Jonathan Wellum: Why Value Investing Beats Speculation Every Time
Summary
Value Investing vs. Speculation: Jonathan Wellum emphasizes the importance of value investing, which focuses on the fundamentals of a business, such as competitive advantage, earnings growth, and management quality, contrasting it with speculative, short-term trading.
Long-Term Holding: Value investing involves holding stocks for extended periods, often 3-20 years, to benefit from compounding, with the potential to sell if a stock becomes overvalued or if business fundamentals deteriorate.
Market Volatility: Wellum highlights that market volatility should not dictate investment decisions, as value investing relies on the intrinsic value of a company rather than short-term market fluctuations.
Tax Efficiency: Long-term investing offers tax advantages by deferring capital gains taxes, allowing compounding to work more effectively compared to frequent trading, which incurs higher tax liabilities.
Psychological Discipline: Successful investing requires controlling emotional responses to market movements, a key advantage of value investing, which focuses on long-term fundamentals rather than short-term noise.
Risk Management: Understanding the underlying business and its risks is crucial for managing investment risk, as opposed to reacting to stock price volatility, which can lead to poor investment decisions.
Market Trends and Passive Investing: Despite the rise of passive investing and high-growth stocks, Wellum maintains that fundamental analysis and value investing remain relevant and can uncover undervalued opportunities.
Historical Performance: The podcast discusses historical examples, such as Warren Buffett's success with Berkshire Hathaway, to illustrate the effectiveness of value investing over speculative strategies.
Transcript
One of the toughest things about uh day trading or shorter term investing is controlling your human behavior. I've been a professional investor since 1990 and even I and can be heavily influenced by what the market's doing. But if the market is dictating that is the volatility of the market is dictating your investment decisions, then you're no longer in control and you're really not a disciplined investor anymore. The market is an auction. In the short run, it's a voting machine, very emotional. In the long run, it's a weighing machine. Weighs value. [Music] >> Don't forget to sign up for our free portfolio review with one of our partners at wealthon.com/free. With markets at all-time highs after a crazy year, now's a great time to review your portfolio and get prepared for what's to come. Jonathan, thank you very much for joining us today. You and your team at Rockl Link Investment Partners are based in Burlington, Ontario. And your investment philosophy is one of value investing and this is totally different from another type of investing and that is more speculative in nature or what we might call short-term trading. And I thought it would be a good idea for you and I to spend a few minutes discussing the differences between value investing and speculative investing. So why don't we just start right there with value investing? What exactly is it? >> Sure. Great. Great question. I think it's important for the retail investors really to have an investment philosophy and they might choose one or the other but uh it's consistency that uh is going to be very important for them. So when we look at value investing what we're talking about is we're looking at the fundamentals of the businesses primarily. We do look at the economy and have to contextualize the business always but both basically you're looking at the company. So you're getting into the business you're looking at the fundamentals of the company. You're looking at its competitive advantage. Uh its ability to grow, uh its earnings, the growth in the industry. Uh you look at different financial measures, the balance sheet, income statement. Uh is this a strong company? Is it uh is it a company that's got a future? Um you look at the management team, uh corporate governance. So you really get into the business as if you were going to buy the whole thing. I mean, you're really thinking like a business person. Is this a company I want to own for the next three, five, 10, even 20 years? You want to hold for the long term? And so, and then you put a valuation on it. So, you're going to spend quite a bit of time saying, okay, what is this business worth if I were going to buy 100% of it and of course you then you divide by the shares outstanding and you figure out what you know per share you should be paying. So, you start to look at valuation metrics, price earnings ratios, price to net asset value. So, the assets that are on the balance sheet. Um, you're going to look at things like that. Um, you know, cash flow. A lot of things that we look for in many of our businesses would be the cash flow, free cash flow. And then you you do a business valuation. And then you say, okay, here's a stock that maybe is trading at $100 and we think it's actually worth um $125. And so, we would look at that. We say, okay, there's a there's a 25% discount um to what we think it's worth. And then we'll look at it and say, is that worth going into and buying and taking a position with the idea that over time it's going to grow and continue to compound and that $100 uh you know valuation which you know we you know we think is worth is worth more uh is going to continue to