maybe it is me, but when push comes to shove, it seems to me, that THEY, are usually wrong.

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Before you buy a dead cat, maybe you should check its health.

Published March 29, 2002

For those who are not familiar with the expression, in investment circles there is the expression "dead cat bounce." It is used to reference a temporary bounce back in the market after a drop. In short, if the bounce is temporary it is often referred to as a dead cat bounce. In this case I am referring to individual stocks, not the market.

It seems to me there is still way to much interest in technology stocks. A couple of years ago, despite our continued warnings, everyone (or it seemed like everyone) had to get them as they were setting the world on fire, even without profits or reasonable expectations of profit. Now the interest is due to their huge drop in price. For a lot of the old favorites, I often hear comments that at these prices, how much lower can they go? People seem to believe that these stocks will eventually be reaching the stars again. There is no doubt that some of these companies will come back and are now attractively valued. However, this will not be the case with all of them, and even with those that do come back, there is the question of how far.

First I will address the question of how much lower can they go? The answer is always the same, they can drop to zero and some of them will. If they do not have a reasonable means of generating positive cash flow, or sufficient means to carry on until they can generate positive cash flow or they go into a temporary cash crunch (e.g. they go into default on their credit terms) then there is a very real possibility that they will go out of business leaving the investors with nothing.

The second question is how far will the ones that survive come back. Here the answer is mixed. Many will survive but the price will never come back significantly and in some cases the price will drop even further. Some will come back and relative to current prices, some of those will provide significant maybe even exceptional returns. However, I expect that those that do provide the exceptional returns will be in the minority, and few, if any, will get near their old highs, at least not for years, maybe decades or maybe never.

So while I would not say you should not buy any of these beaten up technology stocks, limit it to small amounts that you can afford to lose and when you do invest remember: Before you buy a dead cat, maybe you should check its health.

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If you average down, it is time to check your philosophy.

Published July 10, 2002

I should point out that there is a difference between buying more of a stock at a cheap price and in buying more to bring down your cost per unit. If we like a stock it stands to reason that we might own it. However, sometimes, maybe even often the price drops below the price we paid. This is fairly normal market behavior, especially if we have not held it long. If it is still a good company, this should not alarm us, however, it might be presenting us with an opportunity. If our holdings are small in relation to the portfolio, then we might be inclined to purchase more and increase our holdings while the price is low. This is a perfectly reasonable approach as long as we still like the company. It is also worth noting that the price might be higher than what we paid, especially if we have held it for some time, however, the drop gives us a chance to increase our holdings at better than recent prices, in which case we have averaged up, again this is okay too. The problem arises when we are trying to lower our average cost.

We often hear of investors averaging down. This is where an investment has dropped in value, so an investor buys more hoping to reduce their loss per share by lowering their adjusted cost base. In this case, the investor is looking backward and trying to fix past mistakes rather than forward and trying to do the best they can from here on. In my view, the past and our original costs are irrelevant, and there may be more bad investment decisions made because of a fixation on past costs than for any other reason. While the past is helpful from an educational point of view and in helping us determine the future, from a decision making point of view it is really irrelevant. This is the problem with the averaging down philosophy. It is looking backward rather than forward.

So if you are averaging down, it might be wise to check your philosophy. Are you looking at the past and past cost or looking forward and concentrating on where to go from here, regardless of the past.

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Old rules never die, they just become unpopular.

Published October 17, 2002

Currently the rule that comes to mind is the buy and hold rule, however, there are others that also come to mind. In the late seventies the petroleum industry thought that solid balance sheets were not required in their industry. They also thought that costs did not matter as they were the in the oil business so they were different. In many different markets at different times people believed that they could not go wrong buying real estate. In the late nineties many thought that all a technology company needed was an idea and the words dot com at the end of their names. Forget about profits or even sales for that matter, because in technology things were different. To top it off, some very successful portfolio managers were suggesting that the old rules no longer applied and the best thing to do was to buy these great momentum plays. Hell, funds were even calling themselves momentum funds.

In each of these cases there is a common thread. The old rules were being ignored as this time things were different and the old rules no longer applied. The other common thread is that in time it turned out that the rules did apply and in fact were as important if not more important than ever. Currently, the suggestion is being made that buying and holding is dead and that to make money you have to jump in and out of the market, which is actually timing the market. There is no doubt that if done successfully timing the market can bring exceptional rewards. However, there can also be no doubt that if done poorly it cannot only reduce profits; it can whip out a portfolio. It has also been my experience that few can successfully time the market over extended periods, and in the long run even fewer can time it well enough to beat the approach of building a well diversified portfolio of high quality stocks and then holding them for a long time, despite the current markets.

So when you hear people suggesting that the old rules do not apply, and rest assured you will hear it often over your investing career, remember: Old rules never die, they just become unpopular, for a while.

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It is a mistake to buy crap, but it is also a mistake to dump quality.

Published July 29, 2003

It seems to be either feast or famine with many investors. They are either buying everything in sight with plans of grandeur, or stay out of the market entirely. In the late nineties I was continually warning people to avoid crap. Not to stop investing, just to stop buying crap. Since then, we have gone through what is probably the longest and deepest set back since the forties. Now many people are either avoiding stocks altogether or waiting to determine for sure that we are in a bull market. All of these are recipes for failure.

After the last three years, it is unlikely that I need to explain the importance of avoiding crap. However, it is evident that many people are making the other mistake. That is, not investing. While it is true, if you do not invest you will not lose, or at least lose any more, it is equally true that if you dump your quality companies, you will miss out on any recoveries plus future growth. So many of those who follow that whim will likely have a life long pattern of buying high and selling low. No wonder people get frustrated.

The thing is, while crappy stocks often have their day in the sun, they usually end in disaster. So rather than gambling on if you can get it right, and almost certainly you will not get it right very often, we advise that these crappy stocks be avoided altogether. On the other hand, while quality companies do get beaten up from time to time, in the long run they usually thrive. So buying and holding these will usually pay off, as long as you are patient enough. While you might better your returns by not holding them through the slumps, markets have a funny way of sneaking up on us, and before we know it, the best gains (or recoveries) are behind us and we have to decide if we should wait for another set back or just jump in. However, if you just hold a diverse portfolio of high quality stocks, perhaps topping up when things are bleak and thinning a little when your best performers become overweighted, in the long run, odds are your investment experience will be a satisfying one. It is unlikely that your overall returns will blow your socks off, but chances are they will be respectable.

So I will say it again, it is a mistake to buy crap, but it is also a mistake to dump quality.

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When it seems that everyone is doing it: It is probably wrong.

Published January 5, 2004

Talk about De-ja vu. This must be one of my biggest frustrations, and it seems to keep happening over and over again. I just keep asking myself; when am I going to wake up from this ridiculous recurring nightmare. Well all right, it is not exactly the same each time, the specific thing "IT" keeps changing, but the theme is always the same.

There always seems to be something that people cannot get enough of. It is just the best thing to buy and those that do not agree are just being foolish. Of course there is little regard for history, and even if there is, the thing is that this time it does not apply. I do not know, will I ever escape from this ridiculous dream, or am I just naive. In our January 2000 issue (a link to a reprint can be found in the index above), I discuss a lot of examples in more detail, but here are some brief examples. Gold in the late 1970's that reached over $800 U.S. per ounce, Calgary real estate (and many other real estate markets I am sure) in the late 70's, Dome Petroleum (that a friend of mine has called Dead Corp. for over 20 years now), Japan Funds, Emerging Market Funds, Bre-X, Internet Stocks, the dot com phenomena, and right now I am getting tired of having trust units pushed at me. I do not know, maybe I have lost it, and if not I suspect that I am doomed to living this crazy recurring nightmare until I do lose it.

