In September of last year I was interviewed by the Globe and Mail, Canada’s premier business newspaper. A question that really made me think was, “What accounts for your outperformance since the 1990s?” I would like to delve into this question, dividing the answer into personal and investment factors.
Personal factors for success
The personal factors of greatest importance are very similar to those necessary to succeed at any business, including farming:
1. Thinking long-term. Transactions made consistent with a long-term vision, are more likely to succeed.
2. Taking responsibility. I managed a lot of people throughout my career and one of the key defining characteristics of success was taking responsibility vs. making excuses. Even those decisions we don’t make directly but that impact our success are our responsibility (like when working with a financial advisor).
3. Perpetual learning. Similar to any challenging pursuit, investing requires openness towards constantly learning and trying to improve. That’s what makes it fascinating.
4. Stick-with-it-ness. Stock investing is a little like bull riding. Best results are realized when you don’t get bucked off.
I suspect these four key personal factors are more important than the investment factors.
Here are those which helped me achieve above average results:
1. Long holding time. Generally, all market participants are referred to as investors. However, I divide them into three categories: Investors, traders and speculators. I have tried and failed at trading and speculating, and think true investing is more lucrative and less stressful. I would define true investing as owning shares in a company with the intent of participating in the long-term success (and sometimes failure) of the company. Most market participants are traders and speculators because the average holding time for a stock is just over six months, versus my average of over 10 years.
2. Buying value. The market is a very trend following organism and certain companies are often overpriced relative to their earnings and cash flow, because of their current popularity. I tend to buy companies and sectors that are currently out of vogue where values are better, then wait for the trend to change. I prefer market loneliness.
3. Cash flow, earnings and dividend growth. Best to invest in companies that have a decent long-term history of growing these three items, which should approximately double over a 10-year period. Lots of companies talk a big game and don’t deliver. My premise is that if a company has a history of delivering, they are more likely to continue doing so into the future.
4. Stocks and real estate. These are the best two investment mediums for long term growth, thus my focus. They have more volatility than other avenues like GICs or Bonds, but I have learned to accept the volatility for better long-term returns. There is a chapter in my book on real estate.
5. Take advantage of market downturns. The great success of my TFSA, with a 10-year compound annual growth rate of 14.7 per cent, is that I started with stocks at the very depth of the financial crises when many were scared right out of the market. This was probably the best buying opportunity in a generation, but most missed it. The December downturn helped me buy better values with our January TFSA additions.
6. Canada vs. U.S. One of my greatest successes was that between 2005 and 2014 my focus was almost entirely in the U.S. Our currency was at par for most of this era and U.S. companies were trading at a 15 to 20 per cent discount to Canadian stocks. Remember the great resource boom and the angst around the U.S. housing crash, when Canada was considered a bastion of financial stability? Consistent with my value approach I was converting money at about par, buying cheaper U.S.-valued companies and driving our RRSPs to about 65to 70 per cent U.S. This paid off nicely as our dollar declined and U.S. markets took off. U.S. companies are now at a premium to Canadian.
This might sound too simple. It’s my observation that success, whether farming or investing, is almost entirely based on excelling at the basics.