grow and things like that. So that's really value investing thinking like a business person looking at all the fundamentals of the business putting a valuation on it and trying to buy it at a discount to where it's trading in the marketplace. uh so that you have a what we call a margin of safety and then staying with that stock over an extended period of time. That's really I think some of the key elements of value investing. >> And when you say staying with the stock over an extended period of time, can you define that? How long of a time period? >> Well, you know, Warren Buffett says his favorite holding period is forever. And um so this is this is I think a very important issue. If a company continues to grow and continues to compound, uh there's no reason to sell it unless a couple of things arise. Number one, it becomes maybe grossly overvalued. So that you could run the risk of uh the stock coming back quite a bit and maybe it just made five 10 years of return very quickly. And we've seen that in some stocks. They'll run up to ridiculous levels and taking some profits uh can be wise even though it might be a great long-term business. The second issue is you run into trouble in the business. The fundamentals start to change. One of the things that you're doing when you're value investing is you're following the company. You're you're on all the earnings uh reports, so quarterly earnings reports. You're usually uh talking to management from time to time. And if things get off track and you're concerned about the growth going forward, then of course you would sell. And the other reason that we might sell and uh and interrupt the long-term holding period is that we just have a better opportunity arises and we don't want to be continually adding stocks to our portfolio. So we like to keep our portfolios at, you know, 20 to 25 stocks. So if we're at 25 stocks, we're not we don't want to go to 26. We don't want to go to 27 28. So you don't want to continue just adding more stocks to your portfolio. So we'll trim off uh the companies that we think are the least uh least have the least opportunity going forward in growing but otherwise we stay with companies for long periods of time and we can talk about this later but you have a huge tax advantage when you can compound in a business for an extended period. >> Before we discuss the benefits of investing uh or value investing, why don't we first talk about speculative investing or or what some might call day trading. Maybe you can just touch on that and how that is that approach is different from value investing. >> Yeah, it there's of course many different ways that people will day trade, but it I would suggest that the shorter your time horizon, especially 24-hour day or or market within, you know, six, seven hours. Um the the shorter your time horizon, the more you're really speculating because there's so many things that are out of your control at that point. So that's someone who's focusing more on short-term price movements. uh maybe news in the market that they think is going to move the stock inordinately in one day uh and create some volatility. Um it could be more momentum investing. So there seems to be momentum in a certain area then they'll you know they want to jump into a stock and take a short-term trade and sort of ride the momentum. Um some uh can use technical analysis. Now technical technical analysis can be used for value investors also if they're looking at different you know trading um patterns and so on. A lot of technical analysis can be quite shortterm in its orientation and um and therefore they'll make trades uh very quickly. They'll buy and sell and try to run the momentum, see if the news has a big impact and so forth. Um so they'll have high turnover and and typically again you're going to get uh I mean turnover for a value investor might be five years. Um you might have you know one turnover in five years on a stock uh on a speculative investment you could have it you know trading a couple times a day or certainly a couple times a week and uh and so forth. So, yeah, they're really looking more at short-term volatility in the marketplace and uh and then playing that volatility and trying to work that to your advantage. >> Throughout the month of September, we're shining the spotlight on gold with a lineup of expert conversations, sharp market analysis, and practical investment advice. Be sure to grab our free gold investing report using the link in the description below. And if you're looking for a simple, secure way to invest in physical gold and silver, check out Hardass Assets Alliance at hardassetsalliance.com. Speaking of silver, Wealthon will be in Toronto in October for the SCP Resource Finance Global Silver Conference where Eric Sprat will deliver the keynote address. If you have an interest in silver, you want to be there. If you want to attend in person, sign up for our accredited investors list by going to wealthon.comacreditited. For virtual conference tickets, follow the link in the description below. Now, let's get back to the show. Something you said that really resonates with me. I know when, you know, of course, there's been times over the years when I I focus on short-term trading or short-term strategies, but you get caught up in all the noise in the markets. And this year has been you know a perfect example of that right there's been so much going on just in from a political point of view and economic point of view