I guess it just has something to do with human nature. Also, I am sure I am bound to be wrong about it from time to time, don't you think? But it seems that every time it happens the theme repeats itself. I see something get too popular. I express my reservations about it. Then I am labeled an old fool who is just not with it. Then sooner or later my worst fears get confirmed. Maybe I am just delusional.

Well I guess this old fool is just going to stick to the basics and continue to follow the basic principles that we continue to recommend. Maybe eventually I'll start being wrong and start missing out on some great opportunities. So what is new? Missing out on opportunities is a fact of life. The thing is that sticking to my principles has kept me out of many of the worst disasters and afforded me lots of good opportunities that more than made up for my misstakes.

Well, it has worked for me so far, because when it seems that everyone is doing it: It is probably wrong.

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What goes up may come down, but not necessarily all the way.

Published April 5, 1998; Republished May 12, 1999

I find it amazing that when the market starts going up, the bears starting making references to the laws of gravity. As if gravity has an effect on the market. Then again, even if it did, it would mean that once the market went high enough, it would be out of gravity’s reach. It seems to me that NASA has a space probe that is about to leave our solar system. It is fair to say that it is not coming back.

But let us get our focus back. Gravity does not effect the value of stocks. In the short run prices are most affected by human emotion. In the long run it is a company’s profits that most affects its value. So it is fair to say that what goes up will come down. After all, when prices go up, human emotion and greed often push them too high. Then the fundamentals kick in to bring prices back to where they should have been. Often prices go lower than they should as human emotion and fear kick in, but not necessarily as low as the original starting point. It is worth noting that what goes down may go up as well, as sooner or later the fundamentals kick in again and prices go up starting the cycle all over again. Over all if the company is growing, profits are growing and the company is solid, prices will work their way up, but the ride will be bumpy.

So, what goes up may come down, but not necessarily all the way.

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Buy quality, then do not pay too much attention.

Published May 4, 1998

I just finished reading a newspaper article about discount brokers. The article indicated that if you are going to use discount brokers, you need to pay a lot of attention. After all you have no one in your corner watching your investments for you. This may sound reasonable, however, it has been my experience that one mistake made by many investors, including professionals is that they pay too much attention. While you do not want to ignore your investments, if you are not careful, watching them too closely can be even more costly.

My experience has been that more often than not, after buying an investment, the price drops below what I paid. I wonder what I would do if I was worrying about it. Would I sell low only to discover that the price then moved up, then buy it back at a higher price. I am reminded of one securities instructor who talked about how his company sold all their clients' holdings in a stock after a disappointing earnings report drove the price down. It took some time to get going again, but that company has done extremely well since then. Bye the way, he thought they were pretty clever. Then I remember how last summer I bought more shares in one of my favorite companies after a disappointing earnings report drove the price down about twenty percent. It took a while to get going again, but that stock is now up over forty percent above the price that I bought the additional shares for. I am sure glad that those sharp market watchers were so eager to sell.

I am further reminded of a conversation I once had with one of my favorite clients when he was concerned that due to his age he was not always on top of his portfolio. I reminded him that because of the high quality of his portfolio, he could probably not look at it for several years, and when he did come back to reevaluate it, chances are that he would have made almost all the right decisions. Come to think of it, that would closely reflect the decisions that he has made in the past, he rarely sells anything, and his returns more than speak for themselves.

So, buy quality, then do not pay too much attention. In the long run this approach will serve you well.

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Don't Panic

Published September 2, 1998

Panic, in a word, is what was happening on August 31, 1998. As if everything suddenly changed, investors were panicking and selling. I would like to say that this is rare, but I have seen it many times before and watched many investors destroy their chances of investing soundly and successfully. The market goes down, they hang in there, it goes down some more they still hang in there, then something seems to give and there is a panic sell off. Then they are out of the market, probably until the next peak.

I wish I could tell you when we are hitting bottom or when a rally is ending. Hell, I wish I knew myself, I would be very rich today. However, the best I can do is guess and that is not good enough. So I have to stick with holding quality stocks, knowing that eventually the market will move in my favor and in the long run, I will profit very nicely. It might be worth noting what Marian (my spouse) said to me on the evening of Monday, August 31, after I told her what our investments were down to. She said, “Yes, but look at how far we are ahead of where we would be had we stayed out of the market.” I guess I have to agree. Now if we could just come up with more money to invest in all these bargains.

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It is very easy to jump from last year's poor performer to last year's winner, only to find that your new investment is next year's poor performer and the investment you sold is next year's winner.

Published November 1996, republished October 8, 1998

Show me an experienced investor who says that they never made this mistake, and I will show you a liar. I know that I have made it more than once, and I am sure I will do it again. Maybe, if I keep this rule in mind, I will do it less often.

Different management styles, types of investments and even similar investments perform better at different times. This happens for a variety of reasons, but suffice to say that each investment is different, and none are the market. This is one reason why we continually stress a long-term outlook, and tend to ignore the short-term.

Different investments perform better at different times, so sort-term results can be very deceiving. Peter Lynch has been quoted as saying that when selecting mutual funds, once you have narrowed it down to a few specific funds, you should select the one with the worst one year performance. The assumption is that if the quality is there, it is more likely to be that funds turn. I am not sure that I would be prepared to go this far, but I have to agree that short-term performance may be a better negative indicator, than a positive one.

So if you are holding some investments that have not been performing as well as you might expect, you should reevaluate them to satisfy yourself that they still hold the qualities that you originally thought they had. If not, maybe you should sell them. If they do, hold on to them, their turn may be on the horizon. Whatever you do, do not sell them just because they have not matched the market lately, otherwise you may find that you just sold next year's winner, because it was last year's loser.

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Sound investing should not be considered a competitive thing, the more people that do it, the better off everyone will be.

Published May 1995; republished November 7, 1998

It continues to surprise me when investors, and especially some professional portfolio managers want to keep what they are doing a secret. While they may not want to disclose what they are considering, if they are buying quality, why don’t they want people to know what they are holding? If others do the same, wouldn’t this drive up the value of their holdings, making them look good? Interesting enough, the managers who appear to concentrate on quality, do not seem to mind disclosing what they are doing.

I believe that the more people that follow our four IFC Investment Principles, the more stable the markets will be, and everyone will be better off. Then again, I also believe that everyone should read Financial Insight; unfortunately, not everyone agrees.

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If your financial advisor really knew everything, then they probably would not be a financial advisor.

Published December 4, 1998

I guess this includes me too, after all I do not know everything and most of all, I do not know the future. What I do have is a good understanding of how things are likely to unfold in the long run, how to evaluate a Company and how to structure a portfolio. I am also learning new things every day. I guess that most financial advisors would fit that description. What annoys me are the ones who act as if they know everything and know exactly what to do next.

