Will Rogers was an actor and humorist who was popular about 100 years ago. His advice on investing has stood the test of time: “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it”. Ah, if only it were that easy!
We recently passed the 10-year anniversary of the financial crisis, and we thought this to would be a good opportunity to review the firm’s track record over the last decade. The first thing we saw was that we really are “buy and hold” investors. Of the current top twenty equity holdings in our portfolio, five have been owned for 10 years or more, while fourteen have been owned for between 5 years and 10 years. In a world of high velocity trading, that is a very low turnover rate. The average mutual fund holds stocks only for an average of 15-17 months.
The second thing we noted was the that there have been two broad shifts in our sector allocation strategy over the last decade:
- A move away from owning commodity producers to owning superior wealth-creating companies
- An increased exposure to US stocks, driven in part by the strong Canadian dollar up until 2014
Both decisions have been extremely beneficial for the returns of our clients.
Of our entire current portfolio, there have been seven stocks we’ve owned for clients continuously since 2008 through their ups and downs. The average internal rate of return (IRR) for these stocks has been 10.5% per year compounded, including dividends, far outpacing the 3.8% annualized return provided by holding a TSX ETF.
Brookfield Asset Management (BAM); Bell Canada Enterprises (BCE); Bank of Nova Scotia (BNS); Keyera Corp (KEY); National Bank (NA); Telus (T); Transcanada Inc (TRP); TSX 60 Index (TSX).
What about the other stocks we had ten years ago, but no longer hold? Two have been acquired, (Shoppers Drug Mart, and Petro-Canada) providing premium returns for our clients, and three were recently sold. (Canadian Utilities, Saputo, and Empire). The remaining eight stocks are down an average of 45% since 2008. Fortunately for our clients, we had sold all of these stocks before 2013.
The review provided some useful lessons:
- There are substantial rewards for owning superior companies
As much as everyone likes a quick pop from a stock due to good news or earnings, the real money is made over time by owning superior wealth creating companies that can compound their earnings and return the growing earnings to shareholders through dividends. Owning shares of Canadian banks and telecoms will not win us any stock-picking competitions but these “boring” companies have proven to be extremely lucrative investments for our clients. In the same way, the companies we own today are leaders in their respective industries and we expect the returns to follow as they take advantage of their market leading positions.
Another observation is that selling a stock and taking profits simply because a stock has risen has not been a great strategy: over the last 5 years, five out of the seven companies have outperformed the TSX. Investors that sold stocks such as Brookfield Asset Management in 2014 simply “because the stock rose by so much already” would have missed out on substantial subsequent gains.
- Don’t buy and hold indiscriminately
Clearly buy and hold does not work for every stock. For the 11 stocks that we sold, we did not sell any of them at their absolute peak price, but rather sold them after problems began to arise. Note that this does not refer simply to mediocre share price performance, or a sell-off due to weak earnings but rather deeper fundamental business issues or industry-related headwinds. Although there have been situations where we sold incorrectly with the company managing to turn itself around, in most of the cases, the problems subsequently turned into larger issues and we managed to avoid larger losses for clients.
Although we would love to have a batting average of 1.000, the reality in business and in life is that not everything will work out 100% of the time. This is why we diversify and own around 30 stocks for each client, a number we feel both provides the benefits of diversification while allowing us to intimately study and understand the business.
We believe that the quality of companies (and their management teams) in our portfolio is as good as it has ever been, but we’re just getting started. Diversifying into the US and beyond has vastly increased the availability of great business for us to own, and we will continue to work hard to find outstanding and innovative companies that we can own for decades.