and global trade etc. And uh because of this there's been a lot of volatility in the marketplace in the marketplace and so you get these massive draw downs in the market or big pullbacks and you might think oh my god okay I got to go all cash and then next thing you know the market stabilizes and it takes off again and we've had that this year and now the S&P is trading at all-time highs. So maybe you can just speak to that and how um the value investing basically does away with all the short-term noise. Yeah, I think value investing and uh lower turnover investing, taking longer term periods of time when you're in the stock rees risk because now you're looking at the longer term fundamentals. looking at, you know, the executives that are running the company, the industry, the the brand of the business, its moat, it's, you know, franchise value. And so, yeah, the stock, the stock price might bounce around, but those things, a really well-run company, the true value of the company does not move around the way the stock market does. And so, that's why Buffett has this expression is, you know, time is your friend when you're in a good business. Because you can be in stock market and all of a sudden it gets manic. as we know it gets manic and depressive uh gets depressive. It sells off on news. Uh that news really doesn't materialize and um you panic, you sell out. But if you have a great business, you go, you know what, this short-term news is not going to affect the long-term franchise value of you know, Birkshshire Hathaway or Apple stock or, you know, you can name all sorts of businesses. Um and so therefore, I'm going to actually take advantage of the downstroke and actually buy more if I've got cash coming in. And so it gives you a much more, you know, much stronger foundation upon which to build and have confidence so that you're not spooked because one of the toughest things about uh day trading or shorter term investing is controlling your human behavior. It's a psychology which can just take over um and that fear of missing out. There's all sorts of terms that people use, but uh again, I've been a professional investor since 1990 and even I and can be heavily influenced by what the market's doing. But if the market is dictating that is the volatility of the market is dictating your investment decisions, then you're no longer in control and you're really not a disciplined investor anymore. So we don't we can't let the market dictate um our investment decisions. Um but that's what happens in a shorter term time horizon and you can easily get spooked, leave a lot of money on on the table. Yeah, there's a there there's a there's a stat that um that's really interesting. You go back to uh u Peter Lynch. Peter Lynch was an amazing investor at Fidelity and from 1977 to 1990 he ran the Mellin fund and he he really popularized mutual fund investing. I mean he really was a was a an in tremendous uh leader and u and so his average return from 77 to 1990 was 29.2% 2% according to Fidelity. And yet if they they did an analysis on the average return of investors in the fund and it was basically under 7%. And so what you had again is people buying it when it was moving up and then selling when it was going down and so forth. And so um it's very hard to control your emotions. And uh if you're a shorter term investor and you're not based you're basing your investments on fundamentals which are rock solid um then I think you can get spooked at the wrong time. buy when everyone else wants to buy and sell when everyone else is panicking. >> And I think you touched on a very valid point because a big part of investing or trading, whatever you want to call it, it's this psychological component. And I often think this is one of the reasons why Warren Buffett has been so successful is he's unemotional about what's happening in the markets and throughout the world on a day-to-day basis. He's thinking 5, 10, 20 years out. and uh he doesn't get caught up in this all the noise and um when he does see a big pullback like we saw earlier this year that we've seen here in the last five years, he takes advantage of that pullback. He doesn't see it as oh my god, I got to sell and raise cash. I'm going to go in and buy more of these stocks or companies that I really like. >> Yeah. And in fact, as we've seen recently and also really 2007208, um he made sure he had quite a bit of liquidity when he thought the market was expensive. And so, uh when things did drop, as we saw with the great financial crisis, he was able to step in and support all sorts of businesses. And he got sweetheart deals. I mean, you know what he did with with GE? He got it with Goldman Sachs. He got with some of some of the banks where they gave him these preferreds uh where he's making a a boatload of interest, but they're all convertible into stock at very low prices. And so he just, you know, can wait for these opportunistic times because he is a disciplined investor. I mean, part of being a value investor should be tremendous discipline and patience. And uh as you know, you can make a lot of money in short periods of time when everybody else is panicking. But that requires a, you know, a psychological strength. It requires really knowledge of where you're investing so that you have the confidence to step in when other people are, you know, hitting the panic button. And that's not an easy thing to do. I can tell you having been in this business for 36 years. Um, when