Rational Advisor

What an excellent trip

This is one of those trips that all investment advisors need to re-affirm what is the truth and what is BS.

We went down there with some of our top advisors and met with

1) Gerald Cooper-Key of Mawer - who has been voted Fund manager of the Year 2007 in Canada. he manages our International Growth investments. He has been International Fund Manager of the year 5 of the past seven years, and runner-up in the other two. So, if someone says they want us to compare how good their advisors selection process is, I use Mawer as a litmus test. If that other portfolio does not hold the Manager of the Year, and 5 times International Manager of the year - Who do they hold? and how much better than Mawer is risk and return are they? (go on Google him, I know you want to)

2) Charles Brandes - of Brandes Investment Management. he was the investment advisor/broker for Benjamin Graham, the father of value investing and is one of the leading Value managers in the world. He manages our International Value investments. He has been twice International Equities Manager of the year in Canada. There is not enough you can say about this guy (Again, go one google him - I dare you)

3) Christine Gaelzer from Credit Suisse one of the largest global investment firms managing over $661 Billion.

What did we get from them, priceless confirmation that what we are doing is correct. Even though it may not seem like it. If these smart guys with all their history and perfromance track record are affirming that the world is going nuts, and getting way to excited about the wrong things - then I’d rather listen to them, than some guy in a nice suit on TV!

Here are some notes from them

1) Gerald said that he was concerned around China. He does not believe the US will step into a recession, and expects volatility to continue. He has invested the same way since 1970, without regards to what is happening in the world, but more concerned about the companies that he holds have a RETURN ON CAPITAL greater than the COST OF CAPITAL. That is make more money than they spend - simple, but often forgotten, as people chase stories of great and exciting technologies or gains from commodities. Much of the oil companies Cost of Capital is greater than their return on Capital, because they have to spend more and more at higher and higher prices! He holds a concentrated portfolio of only his best ideas. He does not hold a large amount in cash, and does not hedge against the currency. He says this is a very difficult game, and in his history he does not know of anyoone who has doen it succesfully all the time.

2) Charles amazingly gave us a lot of time. He also does not hedge currency. Here are some key points from him and his team. At the bottom is Charles biggest investmetn worry - just wait till the end to read it will make more sense.
- To be good as an investor as opposed to a speculator, you have to keep your eyes on the fundamentals. You cannot do what others are doing.
- In 1967, Mini Pearl chickens raised $400 million in one year - the go-go years. By 1969 it went bankrupt. Everybody was chasing the hot thing and wanted a piece of it. Be careful of what the world finds attractive, even if it hurts you and you are losing and others are gaining.
- Charles told a story to me, about how early in his career, a client left him because he was unsatisfied by the returns and wanted to get into other investments that had provided better returns over the past three years. He wanted Charles to change his philosophy and look at the ways that other managers were doing better than him. Charles was hurt he lost a significant amount of his income - this was a large client. But he did not change because he knew what he was doing was correct, and was considereing risks where as the others were concentrating on returns. Eventually Charles was proven right, this is why now he manages $120 Billion and is ranked on the Forbes Billionaire list. If he had decided to change, he would be just like all the other managers that listen to their clients or get caught up in the current events. No, having a tried and true discipline even when it looks tough is the right approach, time and time again this is shown. If a client is leaving because they do not liek the perfromance or becasue they want to chase returns, yes, it is hard on advisors, but it is also a good thing, as it allows you to partnership with true investors as opposed to speculators - that you would have lost anyways..
- “When clients get interested in things that are happening today they are not investors but are speculators. “
- “Being a good investor does try your patience as much as five years sometimes”
- Do not change your fundamentals
- “Most of the public CANNOT think long term, they are thinking about 6 months - that is OUR PROBLEM, and OUR OPPORTUNITY. We can take huge advantage of their short term thinking and get good long term companies that they think are no good. If we continue to think about fundamentals and long term, we will continue to have an advantage.”
- As an advisor you will be criticized and clients will eave, this shows that that you are doing the right thing, because these critics are only focusing on the Today, this is what the media does only talk about today - they don’t have a proven track record. we do that goes all the way back to 1972 and it has outperfromed indexes peers etc - How by ignoring today!
- “Be strong in believing in your process. be willing to take the pressure. If you lose clients, let that be, because that means those clients never really understood your process. I also lost clients, clients that did not understand the process. Yet, looking back all those that stayed with us did fantastically well. Don’t do things for the short term (short term is three years)” - Charles Brandes
- “Have the courage of your knowledge and experience to remain firm in your sound judgement” - Benjamin Graham
- remember if you are to outperform in the long term, you will underpferform in the short term. It’s these short term underperformance that are more important and allw you to avoid what is ridiculously over priced
- We take no interest in these rankings that agencies and the public uses. Quartile ranks means nothing - All that matters is that the companies that we hold are bought cheap and have good businesses and can continue to make money in good and bad times! Sometimes we are most happy when we are in the fourth quartile, becasue it means all the guys in the first quartile are holding very risky companies. If you compare those guys with us over the long term, you will see who wins! - So, ignore Quartile etc rankings let the rest of the world concentrate on them, And you take advantage of their misplaced analysis!”
- You don’t have to outperform and index to beat an index. Some of the World’s Superinvestors, including (please google these names), Warren Buffet, Walter Schloss, Charles Munger, Bill Ruane, David Dreman underperform their indexes on average 30% of the time, yet have a long term track record of massive outperfromance. (Rational - So all those guys that say that outperforming an index is important I say bullocks!)
- The reason most funds do nto beat the indexes over the long term is because most managers and analysts are buying companies at ANY PRICE as opposed to cheap prices. They get too wrapped up in the stories that lead to short term outperformance and long term underperformance. Their analysis is flawed!
- A Speculator gets concerned about market swings, and investor takes advantage of them.
- “The investors chief problem will be themselves - people tend to think they know more than what they do” - Benjamin Graham
- The future can be addressed in two ways a) By predicting or b) by protecting. Mistakes are made when people try to use prediction. Our approach and all theo other superinvestors quoted in the Intelligent Investor book written by Benjamin Graham is to concentrate on b) Protection.
- We normalize past earnings and cash flows, we compare current earnings etc to these to develop an Intrinsic Value (the true worth of the company). If the price is below this Intrinsic Value we buy else we ignore - simple, and we’ve done it since 1972!
- we look at the minimum base spending of a company, what is the minimum they need to survive and then use that number to work out what is the worst possible pricing.
- Protection Analysis means you render unnecessary accurate estimate of the future. You should not need to care about the future, if you hold good companies that will make make revenues in all markets, and are purchased at a cheap price!
- We will not purchase anything whose Risk is larger than the potential reward - no matter what the world wants us to do, or who tells us!
- We are not finding any good value in Oils. Oil companies are earning about 20% to 30% on invested capital. Historically, they just earn their invested capital - so this is worrying. These are outsized growths and not sustainable! People are focusing on the high price of Oil - the costs to those companies is also higher now. The economics are just not sustainable - we hold NO Oils - Charles Brandes
- The secret to good investments is Diligence, Planning and Discipline and removing the investors participation (emotions) in the decision making of the investments in the heat of battle.
- Main emotional mistakes of investors a) Illusion of Control - they think they can control the markets or see into the future b) Over-optimism - too optimistic about a certain stock - because the TV, friend, broker told them about it, c) Over-confidence - things are going well, and nothing can go wrong - Wham-O wrong thinking d) Inappropriate Risk taking - willing to take leverage when they cannot afford it e) Loss-aversion - don’t want to invest because I might lose it f) The pain of regret - should have invested in Microsoft! Should not of invested in Bre-X
- Humans are always thinking that they can see patterns to predict the future - they tend to see patterns when they are not - a whole industry called technical analysis has been created on trying to predict the future! If you have four Heads in a row, they think the next one will be a heads as well!