I cannot help recalling 1987, remember Black Monday. To be honest, it caught me by surprise. What I found most amazing is how many people took credit for predicting a crash (which was really only a correction) after the fact. I am not sure where they were before hand. Us, well we did not predict it, we just took advantage of it and invested more money, something that proved right in the long run. The mistake we mad was we got in faster than we should have. Then there was the correction/bear of the summer of 1998. I suspect you have vivid memories of it. While a correction did not surprise me, I certainly did not expect anything of this magnitude, nor did I expect such a fast recovery. Our mistake this time was not investing more quickly. Or was it, there will be another correction sooner or later, but I doubt we will see things dip that low again. But truth be known, I DO NOT KNOW THE FUTURE!

This is why these self appointed experts annoy me. They act as if they know it all. Rest assured, sooner or later the truth will come out. Hopefully not at yours or my expense. What I do not understand, is if they are as good as they say they are, then why are they wasting their time advising others. If I was that good, I would be making a fortune managing my own money and would not need to advise anyone else. Maybe that is what I should do, I do spend a lot of time managing my own money, and that seems to be paying off, I could do just that for a living, life would be grand, don't you think. Oh, a, where was I, I think I just dosed off and was having a wonderful dream, or maybe it was just a fantasy. Well, guess I should get back to reality.

So where was I before I started day dreaming. Right, the advice that goes with Dave's rule. I try to avoid those who think they know everything, especially the future. Unfortunately, I have been burned by them before, a mistake that I hope to avoid in the future. I feel much more comfortable listening to those who make sense, are experienced, qualified and most importantly, understand that they that do not know everything and that they will be wrong from time to time. Actually, when I review the writings of those I respect the most, they seem to understand that too.

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If you grab hold of something really hot, be prepared to get burned.

Published January 6, 1999

How do you pick your stocks? We had one reader email us a while ago telling us that their friends would rather get their stock picks by overhearing conversations at the YMCA then by doing any work. When Bre-X was all the rage, I had a friend tell me several times that I must be into that. I just said that anything that hot was overpriced so I was not interested. I found out later that my father had some friends who kept telling him the same thing, and he just said that he did not buy junk. How appropriate, because even if the gold was there in the amounts that could have been reasonably expected, the company was nothing more than an over hyped, overpriced piece of junk. The company and its managers had no history of revenues or profit, they where dealing with a questionable government that had already shown that they might change their mind about who could do the mining and yet the price just kept growing and growing. A stock promoters dream, an investors nightmare. I still find it hard to phantom that investors and especially professionals could buy something this hot and be surprised that it burned them.

Investing and stock picking is not about picking a hot stock and making a quick buck. It is not about getting rich over night. Sure there will be periods when it seems that you can do no wrong. But there will also be those when according to the market you just cannot get it right. Sound investing is about building a sound portfolio of high quality stocks with good fundamentals. Then sticking with them for a long period of time, usually at least three to five years, sometimes for a lifetime. You should still drop stocks when circumstances change, but not just because the market lost interest. You can sprinkle in some more speculative stocks, but pick them for their fundamentals, not because they are hot. We keep seeing it time and time again, investors/speculators grabbing what is hot and then being surprised when they get burned.

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Avoid gimmicks, buy the real thing.

Published February 7, 1999

It is tougher than you think. Coming up with a witty but relevant rule every month. Often, something comes to me during the month, usually because some commentator or sales person has said something to annoy me. Often, but not always, as is the case this month. So I asked myself, what are some relevant or important thoughts that I might pass on for February, the height of RRSP season. Then it got easier.

There is probably far more money invested by Canadians in January and February than any other time of year, a lot of which goes into mutual funds and then flows into the markets as managers try to find suitable investments. One result of this seems to be a very bullish market in the first few months of the year. Another, is the barrage of advertising and selling that we are faced with. We hear all kinds of things about strategies and gimmicks that will help you make lots of money with little or no risk. It is the gimmicks that really annoy me.

The advertisements make it sound as if their new approach will take out the guess work. Count on them, let their computer or formula select the best performers, answer a few simple questions, get market returns without the risk, have your mutual fund guaranteed or your GIC tied to the market. The list is endless. Now I will not go so far as to say that none of these have their place, however, they all have their costs, which are usually hidden and those costs must be considered. Those cost can mean a significantly higher management expense ratio, which may cost you more than the guarantee is really worth, increased taxes by turning Capital Gains into interest, lost interest, blind reliance on something that might let you down when you need it most, lower returns or something else. But I am sure these gimmicks are good for sales.

Personally, my advice is to avoid the gimmicks and the rush. Invest throughout the year, when you have a lump sum, put it somewhere temporary like cash in a self directed RRSP or in Treasury Bills, then take time to make up you mind or spread out your investments. When you do invest, avoid the gimmicks as much as possible, invest directly in stocks or high quality mutual funds for your equity investments. Stick to the real thing, high quality bonds, GIC's and Treasury Bills for your fixed income investments. Avoid all that fancy stuff with bells and whistles, because in the end it is likely that the people selling the gimmicks are the ones who will benefit the most.

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Beware of red herrings. Your goal is to increase your overall wealth, not reduce taxes or invest abroad.

Published March 14, 1999

It seems that every time I turn around someone is trying to sell me on the merits of some great investment scheme, that is better because it either decreases taxes or increases the amount of foreign content in an RRSP (at the time this was written there was a 20% limit on foreign content in RRSP's). People flag how effective the scheme is at meeting these goals, without paying much attention to how good an investment the proposed scheme is. I wish people would concentrate on the real issues rather than these red herrings.

First let me talk about foreign content within an RRSP. Mutual fund salespeople often suggest that I should put 80% of my RRSP's into Canadian mutual funds that put 20% of their investments into foreign content, then put my other 20% into foreign investments (usually mutual funds). This would increase my foreign content to 36%, since the 20% of the 80% equals 16% of the total, it plus my 20% equal 36%. However, no one has proved to me that the Canadian funds with high foreign content have superior returns. Even if that is generally true, I would want to pick the Canadian funds that I thought best met my investment objectives, and foreign content for the sake of foreign content is not one of them. Further, in my personal case, the portfolio is mostly stocks. Since my long term returns are better then most comparable mutual funds, and I have full control this way, I fail to understand why I might want to have less control and probably a lower return so that I can have a higher foreign content. Not to mention that many of the stocks I own are companies that do a lot of business all over the world, so actually my real foreign content may be more than 36%. But that is not why I picked them. For the most part, I picked them because I thought they were sound companies, that were reasonably priced and had good growth prospects. Further, I might note that recently I am finding a lot of good values in Canadian companies. With patience, these could turn out to be among the best performers over the next five or more years. Then again, some of them already have.

The other popular approach that I often hear of is mutual funds that hold a base portfolio of Canadian Investments, then lever up their foreign content by buying directives of foreign investments. Since the majority of the book value is Canadian, they are considered Canadian investments for RRSP purposes. Even though the potential value of the derivatives if exercised is greater than the Canadian content. These schemes sound very clever, but why doesn't anyone show me the average long term past performance of these types of investments as compared to the average of mutual funds that do not invest in derivatives?. Personally, I avoid derivatives. A topic we have discussed in the past. So why would I change that philosophy just to up my foreign content.

Now let me talk about taxes. Again, there seem to be no end to these tax schemes, often pushed by their sales people at the last minute. They usually take advantage of some special rules set up by the government to encourage investing in some special area. This in itself should tell you something. If the investment needs special tax treatment to be a good investment, then it probably means that it was a bad idea in the first place. So what if the government is going to share your losses or share in a lower return. A loss or a lower return is still just that, “A Loss or a lower return.” So while you should consider the tax consequences when reviewing any investment, remember that it is the quality of the underlying investment that counts most, not the tax savings nor the fact that it is invested in another country.

