My investment thesis…

or

Whatportfolio management

means to me

Presented by:Michael PatenaudeFebruary 2016

Objectives

Risk tolerance

Asset allocationRe-balancing

StrategyContext

Review

Forecast

What we’ll cover tonight

� context

� strategy

� objectives, risk tolerance and asset allocation

� re-balancing

� what I’m thinking of doing next

� wrap up

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Disclaimer� everyone has different needs, strategies, objectives, risk

tolerances, and portfolio management styles but we can all learn from each other

� there are few right or wrong answers in investing – what’s important is what works for you and your circumstances

� the views expressed in this presentation are my own opinions as an amateur portfolio manager

� I am continually learning so don’t have all the answers (and never will)

� the information presented here is for general interest and is not investment advice

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Context

� just me and my wife (and our dog) – no kids, mid-50s

� our investment process is customized to our requirements

� we’re both self-employed consultants� project portfolio analyst (me)� writer/media relations consultant (Rhonda)

� no pensions other than CPP/OAS

� self-directed investor for last few years (previously had a broker/investment advisor and gradually migrated to self-directed portfolio management)

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Context (cont’d)

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� we have $CDN and $US:� RRSP� TFSA� cash accounts� two discount brokerages� managed as a single portfolio

� I keep a home-made, detailed Excel workbook for our portfolio and other financial information

� whenever I feel like it I download account data from the discount brokerages to my spreadsheet and analyze it

Strategy

� develop a portfolio “for all markets” very loosely based on the permanent portfolio (Harry Browne, 1980s) that balances growth, income and safety

� for equities, invest in solid businesses at a fair price (e.g., with a moat): � long-term proven performance� well-founded future prospects � great management teams

� don’t act upon day-to-day “noise” in the financial press or short-term changes in prices of assets

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Strategy (cont’d)

� do not “chase” yield or growth – sometimes the train has left the station and it’s safer to wait for the next one

� do look for consistent, long-term performance (and in some cases dividend growth)

� plan diversification carefully – try to avoid excessive asset value correlation

� accept that not all investments are likely to work out but if enough of them do that’s fine

� let winners run (up to a point then trim a bit)

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Strategy (cont’d)

� avoid high fees, management expense ratios and commissions

� take emotion out of investing so as not to be driven by fear and panic and/or greed and euphoria

� recognize about all you can control are:� objectives� risk tolerance� asset allocation

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Strategy (cont’d)

� according to numerous studies the recipe for success in investing is (although this is often hotly debated):� have a well-diversified portfolio� be patient over long time periods� do not try to time the market� invest regularly and consistently� let the law of compounding work its magic

(See for instance: http://www.investopedia.com/articles/stocks/08/passive-active-investing.asp)

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Objectives

� start retiring from full-time employment in about five years with enough savings to live comfortably for the rest of our lives

� make an average 7% compounded annual total rate of return in our investment portfolio (4.25% from asset growth and 2.75% from interest/dividends)

� before retiring from full-time employment, grow our retirement portfolio by 10% compounded per year (combined rate of return and new savings)

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Objectives (cont’d)

� always have enough cash available to avoid having to sell securities (i.e., stocks or bonds) at a loss during a market downturn (and be prepared for a downturn to last up to five years)

� always have at least one full year's income in maturing bonds by using a five-year bond ladder (bonds are held to maturity and re-invested)

� keep enough cash, bonds and precious metal securities to ensure I don't lose sleep at night worrying about catastrophic losses in our portfolio

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Objectives (cont’d)

� follow a routine and disciplined portfolio review process:� try to continually improve portfolio quality� watch for investment opportunities and compare

them to our existing holdings� if there seems to be a good investment that we don't

already own, consider either replacing an existing holding (preferably) or adding the new one

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Risk tolerance

� first and foremost, avoid long-term catastrophic losses of capital

� avoid portfolio value decline greater than 10% in one calendar year

� avoid too much day-to-day volatility (ideally no more than 0.5% portfolio value up or down per day) – this is a measure to help ensure not all assets are correlated

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Risk tolerance (cont’d)

� combine growth stocks with income stocks on the expectation that:� growth stocks will be more volatile (but provide higher

total returns)� income stocks will help smooth out the volatility (while

providing growing cash flows)

� generally avoid assets with less than investment grade quality (i.e., S&P rating of BBB- or higher)

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Risk tolerance (cont’d)

� consider small, opportunistic purchases in high risk companies (based on fundamental research and fair valuation)

� generally avoid: � micro-cap (<$100M market capitalization)� penny stocks (<$1.00 per share)

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Target asset allocation

� 45% stocks

� 30% bonds

� 15% cash and bonds less than one year in duration

� 10% precious metals

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Target asset allocation (cont’d)

� distribute stock holdings over all industry sectors in proportion to our risk tolerance and growth/income objectives: � 15% each in financials and technology� 12.5% in industrials� 10% each in materials, utilities and telecommunications� 6.25% each in energy and healthcare � 5% each in real estate, consumer staples and consumer

discretionary

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Asset allocation (cont’d)

� geographic allocation of stocks:� 62% Canada� 26% US� 12% international and emerging (in $US)

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Asset allocation (cont’d)

� growth vs. income stock allocation:� 50% growth (expected total return of 8-10% per year) � 50% income (expected total return of 4-6% per year)

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Asset allocation (cont’d)� keep no more than 2.5% of the total portfolio in high

risk stocks:� limited track record� lesser market capitalization value� strong but unproven growth prospects� lower liquidity than average� possibly higher than typical momentum

