First off, welcome to The Circle. Over the years, I’ve had exchanges with many of you where we’ve shared ideas, hashed out existing ones, and uncovered new ones. It’s a process that is so important when it comes to investing. Identifying quality situations and taking the time to understand them, sometimes over long periods, has been the key to our success. I’ve heard personal success stories from many of you and I enjoy each and every one of them. I’ve seen investors go from total greenhorns to real market operators, which has been rewarding to witness. My experience gives me a perspective that most investors just can’t get access to… and I’m excited to share that here. Thanks for coming.
No one can exist as an island as in this game. Having played this game for nearly 25 years now — on a journey from Calgary’s oil patch to the towers of Bay Street — I believe that the strength of your network is absolutely critical to long-term success. Patience and discerning conviction are key assets as well, both of which need to be honed through time and experience. The Circle is about being a part of a like-minded community that has a genuine interest in the market and the fruit that it can bear. It’s about finding companies that offer unique and/or highly skewed risk-reward balances. It’s about adapting to the winds of the market tape. And most of all, it’s about you and your intention to put the effort into achieving your own goals.
In business school, there’s a theory called the Efficient Market Hypothesis. The idea is that the market is smart enough to accurately price assets/companies accurately at any given time because of the broad dissemination of information in the market and the market’s ability to synthesize that information into an accurate representation of value. That’s a mouthful, but if I paraphrase, it’s like saying, “Don’t try to beat the market because the market always knows everything you know and has already priced it in”. Hmmmm. I tend to disagree. When you have specialized knowledge and/or are operating in sectors of the market that aren’t well-covered or well-known, the market is not efficient. I’ve seen it time and time again. Granted, operating in sectors of the market where there’s no broad consensus to lean on is considered “riskier”, but as I always like to say, “You can only lose one hundred percent”. However, if you’re able to dig a few gems out of the dirt, those returns are often referred to as “multi-baggers” — investments that go up many hundreds of percent over time. Therein lies the asymmetry. So how do you find these “multi-baggers”? With a lot of patience, conviction, and — when the wind is right — well-timed aggression. Eventually the market is efficient, just not all the time, everywhere at once.
A friend passed on an article a while ago that discussed the anatomy of a multi-bagger and it was also a great summary of what I’ve learned over time. In essence, there are repeating themes common to multi-bagger stocks that can allow an investor who is paying attention to what these opportunities might look like in the market. In no particular order, they are:
That list isn’t exhaustive, but it seems pretty simple, right? Time and time again I have seen these themes play out. So much so that the process of recognizing them is second nature to me sometimes. Not all the time, but sometimes. One of my favourite videos from Warren Buffett is linked here and, while I don’t totally follow his guidance in that I do like to “dabble” from time to time, I can say that without a doubt, the biggest gains have come from thinking the way he does when he describes the “punch card” analogy. Those opportunities are hard to come by and they don’t have a schedule as to when they present themselves, but when you find one, patience is a virtue. Granted, not all multi-baggers will have all of these attributes, as each company is unique, but this list of characteristics is a very good place to start.
Right now, we are in the most permissive market that I have seen for a very long time in the sectors that I specialize in, which broadly covers “energy and materials”. Think gold, copper, nickel, zinc, gold, silver, oil, and gas. Things that are dug up or produced from the ground. I like these kinds of companies because of my background, but also in that they are relatively simple to understand. Simple is good. Simple can occur in other sectors too, where just having a sense of what a good business looks like is as important as any specialized sector knowledge. Right now though, the vast majority of my capital is invested in companies that either produce metals or energy or hope to produce metals or energy. Most investors can barely name a copper, silver, nickel, or gold stock these days and market data shows that money managers are behind on the trade (i.e., underinvested). As a result, as long as the market music continues to play, the performance in the materials and energy sectors will draw in additional capital like gravity. I could make a macroeconomic argument about the weak U.S. dollar, or increasing energy and materials needs, or both, but at the end of the day there is simply no denying that the trade is on. How long it lasts is anyone’s guess, but by focussing on high quality, but perhaps lesser-known, opportunities, the potential for outperformance is there in spades.
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