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If the petroleum industry does not figure out that it is in the energy business, rather than the oil and gas business, then sooner or later, it will find itself in trouble.

Published July 6, 1999

This is a statement that I made to my sister when I moved to Calgary in 1981. I am not sure why, but she recently had cause to remind me of it, and rightly so. Actually, it applies to almost any company in any business, but first I will talk about the petroleum business.

It is obvious that the statement was somewhat premature in 1981, the question is; how premature is it today, 18 years later? I am sure that for the next several years, petroleum companies will continue in an environment similar to that of the last few decades. Those that manage their companies well and are efficient at obtaining reserves will weather the industry's cyclical down turns and thrive on the upturns. However, we might as well face it, sooner or later, a large part of what they produce is going to be replaced with more environmentally friendly and probably more efficient forms or energy. So the question is; who will provide the replacement technology and ultimately supply the energy? Personally, I think the petroleum industry is the best suited and positioned industry for the task, unfortunately, I see little if any effort being made by these companies to expand their horizons from petroleum products to other forms of energy. Hopefully, sooner or later this will change, otherwise the long-term future (measured in decades not years) of these companies may be debatable.

While this is a concern for petroleum companies, it is really a concern effecting any company that we might invest in. For all our companies, we need to be asking ourself, what are they doing to ensure their future. Are changes in technology going to make them more profitable or render them obsolete? Are their goods and services going to be demanded for a long time to come, be replaced by something else or just go out of style. What will happen to the company when this happens? Will they be supplying the alternative or will they go the way of the dinosaur?

If you are a short-term investor you might not care. If you are a typical long-term investor who plans to hold a company for three to five years, this may be less of an issue. However, if you are like me, and generally purchase companies that you hope to hold on to indefinitely, then this should always be an issue. Kind of makes you wonder though. Who will provide the new forms of energy, and a century from now, what will a more enlightened future generation be saying about us?

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Do not beat yourself up over your mistakes. Even if you follow a sound investment approach, you are almost certain to pick some losers and to sell some winners.

Published September 11, 1999

This is something that is easily forgotten. Of course you want every decision to be a good one. Not only that, but if you have done your homework, chances are that when you make a decision you will be very confident that you are right. This makes it hard to accept that you were wrong, and it can be a blow to your confidence when the market seems to think you are out to lunch.

Here are a couple of examples of where this has happened to me lately. In one case, I sold a stock in the semi-conductor business. I sold it because we had a nice profit and I could not justify its current price. To be honest, I believe that I made the right decision, I still cannot justify the current price, which is almost double what I sold the stock for a few months ago. I guess the market had different ideas. It will be interesting to see where it is a year or two from now. Frankly, I believe that either I was out to lunch on my projections of future earnings, or I will be proven right. In another case, I made a speculation in a small petroleum service company. Yes, sometimes I speculate to, but only with amounts that I can afford to lose. I knew that this company was having some difficulty, however, I believed that it's circumstances appeared to be worse than they really were, as it had recently had some massive write downs. My analysis indicated that on continuing operations, the company was a going concern, and that oil prices were rising, which meant that if the company could ride out the short term, it's share price could easily increase by several times. I still believe that I was right, unfortunately, the Board of Directors, the bank and the court saw fit to sell the assets in what was the equivalent to a bankruptcy sale. So in this case, only the secured creditors got something. I really did not believe that that would happen.

So as you can see, I was wrong. These were not my first mistakes, nor will they be my last. However, it is important to focus on my overall long term results, and not dwell on these mistakes. After all, if I wish to make good decisions, then I am going to have to live with the bad ones too, that is just a fact of life. When I review my overall record, I have to say that it is pretty good, so I better keep doing what I am doing. Naturally, I will learn from all my experiences, but I will try not to dwell on any of them.

When you think about it, that is a mistake that society makes a lot today. We are too quick to judge our leaders, both political and corporate. We expect them to make only good decisions with no bad repercussions. Then when they fail, or something goes wrong, we criticize them, rather than admiring their courage. No wonder no one wants to make a decision any more, they are too afraid of being wrong.

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More often than not, the best course of action is to do nothing.

Published October 13, 1999

Of course, if you are not invested, have new money to invest or are holding poor quality investments, this may not be a very good rule. However, if you are fully invested in a diverse portfolio of high quality investments, then more often than not, the best course of action is to do nothing. It is normal to want to shuffle your portfolio, some companies may be doing little while others are doing great. It would seem appropriate to sell the dull ones and replace them with the ones that are currently popular. Also, one would assume that actively managed, means that you are doing something, not just idly sitting by. However, it has been my experience, that more often than not, when we make a change, we sell what turns out to a great performer, only to replace it with what was a winner before.

This does not mean that we should do nothing. I spend a lot of time following and evaluating the companies that we watch. I also spend time evaluating companies that I might start to follow. As things seem appropriate, I add some to portfolios and remove others. When I remove a company, it is not because of recent poor experience, it is usually either to rebalance (I may feel that our holdings in that security are too high) or because I no longer believe that the investment meets my high standards for quality. In the latter case, I often stop following the company once it is sold. When I buy one, it usually means that I thought that the time seemed appropriate to add or increase the holdings of that company for the portfolio in question. Just a point, selling is something that I do not do very often. The amount of buying is normally only higher if there is new money being added to the portfolio.

This following and evaluating and reevaluating is active management. While it may seem that not trading means that you are doing little, remember, trading is a very small part of portfolio management. It is also the part that can cost you the most in both broker fees and because you might just switch from the next winner to the next dud. Fact is that a diverse portfolio will always hold some current duds, but if all your investments are high quality ones, then few will be duds or losers forever. So spend a lot of time monitoring your investments, but before you make a change, remind yourself that "more often than not, the best course of action is to do nothing", then decide what to do.

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Good Things come to those who wait.

Published December 1994

I know I am not the first to say this, but after reviewing 1993 and 1994 I think it is appropriate. In 1993 the TSE 300 provided a total return of 32.6%, its best calendar year since 1983. For the twelve months ended November 30, 1994, it showed a total return of 3.2%, and it is questionable whether 1994 will show a gain or loss. For those who are relatively new to investing, 1994 was a disappointment. I just hope that no one panics and as the cliché would go, cuts bait and sells. It is my opinion that we are in the early stages of a bull market and those who wait will see excellent returns over the next few years.

Seasoned investors will tell you that this is a fairly normal pattern. If we look at the last bull market, 1983 to 1987, we see that for the twelve months ended June 30, 1982, the TSE 300 total returns index showed a loss of 39.2%, just before showing a gain of 86.9% for the next twelve months. Also, during that bull market there were 4 years with gains and one year with a loss. The loss year was 1984 when the TSE total returns index lost 2.4%. Notice any parallels. And guess what, even after Black Monday, 1987 showed a gain of 5.9%.

So, good things may very well come to those who wait. Certainly I would not change my strategy just because 1994 did not meet my expectations. However, I should also point out that History does not always repeat itself, and there are many differences between 1984 and 1994. Therefore, my standing advice is to follow IFC principle number 1; balance your portfolio according to your needs, not someone's market projections, not even mine.

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Don't Let the proverbial tax tail wag the dog.

