Better Returns: Founders Wisdom & Time -Honored Lessons - - PowerPoint PPT Presentation

Better Returns:

Founder’s Wisdom & Time-Honored Lessons

Presented by: Mark Robertson, Founder & Managing Partner markr@manifestinvesting.com October 20, 2018

Founder’s Wisdom & Time-Honored Lessons

No investment recommendation is intended.

This is an educational demonstration.

The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by Manifest Investing or the National Association of Investors. The views expressed are those of the instructors, commentators, guests and participants. Investors should conduct their own review and analysis of any company of interest before making an investment decision. Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. Webcast Reminder List: nkavula1@comcast.net

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Community is about shared knowledge, open communication, and trusting relationships. We feel it is important to share what we know. More importantly, we feel that it is important to share what accomplished Founders have

• discovered. For there, in the trenches, lie the hard lessons, the deserved

triumphs and “how to” advice that is likely better than anything we could come with on our own. From best practices to “if we’d only known” experiences to “this is how it began” stories, Founder’s Wisdom might serve as the beginning of the conversation, as a means of opening up the platform to other shared experiences, stories, and anecdotes. It is in the sharing of communal knowledge and shared experiences that we hope to transform theory into practice and thought into action.

Source: trueventures.com

Founder’s Wisdom

Founder’s Wisdom & Time-Honored Lessons

Centers of Collaboration & Education

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Most people and average investors are doing it wrong. The core values of the National Association of Investors (NAIC) and American Association of Individual Investors (AAII) are centered on collaboration and education. The

• rganizations were founded by George

Nicholson, Jr. and James B. Cloonan,

• respectively. The wisdom of these visionary

founders often runs contrary to the “harmful noise and misdirection coming from the investment services industry.” What notions can we challenge and better understand? What time-honored lessons offer the potential for better performance?

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To put this in perspective, people who invested $1,000 with Buffett in 1957 would have about $100 million by now, whereas investors who put the same amount in the S&P 500 would have $250,000. Greenblatt, one of the most successful hedge fund managers ever, crushed the market between 1985 and

• 2005. Over that stretch of 20 years he turned $1,000

into $840,000, whereas someone who would have put that same amount in an index fund or tracker of the S&P 500 would have had only $12,000. And I “personally watched” $20/month since February 1948 become $1,500,000 by the end of the 1990s.

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• What are “average investors” doing wrong? What

long-term beliefs are vulnerable to challenge?

• What are the most powerful lessons contained in

Investing At Level 3 by James Cloonan and [Better Investing] for the Individual Investor, the handbook that was heavily influenced by George Nicholson (1984 & 1989 editions)?

• How can we get by with a “little help” from our

friends?

Our Agenda

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Welcome, like-minded long-term investors, to this discussion, exploration and tribute to some time-honored principles that can be part of a successful lifetime of strategic fundamental investing. It is important and appropriate that we remember the contributions made by the late George Nicholson, Jr. CFA to his “Grand Experiment” known as the National Association of Investors Corp (NAIC), our Better Investing (BI) methodology and the modern investment club movement. The introduction to the text shown here reads, “[This learn-by-doing manual] is unlike any stock study book you have ever seen. It shows you how you can take the vast amount of information that comes to the attention of investors and put it into a simple picture that tells you a great deal about the investment potential of a particular company.”

A Philosophy of Patient Discipline

Source: NAIC Investors Manual for the Individual Investor (1984)

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Cloonan’s work parallels (and “rhymes” with) Nicholson’s 1984 Individual Investor’s Manual. As we discuss this overview, notice how often the things he says, starting with the definition of risk through the eyes of a disciplined long-term investor, the recovery following the Great Recession

• f portfolios like Tin Cup … and a host of other philosophies

that we hold dear, including but not limited to our practice of all-of-the-above investing. (Note his references to the equally-weighted Wilshire 5000) His objective mapping even resembles Nicholson’s +5% “YES, You CAN Beat The Market!” mantra. We have all been looking at investment risk the wrong way. And unfortunately we have been paying dearly for this mistake. Recognize that greater long-term [appreciation] comes from investing in smaller and mid-cap companies.

Looking At Investment Risk The Wrong Way

Source: Manifest Investing, Forum Discussions (2017-2018)

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Overview: They’re Doing It Wrong!

