Newsletter August 23, 2014

InvestorsFriend Inc. Newsletter August 23, 2014

Some Long Term Winning Stocks, Identified in Advance

I have been tracking and analyzing certain stocks since 1999. The companies that I track come and go to a certain extent. But there are a few that I have tracked continuously since around 1999. And there are others that I have tracked continuously since whenever I first added them to this web site. The following stocks are all of the stocks on my list which were both rated in the Strong Buy range at some point and which I am still tracking.

In no way is this a random sample. In fact it is definitely biased toward better performing stocks. On the other hand these stocks were not picked after the fact, they were analyzed years ago and rated in the Strong Buy range.

The data here shows the gains from the date on which I first rated these stocks in the strong buy range until today.

Company Date we first rated the company in the Strong Buy range Specific rating Total Price gain to date Years Gain per year
Stantec 3-Sep-99 Strong Buy 2708% 15.0 24.9%
Melcor Developments 20-Dec-02 Strong Buy 630% 11.7 18.6%
Canadian Western Bank 5-Aug-99 Strong Buy 733% 15.1 15.1%
CN 25-Jan-07 Strong Buy 180% 7.6 14.5%
Canadian Tire 4-Feb-00 Strong Buy 381% 14.6 11.4%
Wells Fargo 15-Feb-10 Speculative (lower) Strong Buy 87% 4.5 14.8%
Constellation Software 5-Feb-11 (lower) Strong Buy 355% 3.5 53.3%
Couche-Tard 31-Mar-05 (lower) Strong Buy 429% 9.4 19.4%
Visa 6-May-11 (lower) Strong Buy 165% 3.3 34.3%
Bank of America 5-Feb-11 Speculative Strong Buy 89% 3.5 19.7%
Boston Pizza Fund 13-Dec-08 Strong Buy 187% 5.7 20.3%

The biggest gainer is Stantec an Edmonton-headquartered engineering company that grew mostly by acquisitions. It was an obvious bargain in September 1999. It has gone on to gain 2708% in 15 years or a compounded 24.9% per year.

The largest gain per year is for Constellation Software, up 355% in 3.5 years or 53.3% per year.

The point is that this data shows that certain stocks can grow wealth at double digit rates for a period of years. They can be identified as strong buys in advance. And they can be relatively large and established companies. None of the companies above were particularly obscure at the time they were first rated on this site in the Strong Buy range.  Some were household names. Some of these stocks were already huge businesses at the time. Some were relatively small but none were micro caps. None of these were penny stocks. None of these companies are in exotic businesses. None are resource companies. None are heavily focused on research and development. These companies would not strike most people as a group of high-risk stocks. Many of them would be considered blue chip names.

Did I buy and hold any of these stocks over the entire period indicated? I did not, though it appears it would have been wise. I have held all of these stocks from time to time and in some cases held them for years. I tended to buy on dips and sell on rallies to a certain extent. A wiser strategy might have been to buy on the dips or buy regularly over the years but not sell on rallies.

Was the Strong Buy rating maintained for these stocks all these years? No it was not.

Do we rate these stocks as Strong Buy today? No, we do not.

Were these stocks free from volatility, even sickening losses? No, any that were rated Strong Buy prior to 2008 suffered big losses in 2008 and 2009. And in general they all had their ups and downs over the period.

But the point is that sticking with these companies would have worked out very well indeed. Our own performance is well document.

Investment and Business Wisdom of the ages

This summer I spent a good deal of time reading some old books.

Here is a selection of pearls of wisdom from that reading.

The Romance of Commerce – 1918, By Henry Gordon Selfridge founder of a huge department store in London England that still thrives.

Chapter I, Concerning Commerce:

“Ever since the moment when two individuals first lived upon this earth, one has had what the other wanted, and has been willing for a consideration to part with his possession. This is the principle underlying all trade…, and all men, except the idlers, are merchants.”

“…without Commerce there is no wealth. Commerce creates wealth , and is the foundation of the great state.”

“Honesty always pays.”

“It is desperately silly to hold wages down to the breaking point…”

“… the making of a fortune possess almost always in its formula a large quantity of risk.”

The Richest Man in Babylon – Fiction – 1926 by George S. Clason.

The key lesson of this tale is what is described these days as “pay yourself first”. Save at least 10% of all earnings regularly and, just as importantly, put your savings out as investments to grow.