you're going against the market, you feel it. You know, you feel it in your stomach. And of course, you're managing other people's money. So, you're trying to be a tremendous fiduciary. And, um, and and you know, people are putting pressure on you often. And uh so you have to again get back to the fundamentals and your knowledge. If you're taking a value investor, know what you're buying, know why you're buying it, and that'll keep you in the stock I think for longer periods of time to get the benefit of this long-term compounding. >> You mentioned Peter Lynch, very successful investor uh at Fidelity and his performance. What about Warren Buffett and Berkshire Hathway? Can you speak to their performance? Yeah, I mean Buffett uh Buffett's uh absolutely amazing uh performance over the long term. Uh when I got into the business uh in 1990, the stock was at $5500. You know, today that same share is worth $735,000. I mean, it's it's astounding. It's absolutely astounding. So, if you look at the Birkshshire over last just just look over the last 30 years, that would be from 1995. Um the stock was 21,000 back in 1995. again 735,000. So that's a 3,400% gain over that period of time. And um you know there was some ups and downs there. Uh people in 1999 I went to the annual meeting for quite a few years and throughout the 90s and early 2000s and in 1999 um in particular he was being almost yelled at by investors. You know you're crazy. You've missed the tech bubble or the tech. They didn't call it tech bubble of course he thought it was tech bubble the tech the tech upswing and he was taking so much flak his stock had gone from I think 70 or 80 80,000 down to 40 45,000 at the time and uh he you know was out of touch with reality etc etc um and then of course he had his best years right after that when the NASDAQ you know dropped 80%. Um and so again you you have to be prepared to buck the trend and uh Buffett is I think one of the greatest investors of all time uh his discipline and I would always encourage retail investors go back and read his annual reports. You can get just the annual reports. You don't have to look at the financials and you get his uh letter to shareholders and um it is it is a wonderful read and go back and you can read 30 40 50 years of these letters to shareholders and you see the discipline, the focus, the consistency. Not perfect. He admits when he's made mistakes, you know, u errors of omission and commission. Um but over time, if you're right 70% of your time or more, but you can make a lot of money. And if you learn from your mistakes and you're honest, um, then you can do very well. >> All right. So, you touched on this earlier and that were some of the benefits of, uh, this long-term or value approach and you mentioned one of them was taxes. So, maybe you can just discuss that and and what are the different tax uh, consequences associated with value investing as oppo as opposed to short-term trading. >> Yeah, and this is really important particularly in um, in non, you know, in fully taxable accounts. if you're in RAS like in the US or RRSPs, this of course is a little bit less relevant. But um if you're if you're in a taxable account and this will explain why if you look at the Forbes 500 list and you say, you know, who are these people? Virtually all of them on that list are long-term business owners and they're focused also. They only have a couple holdings they've made their money on and that's basically the the the predominant way that wealth is created. But if you look at the tax issue, so here's here's an example. Um Warren Buffett uh has used this example in the past and I'll I'll convert it to uh uh Canadian tax, but the point is is similar when it comes to capital gains. If you start with $1 and you double it 20 times, so I'm talking about 100% each time. So 1 2 4 8 16 32 and so forth. At the end of 20 doubles, you have a million48,000. Okay. So you okay what's the tax implication here? So in Canada tax capital gains are approximately 25% if you're in your highest tax brackets. Let's just use 25%. The rates are not unlike that in the US and you can apply whatever rate uh is applicable. So you pay your taxes and at the end of that period of time you'll have about $786,000 because you'll give up virtually 25% of your million48. Now, if you start with a dollar and every time you double it, you do a turnover and you sell the security and you pay the taxes owing and so you're not building up any tax deferral and allowing that deferral to compound. If you ask somebody after 20 doubles, what would your after tax number be? Very few people would tell you that it's less than 10% of the 786,000. It would actually be about $72,000. Now going from a dollar to 72,000 is a an astounding rate of return obviously but going from a dollar to 786,000 is a much better return and that's the power of deferring the tax and then that deferral is working in terms of compounding more more money for you and that is why the most the wealthiest people in the world are business owners because they defer the tax and they compound it for extended periods providing they can grow and reinvest of course back in their business. That's exactly what Warren Buffett has done is in his own stock. He's tried to keep taxes low and take the cash flow that are generated from his insurance businesses, his investment holdings, dividends, and so forth, pounds it back into his company, and he continues to compound the