Published February 1995

It seems that I am constantly advising people on this. They get so wound up in saving taxes, that they forget that taxes are only one part of the equation. I would say that with the exception of inexperience, tax reasons probably motivate more bad investment decisions than any other cause.

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The best way to get rich quick is to put together a get rich quick scheme and sell it to people.

Published March 1995; republished May 2, 1997

It seems that I am constantly running into these schemes. In the last week, I have had one client ask me about investing using an interest rate wave theory, suggested by one of the so called money gurus; and I came across an article talking about The 17% Plan, as described in a book listed in the Financial Times best seller list. Here again, we have two so called experts, telling people how to make great returns, as if they had the easy and riskless solution.

While I do not know a lot about either of these plans, based on what I do know, both ignore or seem to ignore all four of our IFC Investment Principals. Personally, I consider our IFC principals to be the cornerstone of good investing.

Since the above schemes are timing schemes, it seems apparent that they cannot be advocating that you balance according to your circumstances. Instead, they advocate moving in and out of markets, according to their formula. While they may not oppose diversifying, their methods seem to make it difficult if not impossible to stay properly diversified. Also, I do not see how quality is of prime importance to either plan. Finally, it seems to me that market timing is almost the opposite of investing regularly and gradually.

Then again, what do I know. These people are probably making a fortune telling people about their plans. Still, I wonder, if these schemes are so good, why are they telling us about them. Why not just quietly apply them. I think I will stick with our IFC Investment Principals, I may not get rich fast, but over time my returns should be good, and I will achieve them with a satisfactory level of risk. In the meantime, I guess I will continue writing this letter.

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When people start telling you that something has never happened before, it may mean that it is about to happen.

Published June 1995

I will always remember having lunch in Calgary in the spring of 1981, when the person I was having lunch with explained how they like to dabble in real-estate, as no one ever losses in real-estate. It seams to me that I made some seemingly irrelevant comment that there is always a first time, and that the fact that they are making the statement might be reason for concern. Then the conversation continued, and neither of us really took my comments seriously.

It turns out that we should have heeded my off the cuff remarks. Calgary real-estate had been booming for years, for that matter Calgary was still enjoying the effects of the oil boom. Remember, the one that slowed in 1981 and was definitely over by 1982. Calgary real-estate suffered miserably for the next three years, and I do not think many people have viewed it the same since. The market recovered, as markets normally do, but it took a long time, and today while home ownership is still viewed in a positive light, few people consider real-estate to be risk free.

This is just one example of how the contrarian approach can work. The more people that are sure something will happen, and the more sure they are, the better the chances are that the opposite will happen. History is full of examples of everyone jumping on a bandwagon just before it collapses. Actually, many of the most successful investors have been very successful by constantly going against the tide. To some extent, this is what value investors are doing. They wait for an investment that they like to go out of favor, then they buy it at a bargain.

While I am not recommending that you follow a strategy of always going against the tide, I do suggest that you resist impulses and when there is an impulse to change your original plan, start loading up on something, or to start dumping things, be extra cautious. One last note, while this may sound logical, in practice, it is easier said than done, a lot of discipline is required to be successful.

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If you want to succeed, you have to be prepared to lose.

Published August 1995

During my vacation, I took the time to read The Warren Buffet Way. This is a book about the principles applied by Warren Buffet, who is claimed to be the second richest person in the United States. He acquired his fortune by investing in businesses. I found it interesting that early in the book, it says that Buffet believes that if you cannot watch your stock holdings decline by 50 percent, without becoming panic stricken, you do not belong in the stock market. I could not agree more.

In the short run, markets have a way of bouncing all over the place. This poses what is probably the biggest risk. The risk that you will invest when markets are doing well, expecting a good return, confident that you understand and are prepared for the risk. Then, there will be a major market decline, sooner than you anticipated, and much greater than you expected. It may not matter that the losses are only superficial, and that the companies that you own are as viable today as ever before, what you will see is your life savings shrinking away. That's when you panic and cut your loses, figuring that you can make them back during the next rally, or maybe you will decide never to be so greedy again, you have learned your lesson. Or at least until the next big long term advance, when eventually, after watching from the side lines, you convince yourself that this time the advances will continue. So, you try it again, probably just before the next big decline. And, here we go again!

So, if you want to win, you have to be prepared to lose, because sooner or later you will. However, if your strategy is sound, and you show some patience, chances are that in the long run, you will come out on top.

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There is no such thing as a perfectly safe investment, there are only investments with varying degrees of risk.

Published September 1995

I often meet people who advocate some perfectly safe investment. A recent example is when I was accompanying a friend to see a mortgage representative at a Trust company. The Trust company official criticized our friends RRSP portfolio for having Mortgage funds, instead of CDIC guaranteed Term Deposits. The inference was that the Term Deposits were safe and the mortgage funds were not.

Now, we did not structure this portfolio, and I do think some things could have been done differently. However, I would not criticize it for being too risky. Also, it is easy to criticize now, but knowing a little about the history, I am not convinced that the decisions of our friends financial planner were bad. Remember, the trust company representative thought there was too much risk, if I were to criticize, it would be for not increasing the risk to improve the returns. But that is another issue.

The point is that all investments carry some risk of losing money, and some risk of losing purchasing power. The objective is not to eliminate either, but to find a suitable balance of the two.

Now, you may say that CDIC insured Term Deposits carry only the risk of losing purchasing power. That may be traditional thinking, but I do not agree. I would say that they carry almost no risk of losing money, (that is you should get your deposit back), but I can think of at least three instances where you might not get 100% of your money back.

1. In case of a war, I know it is remote, and in that case, there might not have been any good choices, but it is one circumstance.

2. If several major Banks and/or Trust Companies went bankrupt. CDIC, might not be able to cover the losses, and the Government of the day might not be able to honor its commitments.

3. Finally, there is the case of Principle Trust. In this case, many depositors thought their money was in the Trust Company's CDIC insured deposits, but they were not. They were in investment contracts with the Companies subsidiaries. It is noteworthy that in this specific case, the people in the so called risky mutual funds, were not effected at all.

None of these are likely scenarios, but they make a point, all investments carry some of each type of risk. So concentrate on getting an acceptable balance of the two.

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It is your money, not the Banks, Trust Companies, Insurance Companies or the Mutual Fund Companies.

Published October 1995; republished October 10, 1997

The Ontario Securities Commission, has recently come out with a new (revised) proposal, that would require Mutual Fund companies, to file insider trading reports, whenever the funds they manage, own over ten percent of the shares of a company. This will include all their funds combined.

As usual, some of the companies are complaining that this will make it harder for them to keep their activities and plans a secret. I on the other hand support this proposal. All other investors have to abide by these rules, the United States has similar rules and a few companies already make it public when they control over ten percent of the shares of a company. These companies seem to think that this is a responsible way to do business. Or maybe they have nothing to hide.

Whatever the case, I think this is a good start. We should all lobby the Securities Commission, requesting: 1. That mutual fund managers be forced to disclose their aggregate holdings whenever they exceed ten percent. 2. That they be required to report the holdings of each fund at least quarterly, and preferably monthly, (currently they only have to do this semi-annually). And 3. That by June 30 of each year, they file a public document listing all their investment transactions of the previous calendar year.

I know this will increase the workload of the companies, and it is asking a lot. But I am serious. Few things annoy be more than managers or councilors that seem to think their clients should blindly trust them. I believe that these people should be drummed out of business.