“Willpower is but the unflinching purpose to carry a task you set for yourself to fulfillment…. When I set a task for myself, I complete it. Therefore, I am careful not to start difficult and impractical tasks, because I love leisure.”

“Counsel with wise men. Seek the advice of men whose daily work is handling money.”

“necessary expenses” will always grow to equal our incomes unless we protect the contrary.

Invest to build “an income that continueth to come whether thy work or travel”.

“Guard thy treasure from loss by investing only where thy principal is safe…”

“Own thy own home.”

“Provide in advance for the needs of thy growing age and the protection of thy family”.

“Increase thy capacity to earn” by perfecting yourself in your calling, by increased skill and by increased wisdom. Be in the front rank of progress and do not stand still, lest you be left behind.

Common Stocks and Uncommon Profits, 1957 by Philip A. Fisher

Philip Fisher is known as one of the great influences on Warren’s Buffett’s investment style. In 1957 Fisher has been a very successful investor for a very small group of clients. He started his investment firm in 1931 and focused on “a few growth companies”. He served in the war for three and a half years during which his spare time was used to think about and define the most successful investment principles that he had observed in himself and others. After the war he returned to his investment practice. He wrote his book as a way of communicating his unconventional approach to a wider audience.

In Chapter 1 of his book he wrote:

In the 1800’s and in the early part of the 1900’s it was possible to invest very successfully by betting on the business cycle. This was in an era of an unstable banking system which caused recurring booms and busts. One could could buy stocks in the bad times and sell in the good times. But, he said, this started to end with the creation of the FED in 1913 and came to an end with securities legislation passed in the early days of the Roosevelt Administration.

He said that the most significant fact to be realized was that even in 1800’s and early 1900’s, “those who used a different method made far more money and took far less risk”.

“Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying buy them cheap and sell them dear.”

“What is required is the ability to distinguish those relatively few companies with outstanding investment possibilities from the much greater number whose future will vary all the way from the moderately successful to the complete failure.”

Fisher felt that the opportunity to find such companies was even greater, in 1957, than it had been in the past due to a new emphasis on research and development and the resulting newer products  and due to more professional management more focused on shareholder interests. But, he said, research and development spending could also be a crushing burden if not managed properly.

Fisher noted that since 1932 both political parties had accepted the need for deficit spending to combat recessions. This would lead to a situation where for financially strong growth companies, declines in market values during recessions would prove far more temporary than had been the case previously where the very existence of the company might have been threatened.

Fisher noted that due to periodic deficit spending, there was an inflationary bias in the economy. He (correctly, as it turned out) foresaw that this meant that long-term bonds were undesirable investments in 1957. And this was despite that yields on bonds were abnormally higher than stock dividend yields. He aid that viewing long-term bonds as undesirable “seems to run directly counter to all normally accepted thinking on this subject”.

He predicted inflation due to deficit spending and said: “it becomes clear that major inflationary spurts arise our of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system”.

Fisher said that the evidence showed that “the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. …when we believe we have found such a company we had better stick with it for a long period of time. …such companies need not necessarily be young and small. …what really counts is a management with the determination and ability to attain important growth and a vigilance in performing the day-to-day tasks of ordinary business outstandingly well.

Conclusions regarding lessons from the past

Philip Fisher’s comment on the undesirable ness of long-term bonds for long term investors seems even more appropriate in 2014. As in 1957 there is a fear today of inflation due to government deficit spending. Unlike 1957, the yields on bonds are not higher than many available dividend yields. I have explained this in my article comparing bond investing to stock investing.

Fisher’s comments that we should look for excellent companies with good management and then buy and hold these seems as true today as it ever was. It proved to be the case for the examples I identified above.

The advice from The Richest Man in Babylon to save and invest at least 10% of income is certainly still true.

Gordon Selfridge’s argument that all wealth stems from Commerce is just as valid today as it was a hundred years. (Even natural resources don’t create much wealth until trade and commercial business gets involved.)¬†Investors should feel good about owning shares in the businesses of the world.

Subscribe

In addition to this free newsletter and in addition to our substantial body of free
investment educational articles
, InvestorsFriend Inc. also offers a paid service that rates a selected number of stocks as Buy or Sell and which has a very good and documented track record since our inception 15 years ago. Those who are not already paid subscribers can learn more by clicking this link.

END

Shawn Allen, President
InvestorsFriend Inc.

To see older editions of this newsletter, or to get off of this email list, click here.