the cash flow stream in the business. So taxes really matter. And uh so when you're doing short-term trading and giving up a lot of money to the government, in particular the US, if you're doing short-term trading there, the capital gains tax is actually higher. They penalize you for short-term trades. um then you have to factor that into your after tax rates of return because from from a value investor's perspective all that matters is your after tax rate of return not your pre-tax and those can be quite different based upon your investment behavior. >> Jonathan you mentioned that the tax rate in the US for speculative trading is higher than that for value investing. Uh what about in Canada? >> In Canada our capital gains are all the are taxed the same. Yeah. basically uh at this point one half of the gain is taxed at your marginal tax rate. So that's the way that that works. So but again as I just caution people always look at you the tax implications of of your investment decisions and that will I think influence you to maybe look for longer term holds and uh your ability to compound without uh giving it up to the government every year. >> Yes, the less we give to the government the better. >> We're much happier that way. I think it also helps in our uh our mental sanity. Another element I want you to touch on is risk management, volatility and and this is once again going back to this year. Uh we've had a very volatile year and risk management is very important when it comes to managing your wealth and growing your wealth over time. Can you just speak to that? >> Yeah, and of course people will um use different approaches when it comes to risk management. And I'm I'm definitely I'll put uh my my my card my uh placard out there and say that look I'm biased because I'm more of a value investor. So for me the risk ris protecting your risk is knowing what the business you're in and the risk of the underlying business itself. Um not the way it's going to trade on the marketplace and there's a big difference. So people can look at volatility on a stock but is that really the underlying b risk of the business? And in many cases it's not. And so if you get into a market where there's a lot of volatility and you don't know what you own, then you can really get spooked in and out of these businesses and chase things and you know and you know new businesses come out all of a sudden this is an AI stock. I'm just going to buy it regardless of the valuation because I think it's going higher. If you're more disciplined investor you'll sit back and you'll say no I want to control my risk. I want to make sure that if I'm going to buy this AI stock, uh, that the fundamentals will support this price today and the growth that I'm paying for in the future is not ridiculous and is actually, you know, tied to some some reality uh that that can that can take place. So, a lot of I think risk behav risk management really comes from under understanding the business. uh Warren Buffett says the the more you know um and the the less ignorant you are about your investing the less you have to diversify because you can focus your attention. So I think a lot of again just managing risk is understanding the business and um and not getting sucked into just the volatility or the momentum or the headlines and uh you know chat groups and different meme stocks and things like that. That's a whole different way of investing. And I think if you're going to go down that road, realize that you're speculating and realize that the market can move against you even with all the best information in short periods of time. And you know, time is not your friend and you can end up losing a lot of money and it's very hard to recoup that. You know, if you're buying some meme stock or you're day trading and your stock drops 30 40%, it's very hard to get that money back. You got to really really struggle. Um, and that's where I think uh, one of the things about buying stocks with value and fundamental, you know, balance sheet strength underneath them and cash flow is you avoid torpedoes. And, uh, you've been in the business a long time, Jimmy, and you know what I mean, that sometimes you get these torpedo stocks where where you can just almost lose everything very quickly. Um, and recouping that loss money takes time and it's very difficult. And, uh, and so I I tell people, um, you want to avoid torpedoes. unfortunate really never to have have a true torpedo in my portfolio. But then I'm very careful. I've had, you know, stocks that have underperformed and haven't done well. Um, but haven't wiped out all my money in that particular stock. And uh, I think that's uh, you know, better much bit much better risk management for people. And we've seen that many times over the years when you look at the tech bubble of the early 2000s. Many of the stocks that were doing well in 989 got completely obliterated in 20201. They got wiped out. Never to return. We saw it again in the great financial crisis of uh 0809. >> Yeah. And that's one of the things survivor bias. So when you go back and look at numbers, I mean I was looking at some of the hedge fund returns. E so if you look at hedge fund returns um just over periods of time uh like over 10 year over a 10-year period only about 7% of hedge funds actually outperform the uh the market index. And if you go 20 20 years it's it's it's it's abysmal. It's it's just a really just a couple percent. But what you don't factor in