After all, "IT IS YOUR MONEY," and you have a right to know what the people who work for you are doing with it.

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Just because someone uses a lot of big words, it does not mean that they know something.

Published November 1995, republished July 5, 1997

This is especially the case in the financial business. I often meet people who are good talkers and use lots of technical jargon, trying to sway me towards their products. I often used to wonder what they were talking about, and wondered, if I do not understand, how can anyone else. Eventually, after listening enough, I realized that the reason I do not follow them is that they are not making sense. I should know, after all, usually I am more qualified then the people doing the talking.

In many cases, these people have learned to talk in a way that makes them sound like an expert, so people will believe them and follow their advice. I find this to be particularly true with many Life insurance agents. I actually had one tell me that the client did not need to understand why they were buying their insurance. After all, she (the agent) was the licensed agent, and therefore an expert, who knew what was best for the client.

When dealing with financial consultants, only deal with people who will take time to explain things to you, in a way that you understand. Your understanding may not be perfect, but you should understand the principles, and they should make sense to you. If they do not, remember that it may be because the person explaining them does not really know what they are talking about.

Also, remember, no one knows everything. So if someone never expresses any doubt, and always acts like they are totally confident in their opinion or could not be wrong, maybe it is just an act. I prefer people who do not always know the answer, and are prepared to admit it. They are much less likely to lead you astray.

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Actions speak louder than words.

Published December 1995

I am obviously not the first person to say this, and I am sure that I will not be the last. However, this statement is often true. There are many people out there that can talk up a storm, especially about financial issues. Yet, when it comes to their actions, you have to wonder if there is any relationship between what they say and what they do. For some of them, it sometimes seems that what they say, what they think and what they do, are three entirely unrelated items, which have nothing to do with one another.

When you meet someone who acts very knowledgeable, and talks up a storm, take a step back and watch their actions. Over time, their actions will reveal if they really are competent and sincere, or if they are just good talkers. Another sign, may be if they are always saying what you want to hear, or are they prepared to tell what you do not want to hear. People who tell us what we think we want to hear, will usually appear more knowledgeable to us, but those who are prepared to disagree with us (hopefully in a pleasant way), may turn out to be more valuable.

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Nothing changes, but then again, nothing stays the same either.

Published January 1996; republished November 30, 1997

This statement is a bit of a paradox, but I believe it holds a lot of truth. There is no denying that the world around us is rapidly changing. Then again, this is nothing new, since before man stepped foot on the earth, the world has been changing, just at what appears to be an ever increasing pace. Or maybe, faster than ever because it is now happening to us, instead of our ancestors. Nevertheless, our investment and business actions must recognize these changes, and adapt to them. If they do not, then we may receive what is often referred to the booby prize. As business people, it means being astute to how the changes will change our business and provide new opportunities. As investors, this means recognizing that changing times may change some of the rules, and that the companies we invest in better have management that can adapt.

On the other hand, I also said that nothing changes. This is because we can get so caught up in change, that we fail to see that there are certain truisms that never change. Most of the basic sound management business principles of the past are as true today as ever. In the long run, companies that deal professionally, honestly and ethically still come out ahead. Maybe not in the short run, but eventually, in the long run. Also, manageable debt is still a corner stone of quality. Finally, in the past, companies that recognize change and position themselves properly were the ones that prospered, and I doubt that will change either.

So, when you find yourself becoming caught up in change, or trying to ignore it, remember, nothing ever changes, but nothing stays the same either.

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If it were not for deadlines, nothing would ever happen.

Published February 1996

As RRSP season comes to a close, and tax time rolls in, I think of this statement. On February 29, the brokers will be swamped with last minute requests to purchase RRSP's. In January and February, we are bombarded with advertising, while everyone tries to get a piece of the action. For taxes, you have to wait to March, to be certain that you have all your information. However, with RRSP's, you do not need to wait, and if you invest early, you get extra sheltering. Not to mention, rushed decisions are usually poor decisions, and it is not good to join the herd.

So, my advice is, once you get your tax assessment for 1995, look at the box that tells you how much RRSP contribution you can make for the 1996 taxation year. Then talk to your financial advisor, and start contributing right away. The result will be better investment decisions, more time for your retirement money to grow, better timing and maybe even, more money to invest.

Then, when February rolls in, you can sit back and laugh at the crowd, running around, trying to make last minute decisions. Better yet, you can laugh at the advertisers, who are trying to get your investment dollars, because this time, they are too late.

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If you do not know what you are doing, you will probably do it wrong.

Published March 1996

I find it interesting how often people talk about investing in the stock market. One day I am going to find out how to do that, because to the best of my knowledge, you cannot.

You can only invest in companies, vehicles that hold a collection of companies and derivatives of the same. The stock market is not for sale. The stock market is the medium that facilitates the buying and selling of shares of companies. In reality, it makes investing in companies much more secure, even though many would have you believe the opposite. By facilitating the buying and selling of companies, the markets make it easier for ownership to change hands, which in turn increases liquidity and reduces risk.

It is not about trading shares, or playing the market, it is about owning businesses, which are the driving force of the economy. In the long run, when business succeeds, the economy grows, and everyone prospers. If you buy shares in the hopes of trading them for a quick profit, sooner or later you will get burnt. However, if you understand that you are buying an interest in companies, and look for companies that you want to own, and hang on to, in the long run, you should be successful, because now, you really understand what you are doing.

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Making money makes me happy.

Published May 1996

I am not sure if this can be called a rule, it is really more of a statement or maybe a motto. However, It is something to keep in mind whenever you choose an investment. After all, this is what investing, or owning businesses is all about. This does not mean making a fast buck. Quite the opposite, I like owning companies that have good staying power and are likely to earn me a lot of money over a long period of time. This requires a management that is socially conscious, can identify good opportunities, uses technology wisely and concentrates in the areas where they have an advantage. It also means managing with the shareholders best interest in mind, rather than protecting management's interest, or even worse, building up the ego's of senior management.

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When all the experts agree, they are usually wrong.

Published June 1996

This is a favorite of mine, it is contrarian, it helps to keep us humble and it also has a tendency to be true.

I especially like the humble part. After all, the only time that all the experts can be right is when they agree. So, if when they agree they are usually wrong, it stands to reason that non are right all the time and at the very least, many are wrong a lot of the time. Right?

This plays into our philosophy of not timing the markets, as you never know who to listen to today. By the way, I seem to be hearing lots of differing opinions out there. I personally find that to be very comforting.

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Always expect the unexpected.

Published August 1996

At this time of year I like to find a way to relate some real life vacation experiences to investing. I know it is kind of corny, but please indulge me anyway.

So this year while reminiscing about our vacation I recalled some experiences with our youngest dog Shea. She loves the water, the boat, fishing and most of all, retrieving. After all, that is what Golden Retrievers do. Needless to say, taking her out in the boat fishing can be an experience. Yet, we seem to be making progress teaching her to stay in the boat. Except that one time, everything was going great, then Marian hooked a small Rainbow trout. While she played it everything seemed to be going great. Shea was sitting relatively quietly with all four feet on the floor. Then it happened, without warning, the fish jumped, and so did Shea. She completely cleared the side of the boat and landed in the lake. I guess the lesson was to remain prepared, even when things were going smoothly.

