Jul, 03, 2016

Scorecard #15 – Noise


After a slow start to the year, the Value Fund finished up +3.85% in Q2 (after all fees and expenses) and is up +2.11% year‐ to‐date (YTD).*


*Returns are as of June 30, 2016 and are net of all fees and expenses. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. GreensKeeper Asset Management Inc. assumed the investment management responsibilities of the Value Fund on January 17, 2014. Prior to that date, the Value Fund was managed by Lightwater Partners Ltd. while Mr. McCloskey was employed by that firm.

Our best performers for the quarter were Corus Entertainment +13.3%, Urbana Corp. +12.6% Exxon Mobil +12.1% and Express Scripts +10.4%. Our laggards were Swatch Group (15.0%), Home Capital (8.7%) and Wells Fargo (2.1%).

Fortunately our gainers outperformed our losers and also managed to overcome a (1.5%) currency headwind during Q2. The strengthening of the Canadian dollar has been about a (6.0%) headwind for the portfolio YTD. We remain unhedged given our belief that once the US Federal Reserve decides to finally raise US interest rates, this headwind will reverse and add to our future returns.

Business TV

Most mornings when I wake up I turn on the business cable channels to get a sense of what is happening in the world and overseas markets before digging into the financial newspapers. CNBC’s Squawk Box and Bloomberg Surveillance are my usual go‐to favourites.

On days when the guests are CEOs of quality businesses, I can watch for hours. Learning about how a company is navigating the economic environment and generating future earnings is always a good use of time. However some days the viewing is less than compelling despite the entertaining personalities of the hosts and the TV is off before it is even warm. The recent Brexit referendum is a case in point.

Over the past month, segment after segment was focused on the United Kingdom’s referendum on remaining in the European Union (also known as “Brexit”). Now, make no mistake ‐ this was an event of major significance to the British electorate and their economy. But whether or not they chose to leave the EU, the impact on the companies that we own in the Value Fund was largely immaterial. Speculation about the outcome of the vote and predictions about the equity markets’ reaction to each outcome were discussed ad nauseum. So I tuned out and went back to reading financial reports and valuing businesses that we would like to own (at a price). The vote to leave the EU ultimately passed and the market sold off. The next morning I added to our positions in two companies whose operations are almost entirely based in North America. Within days markets recovered and life went on.

To be clear, I had no particular insight into which way the vote was going to go. Nor did I know how the market would react or how long it would take to recover once the market did sell off. But I do know how to recognize stocks that are undervalued and how to seize opportunities that present themselves.

Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

– Warren Buffett, Berkshire Hathaway

At GreensKeeper, we firmly believe that the short‐to‐mid‐term direction of the markets cannot be successfully predicted with any consistency. Yes business cable channels will always find a so‐called ‘expert’ that made a recent prediction that was spot on. But I would posit that market Nostradamuses simply do not exist. The reason is that short‐term market moves are driven by investor sentiment which is undeniably moody. But over the long‐term markets do rise due to inflation and retained earnings. Long‐term, what truly matters are earnings and equity valuations.

To prove our point, here is an interesting experiment that you can try. Take any reputable daily newspaper like the Globe &Mail or the Wall Street Journal and set it aside for one month. Then come back to it and see how much of the information in it is still relevant to your investment portfolio. You may be surprised at how little truly matters. While it is important to keep abreast of current events, long‐term investment decisions are based on factors that generally change quite slowly. It is on those factors that we remain focused.

Environment Matters

Having worked on Bay Street for 15 years, including more than half that time in Investment Banking, I learned that when capital markets are at there extremes, it is unhelpful to be around others in the finance industry. Being “in the flow” may be helpful for day traders, but certainly not for long‐term value investors.


When markets are rising and it seems like everyone around you is making money, valuations are usually lofty. In other words, it is a time to be cautious. However, we humans are social creatures and are wired to follow the crowd. Seeking safety in numbers may have helped us successfully evade predators on the savanna in prehistoric times, but it is precisely the wrong approach in investing. Unfortunately this bias is innate and simply tugs at us when we are in the presence of others. No one likes to miss any of the fun.

Being around others when markets are in freefall is equally unhelpful. I recall a specific week in the fall of 2008 when markets were plummeting and the global financial sector appeared ready to implode. It was a historic time and one that is seared into my memory. Stocks in quality companies like Starbucks (Scorecard #1) were practically being given away and I was putting additional cash to work. It is difficult enough to have the conviction to invest in turbulent times. It is emotionally discomforting and being around others who are in panic and trying to talk you out of it only amplifies that discomfort.

The big money is not in the buying and the selling; it’s in the waiting.”

– Charlie Munger, Berkshire Hathaway

Successful value investing requires being different than the crowd. Stocks are cheap only when they are unloved by the masses. Sometimes they are cheap for a valid reason. But on occasion, the market overreacts and opportunity presents itself.

Warren Buffett located his investment partnership in out‐of‐the‐way Omaha, Nebraska for a reason. It is the same reason that GreensKeeper’s headquarters were set up in Oakville, Ontario instead of downtown Toronto. Successful value investing requires extreme discipline, patience and conviction. Creating a calm environment which nurtures these attributes is helpful. By creating an environment where we can spend time reading and thinking away from the emotional pull of the crowd, it improves our odds of making intelligent investment decisions. It also keeps us focused on studying companies, their financial results, valuations and the overall economic and business environment. In other words, what really matters in investing.

Avoid the noise.

GreensKeeper’s 5th Annual Meeting

Thank you to those who made it out to our 5th Annual Meeting last month. We had a great turnout and as always, we enjoyed spending time with our clients and potential clients.

We are continuing to grow both the firm and our assets under management. existing clients for referring GreensKeeper to others. Please keep them coming!

Michael McCloskey
Founder & President

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