Bottom Line - Carry on doing what’s right, even if it seems that you are wrong, because the rest of the world wants to concentrate on short term perfromance, and what is hot. If your numbers are not as good as others, it does not mean that you have lost your sound judgement, it means the rest have become excited and ready to fall. Brandes and MAwers long term performance outperfromance shows that sticking to good principles makes sense.

3) Christine Galzer from Credit Suisse - Whew I though nobody could top Gerald and Charles and was I proven wrong. Christine was a power pack, and answered all of our questions and concerns about the recent markets. Here are her notes
- Do not see a recession in 2008
- US Macro ISM numbers are at 0.5 which is good. If th enumber is under 0.5 then we are concerned. US still has low unemployment.
- No bubble in US house prices anymore, we are at the bottom and most probably will see house prices in the US increase over the next 12 months. In New York it is the exact opposite of the rest of the US - thanks to foreign buyers. Will see the housing bubble of the US affect the rest of the world - credit problems, like a wave will sweep through everything.
- US earning revisions by analysts is negative, means they keep on reducing their earnings number, this is good, as companies will eventually be able to beat the more realistic numbers.
- Europe is doing well. but has higher inflation than the US. Earnings numbers are coming down, but not to concerning levels.
- We like Japan, unemployment is low, consumption level is still good.
- Emerging markets are looking very Rich and expensive, we are concerned about them
- China has above 6% inflation - this would be dangerous if there was no growth - and that has not been factored in. Most people think that China will carry on like this forever - these are dangerous thoughts, and can ultimately lead to some large dissapointments. China’s valuations are very rich - very dangerous.
- The Forward P/Es on emerging markets are above average relative to five year P/Es
- There is no bubble in Brazil. Funnily cars in Brazil have been running on Ethanol since the last two decades. 75% of cars run on Ethanol, so the high price of Oil does nto affect Brazil. Not the same for India and China.
- Canada, P/E not cheap, but not too expensive either. The other sectors are keeping the Oil sector P/E more in range. Price to Book Value is 1 standard deviation above norm, 1.5 above is concerning.
- The current Earning Yields Gap, which is the yield (interest received on Dividends) over the Bond Yield (Interest received from Bonds) is in favour of dividends.
- Oil will not go higher than $110 - $120
- C$ currency could stay at par for a while.

So as you can see jam packed, there was a lot more, believe me it was amazing.

I strongly encourage you to google Charles Brandes and Gerald Cooper-Key to see the calibre of investment management.

This Monday to Wednesday I will be downtown Toronto at our Canada Due Diligence, talking to our Canadian investment specialists about what is happening in Canada and their interst rates

I will be talking with

TD Canadian Bond - Satish Rai
Acuity Fixed Income - David Stonehouse

Canadian Large Caps - Bill Tynkaluk - Leon Frazer
Canadian Growth - David Picton - CI Synergy

Canadian Small Caps - Bob Tattersall - Howson Tattersall
Canadian Mid Caps - Hugh McCauley - Acuity

Canadian Dividends - Stu Kedwell - RBC Dividend Team

and Bonds and Dividends - Dan Bain - Thornmark

whew another very busy weak, in trying to figure out what’s what - and what’s BS
I’ll keep in touch.

Oh Yea - Brandes number one worry - Y3K!!

Rational - Be safe this winter, be careful driving - Here’s Canadian winter driving http://www.youtube.com/watch?v=BM2gLjfE_3Y

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