This is not unlike investing. When the bull is roaring ahead, it can suddenly turn into a nasty bear. The reverse is also true. As the bear drags on, after all hope has been lost, you have finally given up on the markets and liquidated your investments, the bull suddenly rages, and by the time you have reinvested, it has turned back into a bear. And that is why we continually stress our four IFC Principles. So no matter what, you are ready for the unexpected.

Oh yeah, we did land Shea, along with about twenty gallons of water. Actually I had her back in the boat so fast that the guy in the next boat thought I caught her in mid air. Unfortunately, we cannot say the same for Marian's fish.

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When you are having fun making money, remember that it will not be as much fun when you are losing.

Published September 1996

I have been waiting two years to use this rule, and it may be a little premature, but it is better early than late. Now that the bull is under way, there may be a tendency to start to become complacent, look for excessive returns and over invest to ensure that you do not miss anything. Usually when that happens what you do not miss is a major correction, which has a nasty tendency to happen right after you increased your holdings in whatever is corrected the most.

This is why we continually emphasize proper balance and de-emphasize market timing. First, to take advantage of all growth markets, and second so that you can live through market declines. If you are holding a reasonable balance of quality equity investments, you may not experience the most growth from the short market spurts, however you will usually make up for it during the slower growth periods, when the quality investments chug on and the high flyers go flat or loose ground.

So enjoy the bull, but remember that there will be corrections, and you should always be prepared for them.

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Your overall objective should be to accumulate wealth.

Published October 1996; republished December 24, 1997

Sometimes we get so busy calculating our returns, that we forget this very important rule. We look for the best capital gains, sometimes we even sell securities so that we will not lose the gain. Or, we just look for the best interest rate on our fixed income investments. In business, we can be caught up in increasing our sales, or current profits without determining what is the best way to accumulate wealth, which is what should be our real goal.

Often, increasing sales, profits or getting a higher return is the best way to do this, but not always. In business, the quality of the sales may have a greater impact on long term profits. Then again, sometimes restructuring our balance sheet or restructuring our cash outflows will have a greater impact, such as turning an expense into the acquisition of an asset. In our investments, increasing our returns may be good, but holding quality investments or assets like a home might be more beneficial, or reducing costs or debt, might also have a greater long term impact.

So getting a good return is important, but remember, that is not the ultimate goal, the ultimate goal is to accumulate wealth.

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When reviewing your investments, ignore your actual costs, as they are irrelevant to decision making.

Published December 30, 1996

We all do this, compare our investments current value to their costs. After all, we want to know how we did. However, from a decision making point of view, this information is irrelevant. What is relevant is the current value and expected future returns of the investment. The fact that the investment is up or down now, tells you how you did, but that is the past, and unless your name is Orsen wells, you cannot change it.

Actually, your costs now is the current value of the investment. That is what you could sell it for, so if you keep the investment, that is what it cost you now. The question is not what happened, but what will happen in the future. Is it a good investment at its current price?

So do not dwell on the past, learn from it and then look at where you are now and make sound decisions about the future, after all, that is the only thing you can change.

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When in doubt, tell the truth.

Published February 2, 1997

This is probably more a life philosophy, than an investment rule, but I think it applies everywhere. It seems that more and more, people including professionals are telling us what they think we want to hear, and not prepared to make statements like "I do not know," as that could be seen as a sign of weakness. Further, we tend to be drawn to these people, as we like what they are saying, but they really are not helping us. Presumably, when you hire a professional, you need their advice, so it is important that they tell us all sides of an issue, even the ones that we do not want to hear. I also think that when a professional says that they do not know something, that this is a sign of strength and confidence, not the opposite.

If we are not getting completely honest information from the professionals we hire, then we could easily make very costly mistakes, possibly the ones that we hired them to help us avoid. So when you are selecting professionals to give you advise, ask yourself: Is this person prepared to disagree with me, even if it angers me? Would this person hesitate to admit that they did not know something? If the answer is not a definite yes, find someone else. Also ask yourself: Is this person telling me what they think I want to hear, rather than disagreeing with me? If the answer is yes, find someone else.

One other point, be honest with yourself. Ask yourself: Do I like this person because they are saying what I want to hear or because of their honesty? Be careful here, and remember, that honesty is a two way street, so be sure to be honest to both others and yourself.

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You can ride a wave if you like, but sooner or later, you will be thrown off.

Published June 2, 1997

I am reminded of years ago (1987 I think) when I commented to a college that the Japanese funds had grown over 100% for a couple of years. I suggested that this was a good place to stay away from. The college suggested that while I may be right, why not ride that wave first then get off, since it would probably go on for a couple of years.

I did not pay careful attention to the Japanese markets as I did not invest in them. However, it seems to me that for the last ten years Japan has not been the greatest place to invest. It also seems to me that when something gets hot and everyone starts jumping on hoping for excessive returns, it collapses. So you can ride the wave if you like, but sooner or later you will be thrown off.

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Buy on bad news, sell on good.

Published September 1, 1997

For a contrarian, this should be obvious, but it is the opposite of what most people do. The news is good, so the price rises and people start buying. Then there is some bad news, so people get nervous and start selling, pushing the market down. Consequently, they buy high and sell low. This probably explains why there are so many people who have lost money or not made money by investing in stocks, when history shows that over the long term, stocks as a whole go up.

We saw a recent example of this when a major Canadian manufacturer announced lower than expected profits for one quarter, and its share price tumbled about twenty percent. One quarter,down slightly due to one division, and the price dropped this much, despite all kinds of new orders in other divisions and years of double digit growth. One really has to wonder what goes through the average investor's short term mind. If one piece of bad news sent them running for cover, what were they doing there in the first place.

Then again why am I complaining. This skittish attitude of the masses will continue to provide opportunities for contrarian style investors.

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The hardest part of a market correction is deciding what to buy.

Published November 2, 1997

The other day (Monday, October 27) Marian (my spouse) was working at a client's office, whenthe client walked in and told her that the markets were crashing. Her instant comment was "Oh good, they are having a sale." She told me that night that I must be rubbing of on her. I told her that happened years ago, as she might recall how excited we got over the sale on Black Monday (Oct. 19, 1987).

These above comments go a long way to explaining our perverse/contrarian attitude's towards investments. While everyone is running around panicking, we know through years of experience and research that markets go up and more importantly, the best companies get better, and therefore are worth more every day. This means the regardless of what is happening on the market today, in the long term, the value of our companies will go up, and eventually stock values reflect this.

So, unless we need the cash when the market corrects, it means that they are having a sale and it is time to buy more.The problem is more a matter of finding some money to take advantage of the sale, then picking the best deals and knowing how long to sit tight before buying. Then again, this is always the case, which is why we never do anything in a hurry. We just keep investing new money, so that over the long run we can increase our overall wealth.

Isn't life grand for investors like us? If the markets go up, we make money, when they go down, there is always a silver lining.

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The market is irrelevant.

Published February 1, 1998

This may make me sound like Seven (a Startrek Voyager character), but it is an important statement. We seem to to spend a lot of time discussing and evaluating the market place. I do not suppose that we are any better than the rest, evidenced by the fact that the first article in every issue of this letter starts with a market outlook. I also have to confess that I do watch the markets carefully, especially as they pertain to the stocks that I am holding or am interested in holding. I find that this analysis helps me determine what companies are a good buy today and which ones are overvalued. I should point out however, that the market has little influence over when I invest, as I try to continually increase my investments as often as I can. Although, when I see the market dip, I do try harder to invest than I might otherwise have. Who is to say that is bad, the point is that I do not stop investing because I believe the market has peaked, or is about to drop,I keep investing anyway. As I said, the market is irrelevant.

