I write to you today a "beaten-up" man. Thankfully for you, we have not been beaten up in the market, quite the opposite, but I am beaten up physically and emotionally. On Thursday morning, 7 of my closest friends and I were on our road bikes on our way to ride from our homes near the Leaside area to Muskoka (to Jonathan's cottage). Most of us have ridden the 217km route several times and last Thursday was to be no different. Unfortunately, a couple of us made it only about 25kms. After about 7 years of riding together in rain, sleet, hail, heat, cold, snow etc with no crashes, three of us went down hard. I went down first, then my good friend Ross and then Rob. Ross broke his arm about 5cm above the plate where he broke it mountain biking in November. Rob bruised himself up on my bike frame...he claims his cheek bone broke my top tube (picture above). A few of us felt pretty beaten up but also very lucky as there was traffic around and we managed to avoid what could have been. So as I sit gingerly at my post this morning, trying desperately to avoid sudden movements with my hips, glutes, elbows and knees (who knew road rash stung so badly...doesn't look so bad, but boy does it hurt), my friend Ross should be coming out of surgery on his arm. But hey, cycling is supposed to be good for you and a great way to stay fit!
The last two blogs I have written, I have laid out our overall research process in Part I and then our fundamental research process and cash flow analysis in Part II. Today I will conclude with what the heck we do with all of this research. The title of this one could be more appropriately called " The Decision Making Process", but I leave the theme running for continuity.
The first thing to know is that we don't just do all of this fundamental work each quarter, walk away and come back the next quarter when companies report their financial statements (earnings season). It is very much an ongoing process. For example, if a piece of news comes out either directly on a portfolio company, a company we follow or even one in a similar industry, we then take that information/news and look at it in the context of our portfolio company. IE, was there a takeover in the industry and at what valuation metric and how will that new valuation affect the trading price of our portfolio company?
Second, we tend to look at things through three lenses: fundamental, technical and flow.
Fundamental research, which I have talked about a the past two blogs, forms the base for our view. No need to explain it further here.
Technicals, or charts, help us ascertain good entry and exit points. Some examples:
And then we use "flow" to help us as well. Flow is what type of flows we are seeing/ hearing from the sell-side dealers. As an example, we might hear that there is a big seller of a particular stock or bond out there so even if we like it fundamentally and technically, we may just wait so as not to get run over by a freight train. This is where contacts and relationships (office mates, sell-side counterparts, the fact we manage $100mm for BNS) are invaluable tools for us...having our "ear to the track", as we like to say.
So the analysis of all three of those items (fundamental, technical and flow) go into the mix each minute of each day but there is more on a weekly basis.
On a weekly basis (Thursday mornings at 8:30am) we have an Investment Committee Meeting (ICM). The purpose of the ICM is to provide even more structure and dialogue to our research process. Scott and I will engage and discuss everything from our top-down view to our risk exposure to our view of Trump vs Hillary...and everything in between.
The other important thing we do at the ICM is we run a report on absolutely every account we manage. Because we do not manage "funds" (we manage all client portfolios on a Separately Managed Account basis (SMA)), we need to go through each account with a fine-tooth comb. Fortunately, we have two things that make this process extremely efficient: 1) Bianca (who is extremely proficient in such matters) and 2) Excellent portfolio management software that spits out an excel file on all of of our accounts and all of our positions.
As part of our risk management, we then go through each account and each portfolio company line by line to see who is overweight versus our model weight (if a stock or bond went up a lot) or who is underweight versus our model (if new money came into an existing account or a new account was opened). Then we need to make buy/sell decisions and we go back to fundamentals, technicals and flow to determine what and when we will buy or sell to get those clients to the model weight. Scott talks a bit about "re-balancing the portfolios" and this certainly comes into play here each week during our ICM. Rest assured, we understand each client's risk exposure at all times.
Now all of this experience, work, research, discussions,meetings etc in no way guarantee great performance. What it does do is, it puts structure around our process and, we believe, sets us up to, at a minimum, give us a fighting chance against what is a very tough thing to do...invest profitably so as to achieve our collective.future goal...a comfortable retirement (although I probably will never "retire" from doing what I am doing).