there is that you've lost a lot of hedge funds, they've disappeared, you're actually looking at the ones that survived. And so, um, if you are again taking a shorterterm view where you have high feed, you know, some of these hedge funds have two and 20 things like that. If you actually look at hedge funds that are that are more short-term traders and they have a high, you know, 2%, you know, minimum fee and then 20% performance, um, very few of them are able to perform over time. um and uh to add the kind of value that just long-term ownership in a stock or you know handful of great stocks can do. So again they have great sales you know sales guys and gals and uh they've got great marketing and it's slick and they'll market uh you know a year performance, two-year performance, threeear performance but investing I think again you're talking we're talking to uh investors retail investors it's all about repeatability and sustainability. The only to return that really matters for most of us is your 20 and 30 year rate of return. Um because you got that's what matter you know you can have a great three year return two year one year six months and so forth but then if you blow it out because you're not disciplined um you know in year four or five you're back to square one. So that's why you again we talk to investors have a s a sustainable repeatable strategy that's rooted in fundamentals and protects you from you know tremendous volatility uh in the marketplace or permanent losses in businesses that are you know ridiculous in value because you you mentioned the the u the um uh the NASDAQ going up and the tech bubble of the you know 2000 um situation. I mean you had businesses that were trading just in ether in the ether world. I mean they were just crazy valuations and they're gone. And then you've had tremendous business like Amazon where also trading at high valuations and then it took you know 10 15 almost you know years or more to get back to the valuation. So you can still have great great companies um and they can do very well in in the long term but you could underperform for 10 years 15 years if you if you really overpay and sit on them. So, um, again, these are things you've got to really get back to understanding what you're buying and what you're paying for the businesses. >> So, I want to take the other side of this argument. Now, we've talked a lot about the benefits of value investing, but I want to play devil's advocate. Now, especially in the last 5 years, we've seen tremendous growth in the US stock market, also the Canadian stock market, but not as much. And a lot of the growth in the US has to do with this whole MG7 AI, etc. And that can be quite challenging for a value investor because you're watching these stocks that might go up 50 or 100% in a year, but meanwhile your your value stocks don't go up nearly as much. And um and I guess the second question I want to ask is the world we live in now like it's changed so much in the last 10, 15, 20 years, right? and and it's like there's less and less fundamental analysis going on, more and more passive investing. This whole ETF world has really exploded. Can so can you just speak to that? Um, one, how do you deal when you go through this high growth period like we've seen in the last few years? And two, what are your thoughts on whether or not fundamental analysis and um value as value investing is it still relevant? Yeah, I mean we we haven't been we haven't been shaken from our principles and we've done very well and and kept up uh um quite quite well with the indexes although you know clearly the S&P 500 is one of the tougher ones. the TSX not as hard. The Dow has been easy. Of course, some of the smaller cap companies indexes, the Russell, uh, you know, 2000, so those are much easier indexes to compare yourself against. But you, you're quite right. I mean, you can go through periods of time where you got the Mag 7 and, uh, these are amazing businesses, too. I mean, these are powerful powerful businesses. So, when you look at the modes, the brand, the franchise, the the ability to generate free cash flow and to compound that, it's all there. And so it's, you know, they they're they've got great futures and so on. What do you pay for them? That's the question. What do you pay for them? So we've we look at them. We scour them and we have owned and we still have on our books um we have some Google on our books and we also have owned Amazon through this period. We've been able to buy it. Um it got beaten up a little bit 20 2022 2023. It was down a substantial amount almost 40%. And I think when we look at that business from a price to sales, a price to cash flow, uh there's still metrics that are at least intelligible and can make sense um there. So we've been able to participate in again some of these fantastic businesses. Uh you know, Meta or Facebook, it just hammered a few years ago and of course it's up like 10 times from its low. Um but that was cheap there for a period of time also. So even with the Mag 7, there's been some opportunities to to participate in some of those names. uh if I think if you're reasonably you know value investor and you're having some flexibility there. So um but otherwise yeah you just look harder and look for businesses underneath the uh underneath the skirt that other people aren't looking at. Now when you come to passive investing yeah this is really intriguing for us because you are getting um sort of businesses