The market does play a role, because as a value investor, I try to increase my holdings, or add to my holdings, stocks that I perceive to be undervalued. Also, if there is a stock that I wish to purchase, and I consider it to be of exceptional value, but I do not have enough funds to make the purchase, the market may help me choose which investments to liquidate to create money. By using this approach,over time I am building a well-balanced portfolio. I try to ensure that do not become overweighted in any one area and I try to take advantage of the fact that different companies move in and out of favor at different times. Boneless, it is critical that we do not get hung up on what the markets are doing. Otherwise we may become market timers, which can be a very good way to miss out on the biggest gains and/or get hurt by the inevitable corrections. So, as I said, for the most part, the market is irrelevant.

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Those who really want to be, should never be bosses.

Published March 7, 1998

I am not sure what this has to do with investments, however, it is something that I have observed over the years. As I review my past experience dealing on one level or another with managers of all levels,this is something that seems to prove itself over and over again.

First, there are those ambitious career minded people who want to get to the top. They always tell there bosses what they want to hear and would not hesitate to stab a friend, co-worker or employee in the back. In some organizations, these people will rise to the top, but they are always bad for the organizations. This kind of behavior will eventually hurt the organization one way or another. Luckily, sooner or later it hurts them too.

The second group that comes to mind are those who have something to prove. They may be concerned that their staff do not respect them enough. I actually had one tell me that your staff should be a little afraid of you. I guess if you are very insecure this might be true, but I doubt it is a good way to get people's loyalty, best efforts and respect.

Then there is another group of managers. They try to treat people with respect and to do the best job they can. They have little to prove, are not necessarily ambitious, but nonetheless they are very successful. These people are usually talented, have superior people skills and a desire to do a great job. They usually do, they attract the best people to work with them, they motivate the people around them, they accept responsibility and receive a lot of loyalty. They may want to be successful and usually enjoy a competitive environment, but they have nothing to prove and they are not hung up on being the boss.

Maybe this does have something to do with investing. After all, the first two groups are the people that I would avoid working for, or have working for me. The last group are the ones I want to work for and have working for me. I guess in the future, I will listen carefully to the statements of the managers of the companies that I am or am considering investing in. This will help me determine if they are the kind of people I want working for me and if I should have a warm fussy feeling about owning their companies. What about you?

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Trading is a negative sum gain

Published January 12, 2012

It never ceases to amaze me how many people including professionals see trading as a way to improve their returns. The Financial press is constantly bombarding us with this message and trotting out experts who reinforce the message. And it seems to me that for the past 30 or so years on a regular basis I hear these experts explaining how things have now changed, buy and hold no longer works, now you have to trade to make money! It is as if the science/art is settled, and everyone agrees, so there is no need to listen to any of those nutty dissenters, let alone afford them any press coverage.

Well, I am here to say, I emphatically disagree and I am not the only one, despite what you hear in the press. The fact is that buying quality and holding quality remains the best way to make money, both in the long and short run, but especially in the long run. Overall, it has to be. Simply put, by its nature, trading is a negative sum gain, and here is why.

The market represents a collection of transactions that represent transfers of ownership. For every sale, there is an equal and opposite purchase. Or there would be, if it were not for transaction (broker) fees that take a little something from both sides every time. So in total, if there were no transaction fees etc., then for everyone who beats the market, there would be others who underperform the market by the same amount. In that scenario, that is, no fees, then overall, market timing would equal buy and hold. However, since there are transaction costs, in total, investors will underperform the market by the amount of the transaction costs. Let's look at a simple example.

Let us assume that there are two investors, A & B and they trade 100 shares of company X back and forth as it grows from $10 to $20 per share. Now, over that time, the total value of the shares will grow from $1,000 to $2,000 creating a total profit of $1,000. The buy and hold guys make $1,000, but these guys trade, because apparently they are smarter than everyone else. So omitting transaction costs for the moment, let's say A buys the shares on the market for $10. Then they go to $12. A sells to B and makes $200. Then they go to $15 and B sells to A making $300. A is up $200 and B is up $300. Then they go up to $16 and A sells to B making $100. A is up $300 and B is up $300. Then the price drops to $12 and B sells to A, losing $400. A is still up $300 but B is down $100. Then they go to $18 and A sells to B making $600. A is up $900 and B remains down $100. Then they drop to $17 and B sells to A losing another $100. A is still up $900 but B is down $200. Finally they go to $20 and A sells to the market making $300. The final tally is that A made $1200 while B lost $200 for a total $1,000, the same as the buy and hold guy. OH, wait a minute, in the real world there are transaction fees, whittling away at the profits of both sides every time there is a transaction. So the final tally is that A made a little less than $1,200 while B lost over $200. Final tally in total, A & B made less than $1,000 and their brokers made the difference, while the buy and hold guy still made the whole $1,000.

Of course another and probably more likely result would be that both A and B made money but both less than $1,000 and in total $1,000 less the transaction costs. Also, in real life there are more than two investors and some will beat the market, most will underperform the market and some will lose money. But all these traders and investors, including the professionals who probable make up over half the market are the market, so in total, their returns will be equal to the market less the transaction and other costs.

As I continue to say, despite what the press and others would have you believe: Trading is a negative sum gain. Yes, some traders will beat the market, at least for a while, but they will be in the minority, the fact is, they have to be.

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Dave's Commentary on Fishing and Style

Published August 1995

Okay, not really a rule, but here it is anyway.

I cannot resist the urge to include this little commentary about some thoughts I had during my vacation. There I was, one Friday afternoon, sitting in my boat, anchored in a favorite spot on Bolean Lake, with my dog Teak asleep at my feet, in pursuit of rainbow trout. When it occurred to me, that after fourteen years I appeared to be a rut.

Every year, for fourteen years, I would go out in the afternoons and anchor of the island and fish with one of two different dryflys. Then, in the evenings, I would anchor off the weed beds and fly fish with one of three different dryflys.

Now this may sound like a rut, and you would think that from time to time I might try something else. But I don't, and the reasons are strikingly similar to our IFC investment principles. First, let me explain that when I compare my results to other fishers, I nearly always catch more and bigger fish, although I cannot prove it since I release nearly everything I catch. Second, I spend about half as much time fishing as most of the people I meet.

Now, I do not really think that I am better than the others, many are very accomplished fishermen or fisherwomen. So, what is the secret, or am I just lucky and boring. Well, some would say yes, especially to the boring part. But I don't think so.

The answer I came up with is almost eerie. First, I have found a formula that suits me. So, I can live with the ups and downs so to speak. Second, I have found a few quality spots and techniques that work very well. Finally, I fish regularly at these spots, regardless of my results, after all, I know that sooner or later my approach will pay off, and, in the long run, it will usually show better results than most other approaches.

Unfortunately, I cannot say how I diversify my approach. Actually, I have to admit that I don't. Then again, this is a fish story.

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IFC Investment Principles

The following are four basic principles that we believe to be the foundation of sound investing practice. By regularly referring to these principles we hope to avoid any major mistakes and ensure a satisfactory return on our long-term results. The four principles are:

1. Balance your investments according to your personal circumstances.
2. Always diversify your investments.
3. Invest in quality.
4. Invest regularly and gradually.


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