Volatility ▪ Core principle of Modern Portfolio Theory Potential for capital loss ▪ This can be real ▪ But is not the same as volatility How would you define risk?

Founder’s Wisdom & Time-Honored Lessons

Contemplations on Risk

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Founder’s Wisdom & Time-Honored Lessons

Contemplations on Risk

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Founder’s Wisdom & Time-Honored Lessons

Graham/Buffett, Nicholson & Cloonan: Risk & The Egg Basket

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“Probably 12 stocks is enough for diversification in most portfolios … The best rule for diversification is this: Hold no more stocks than you can remain effectively informed on.” – George Nicholson

Founder’s Wisdom & Time-Honored Lessons

Risk: A Few Moments With Muhlenkamp …

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Which line is riskiest? Squiggly and Up? Straight and Flat? Straight and Down?

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Fact: “Stock Prices Fluctuate.” – Multiple “Founders”

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An Open Letter To The President (2008)

https://www.manifestinvesting.com/articles/200811cover

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Tin Cup: Ten Years Later

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Context, Stewardship & The Long-Term Perspective

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Rethink and Redefine Risk: A Better Future Awaits

Volatility is not risk. Decline in a stock or portfolio is not a capital loss. “Realize this.” The probability of a decline in total assets lessens with longer holding periods.

“Unnecessary fear of volatility results in investors throwing away returns to

• ffset risk that doesn’t really exist for

the long-term investor.” Volatility is not an appropriate measure of risk for the long-term

• investor. In fact, volatility is the

friend of the long-term investor.

Founder’s Wisdom & Time-Honored Lessons

Graham-and-Doddsville Super Investor Walter Schloss (1955-1994)

(1) Invested just like you and me. (2) Value Line Investment Survey was one of his favorite sources of ideas.

$100 invested with Walter for 39 years became $63,591

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Shadow stocks: … relatively small, but large enough to be clearly developed – but of a size capable of supporting “dramatic growth” … undiscovered … -- February 1983. … concerning the lifetime strategic decisions of the individual investor in the management of a common stock portfolio. … we will assume a “wealth maximization” objective. [the journey was described in stages vs. levels] Even if your tactics for selecting stocks with the greatest growth potential are imperfect, your portfolio will likely

• utperform over the long run. -- Nov-Dec. 1981.

The Legacy of Level3 Investing

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“Over the last 45 years (1970-2015) the equal weighted Wilshire 5000 has outperformed the cap- weighted index 17.1% to 10.5% -- for an annualized difference of 6.6%.” – Cloonan.

Founder’s Wisdom & Time-Honored Lessons

A little algebra: If the S&P 500 checks in at 5.6%... and is included in the Value Line 1700 (11.5%), solving for the return delivered collectively by the 1200 medium and smaller companies is 14.0%. Boom.

Founder’s Wisdom & Time-Honored Lessons

We Hope You Dance

https://www.manifestinvesting.com/articles/201501cover (Public)

Founder’s Wisdom & Time-Honored Lessons

Source: http://aswathdamodaran.blogspot.com “Musings On Markets”

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Shadow Stocks (9/30/2018)

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Long & Short: Shadow Stocks (9/30/2018)

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Growth Matters

Growth rate expectations should always be influenced by company size. A superior measure of company size is forecasted [sales] growth rate.

Large <7% Med 7-12% Small >12%

Better Size Guidelines

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Growth Matters

“The target of 15 percent annual RETURN applies to your TOTAL portfolio.” Your total portfolio should achieve a distribution of small and large companies and yet achieve an overall sales growth forecast of 10-12%. “In selecting stocks ... It seems wise to choose 25% from major companies, 25% from smaller companies and the balance from the rest (medium-sized companies.)” “Among the major companies, seek sales growth forecasts of 5- 7%. Among the smaller companies, you may be able to find sales growth forecasts at 12% and upwards ... Your total portfolio can achieve a distribution of small and large companies and yet have an overall growth rate of [10-12%] ... ” – George Nicholson, page 12.