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Asset allocation (cont’d)� over time, be ready to add new cash, re-deploy

maturing bonds or sell a portion of high achieving stocks to maintain the allocation among stocks/bonds/cash/precious metals

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Re-balancing

� a properly constructed portfolio needs to be reviewed no more than once a quarter

� obsessing with and reacting to day-to-day market gyrations will not likely improve portfolio performance

� trades are to be guided by quarterly re-balancing rules and/or changes to company performance and business fundamentals

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Re-balancing (cont’d)

� I regularly look for ways to improve portfolio quality

� in between quarterly reviews I channel my interest in investing into:� staying on top of trends� research� analysis of company fundamentals� monitoring my alerts and watch lists� and now blogging…

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Re-balancing (cont’d)� consider re-balancing quarterly based on rules:

� if a single security exceeds 5% of its asset class� if bonds or stocks vary 2.5% or more from 45/30 � if growth or income stocks vary 2.5% or more from the

50/50 of our equity component� if US/international climbs to more than 35% of our stock

portfolio � if a single security climbs or falls more than 20% in value

in the trailing twelve months � if cash (including short maturity bonds) exceeds 15% � if one sector varies more than 2.5% from its intended

allocation

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Re-balancing (cont’d)

� consider selling any security if its fundamentals change negatively:� dividend cut� change in dividend payment type� rating downgrade� growing debt load� unwanted share dilution� earnings misses� major management changes� chronic negative sentiment among investors (including

short attacks)

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My 2015 year-end review

� started my review in late November

� jump-started my quarterly portfolio buys and sells on December 15, 2015 to capitalize, in part, on some tax losses

� 2015 Results:� our total portfolio return: 5.9%� our total portfolio objective: 7.0%� our performance score: 84% of goal� our broader portfolio growth with savings: 9.2% (vs. 11%)

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Year-end review (cont’d)

� Positives:� high-performing growth stocks� US dollar denominated holdings� bond interest� dividends� minor harvesting of capital gains� holding bullion which is valued in US dollars � limited exposure to the volatile energy sector (about 5%

of our stock portfolio)

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Year-end review (cont’d)

� Not so good:� energy stocks (in crash territory)� some high risk stocks (in correction or crash territory –

minimal holdings)� bonds (down about 1/2% – actually more a stabilizing

holding than anything)� dividend paying stocks (down about 3.3% – somewhat

stabilizing)� precious metals stocks (down 15.3% – in correction-plus

territory)

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Year-end review (cont’d)

� Re-balancing:� replaced Husky (HE) with Exxon-Mobil (XOM)� replaced ½ Goldcorp (G) with Agnico-Eagle (AEM)� replaced ½ Silver Wheaton (SLW) with Klondex (KDX)� added to Central Fund (CEF.A)� replaced National Bank (NA) with Fortis (FTS)

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Year-end review (cont’d)

� Re-balancing:� sold Avigilon (AVO)� sold Currency Exchange International (CXI)� held Intertain (IT)� held Franco-Nevada (FNV)� bought two BBB rated bonds (2020 maturities) at 3.5%+

interest� let cash run down slightly in anticipation of fresh cash in

2016

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Year-end review (cont’d)

� Did not harvest any gains from 2015’s best performers:� Enghouse Systems (ESL) – up ~78%� CCL Industries (CCL.B) – up ~74%� Constellation Software (CSU) – up ~74%� Stella Jones (SJ) – up ~60%� Alphabet (GOOG) – up ~42% (~65% in Canadian dollar

terms)

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2016 ideas

� continue looking for quality improvements� keep an eye on:

� energy (possibly add a bit in natural gas)� precious metals� consumer staples (looking for a fairly valued one)� look at “alternative investments” (e.g., access to

private equity)� add a bit more to health care� possibly harvest some capital gains (if they

continue like they did in 2015)

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Thoughts since year end� re-balancing bullion-related assets in favour of bullion

rather than bullion producers (7 parts bullion to 3 parts bullion stocks) – insurance and non-correlation of assets is the goal here

� reduce 2016 total return objective (including new savings) to 10% from 11% in 2015 (maybe total return objective is a bit high)

� consider new rules for valuing income stocks (e.g., fair relative P/E and P/CF; high relative dividend)

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Thoughts since year end (cont’d)

� consider new rules for valuing growth companies (e.g., buy when forecast growth rate is higher than P/E)

� consider new rules for selling high risk stocks (e.g., when a stock drops >20% in value)

� decide what to do with Intertain (IT)

� take a closer look at Alaris Royalty (AD) and Andrew Peller (ADW.A)

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Thoughts since year end (cont’d)

� consider adding to:� emerging markets or other international (down but

not out)� Dirrt Environmental Solutions (DRT) (high risk)� Methanex (MX) (cyclical)� Knight Therapeutics (GUD) (management bet)� Cash (top up)

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Thoughts since year end (cont’d)

� very long term - look for opportunities to invest in disruptive business models as they emerge:

� sharing economy� P2C (producer to consumer)� digital commerce� alternative energy� robotics and automation� nano-technology� bio-technology� Internet of things� etc.

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Thoughts longer term

� Pre-retirement path (still plenty of time):

� Consider reducing equity holdings slightly overall (5% or 10%?)

� Gradually move more equity assets to dividend growing and dividend paying stocks

� Reduce/eliminate high risk exposure

� Re-allocate some growth equities towards dividend payers

� Increase bonds to take up equity slack (if needed)

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Wrap up� I try to control my fear and greed by following a process

and rules

� I try to invest in quality in three realms:� growth� income� safety

� I like to sleep well at night

� I know our objectives are stretch goals

� I am optimistic about innovation and opportunity driving quality assets up in value for a long time to come

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