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Motivation

Founder’s Wisdom & Time-Honored Lessons

Number of Companies

The search for growth stocks was based on T. Rowe Price’s “life cycle” theory of corporations, which held that companies go through a cycle of growth, maturity and decline. The greatest possibility for gain and least risk, he felt, is when the long-term earnings trend in a company is positive. And the best time to invest in a company … is when it is small, before its shares “gain in stature” and sell at higher P/E ratios. – Wayne Thorp, AAII.

Founder’s Wisdom & Time-Honored Lessons

Best Small Companies (Forbes/Manifest Investing)

Methodology: Quality Matters – Yes, Even For Small Companies.

Criteria:

• Sales Growth Forecast Matters, so Sales Growth > 11.6%
• Annual Revenues less than ONE BILLION (with some latitude)
• Annual Revenues > $50 million (with some latitude)
• Stock Price > $5
• Asset-Based Businesses are not excluded but rare due to realities of growth for

the group.

• BEST? We define BEST/BETTER as an EXCELLENT QUALITY company that

has a superior RETURN FORECAST – so we use MANIFEST Rank (combination

• f return forecast and quality) as the primary criterion.

Founder’s Wisdom & Time-Honored Lessons

The Best Small Company tracking portfolio has now beaten the Wilshire 5000 in 10-of-13 years. The last four years have delivered 19.0%, 21.6%, 31.7 and 36.0% respectively. The 36.0% has been achieved versus a Wilshire 5000 at 8.6% for 10/31/2017-10/15/2018. For 2006-2018, the average annualized return is 16.5% versus 10.2% for the total stock market.

Founder’s Wisdom & Time-Honored Lessons

The Best Small Company tracking portfolio is created by investing $100 into each of the annual selections on Halloween (10/31). (Dividends are included.) BJ’s Restaurants (BJRI) is our top performer this year as $100 invested 10/31/2017 is now worth $214.20. (A 114% gain!) The average quality rating of these companies is 73.2.

Founder’s Wisdom & Time-Honored Lessons

• Value Line Investment Survey: Small and Mid-Cap

Edition

• Morningstar Screening For High Growth (SSG+)
• PRIMECAP Odyssey Aggressive Growth (POAGX)
• T. Rowe Price New Horizons (PRNHX)
• Brown Small Company (BCSIX)
• Conestoga Small Cap (CCASX)
• Kris Jenner (Rock Springs Capital Management)
• David Gardner & Gem-Seeking Fools, Motley Fool
• Red Chip Review
• American Association of Investors: Shadow Stocks
• Ken Kavula, Marie Frank, Kim Butcher, John Kimmel,

Club Portfolios & Others “Bring Out Your Best!”, Stock Selection Contests

Founder’s Wisdom & Time-Honored Lessons

Our Favorite Small Company Funds. We like them for a reason. They seem to know how to discover and invest in high-potential rapidly-growing companies. POAGX has delivered 21.1% over the last decade. (VTSMX = 14.5%) https://www.manifestinvesting.com/dashboards/public/best-small-company-funds

Founder’s Wisdom & Time-Honored Lessons

Brown Small Company (BCSIX). Stocks to Study (or add to coverage): Q2 Holdings (QTWO)

Founder’s Wisdom & Time-Honored Lessons

Neogen develops, manufactures and markets products dedicated to food and animal safety. It operates through two segments: Food Safety and Animal Safety. The Food Safety segment consists of development, production and marketing of diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens, drug residues and levels of general sanitation. The Animal Safety segment development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors as well as provides genomic identification and related interpretive bioinformatic services. The company was founded on June 30, 1981 and is headquartered in Lansing, MI. (WSJ)

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Best Small Companies (2019): Leader Board (10/16/2018)

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(1) Understand risk. (2) Experience the freedom of investing in small and medium-sized excellent companies. “Dramatic” results are possible. Discover a discipline – patiently and diligently exploit it. “I think the best approach is to understand that sometimes the simplest things are the best.” – James B. Cloonan. Investment clubs are the gateway to an investing experience unlike any you have ever seen.

• Learn. Share. Celebrate. Invest regularly. Stay invested. Discover leadership growth

companies and prudently diversify. Exercise patience, discipline and stewardship. “On the bright side, the failure of [average ‘investors’] to take and be faithful to a [long-term perspective] is what provides the opportunity for you [and our community of long-term investors.] Don’t let it slip by.” – Cloonan.