being reinforced and less and less companies dominating the indexes and then the money continues to pour into that. We view that as an opportunity for discipline. It means that um we're trying to look for companies that are not influenced as much by the index. Therefore, uh they are cheaper. And our fundamental belief is that over time, people will pay um reasonably, you know, a there'll be a correlation between, you know, the price to cash flow across businesses that maybe are big in the index and and companies that are not index that people will far it out uh these undervalued opportunities over time. And so, we continue just to look for companies that aren't as influenced by the index. I think the index is skewing the um uh the valuations of some companies more and I think that's only means we're going to have a larger downstroke at some point and uh adjustment. I mean we have to you just can't run these things up uh completely to valuations that are totally ridiculous. So um it doesn't change us. We continue to look for companies below the surface and um and you know I we can be quite successful there and sectors that are out of favor. Um, as you know, uh, we, you know, we've been in some of the precious metals sectors and things like that. You know, for the last couple of years, no one wanted to be there. I mean, Canadians have almost no money in that sector. The U, Americans, the same thing. Europeans maybe a bit more. And so, we look for sectors where even if you have index, you know, for, you know, for precious metals companies, no one wants to buy those either. Um, and so you can find valuations, you know, good valuations in that space. So, we we stay disciplined. We're not going to throw out our fundamentals just because there's some shorter term trends that might be uh obscuring those or making them more difficult to be successful. >> Yes, the precious metals have really come alive here in the last few months. Jonathan, as we wrap up, why don't we spend a few minutes just summarizing the benefits of value investing? Yeah, I think the benefits of um of taking a uh a more disciplined approach and keeping the turnover uh you know lowering the turnover so you're not flipping through stocks as rapidly is I think it it it fits with historical returns. I think over time the sustainability and repeatability of higher returns are those individuals who are disciplined who take a longer term disciplined approach to investing. Again, you look at the day trading numbers. There's studies that have been done. Uh, you know, I I went through like five different studies that looking at shorter term uh investing and uh only over time if you get a 10 15 year period, there's about 1 to 2% actually outperform uh and create you know excess rates of returns. It's very difficult especially just retailers retail investments. So that would be one is historical returns are better I think if you're more disciplined. Second risk control. I think you can again protect your capital better if you know the companies you're investing in and you're investing in really really strong companies with strong balance sheets that could weather you know the challenges of the the broader economy from time to time that we that inevitably will hit the marketplace. Third, I think it's better from a human behavior behavioral perspective. Um if you are a longer term investor, you're not freaking out with the market all the time. you're not uh you know watching the market every single moment wondering whether you should pull your money tomorrow or you know this afternoon type of thing and so I think again uh you can be much more stable in your approach and enjoy the market and enjoy investing and take a longer term view and then the tax efficiency you you know you drive up your tax efficiency if you're not trading all of the time so I just you know that's it's really my psyche I'm definitely biased and I understand that uh some people like the short-term buzz but you got to be careful that you're actually not a gambler and speculator and if you are uh the numbers show that it's very hard to repeat and it's very hard to outperform over time. Be honest with yourself. Um it does not work for the vast preponderance of people and the very few people you hear are successful in short-term trades, you know, are they successful over 5, 10, 15, 20, 30 years? Because really your time horizon and your overall uh returns, you've got to look at that over a long period of time. Don't look, don't cheat and just pretend, you know, you made a lot of money this year or, you know, trading stocks. Great. Um, you've got to repeat it, otherwise you're going to end up losing it at some point. Jonathan, when I hear you talk about value investing versus more short-term speculative investing or trading, it kind of reminds me of investing in your home. Uh, when you buy your home, you're you're not thinking about selling it in a year or two years down the road. You're you want to hold on to it for 10, 20, 30 years. And that's when the value of your home really goes up is over the long period of time. >> Yeah. Warren Buffett has this. We again go down to the annual meeting and he uses this example. He says if someone came to your the front of your door every day at your house and offered you money for your house and one day it was, you know, $800,000. And the next day someone goes, I'm only going to give you $675,000. And you go, oh my goodness, my house has just dropped $125,000 or something. And then the next day is up to 900. You go, I feel better. You got to be careful because that it's an auction. The market is an auction. And you know Ben Graeme has that famous expression that he has said that saying that he has is that in the short run it's a voting machine. Very emotional. In the long run it's a weighing machine. It weighs value. So yeah, one of the one of the downfalls of the of the stock market is it's flashing numbers at you constantly. Doesn't mean they're right. And what's your time horizon? And uh if you're getting all your cues just from the volatility in the market, it's almost impossible not to make all sorts of mistakes. So that is one of the benefits of the private market um because you're not getting your the valuation flashed in your face all the time. And I I I've been on endowment boards and uh you know with pension funds and things like that, a lot of them uh try to put more money into private investments because uh they say well it doesn't doesn't you know you don't get the price volatility. Now that's there's a whole different argument there. They're what they're trying to do is get away from this daytoday just pricing assets constantly and holding people accountable to just stock market moves and not really what's happening in the underlying business, right? Um and so I think yeah, there's there's some good points that people should uh should bear in mind when they're investing. >> Well, Jonathan, that was a great discussion and very insightful and I want to thank you. And if someone would like to get in touch with you or learn more about your firm, Rocklink Investment Partners, where can they go? Yeah, best place is the website rocklink.com. Link is spelled with a C at the end and not a K. So rocklink.com and you can just send us a note at info@rocklink.com and love to hear from uh the listeners and the viewers and uh if you want a free look at your portfolio, we're more than glad to do that. So by all means, reach out and talk to us. >> Jonathan, once again, thank you. >> Thank you very much, Jimmy. All the best. Don't forget to sign up for our free portfolio review with one of our partners at wealthon.comfree. With markets at all-time highs after a crazy year, now's a great time to review your portfolio and get prepared for what's to come. Thanks for watching and we'll see you back here soon. [Music]
Jonathan Wellum: Why Value Investing Beats Speculation Every Time
Summary
Transcript
One of the toughest things about uh day trading or shorter term investing is controlling your human behavior. I've been a professional investor since 1990 and even I and can be heavily influenced by what the market's doing. But if the market is dictating that is the volatility of the market is dictating your investment decisions, then you're no longer in control and you're really not a disciplined investor anymore. The market is an auction. In the short run, it's a voting machine, very emotional. In the long run, it's a weighing machine. Weighs value. [Music] >> Don't forget to sign up for our free portfolio review with one of our partners at wealthon.com/free. With markets at all-time highs after a crazy year, now's a great time to review your portfolio and get prepared for what's to come. Jonathan, thank you very much for joining us today. You and your team at Rockl Link Investment Partners are based in Burlington, Ontario. And your investment philosophy is one of value investing and this is totally different from another type of investing and that is more speculative in nature or what we might call short-term trading. And I thought it would be a good idea for you and I to spend a few minutes discussing the differences between value investing and speculative investing. So why don't we just start right there with value investing? What exactly is it? >> Sure. Great. Great question. I think it's important for the retail investors really to have an investment philosophy and they might choose one or the other but uh it's consistency that uh is going to be very important for them. So when we look at value investing what we're talking about is we're looking at the fundamentals of the businesses primarily. We do look at the economy and have to contextualize the business always but both basically you're looking at the company. So you're getting into the business you're looking at the fundamentals of the company. You're looking at its competitive advantage. Uh its ability to grow, uh its earnings, the growth in the industry. Uh you look at different financial measures, the balance sheet, income statement. Uh is this a strong company? Is it uh is it a company that's got a future? Um you look at the management team, uh corporate governance. So you really get into the business as if you were going to buy the whole thing. I mean, you're really thinking like a business person. Is this a company I want to own for the next three, five, 10, even 20 years? You want to hold for the long term? And so, and then you put a valuation on it. So, you're going to spend quite a bit of time saying, okay, what is this business worth if I were going to buy 100% of it and of course you then you divide by the shares outstanding and you figure out what you know per share you should be paying. So, you start to look at valuation metrics, price earnings ratios, price to net asset value. So, the assets that are on the balance sheet. Um, you're going to look at things like that. Um, you know, cash flow. A lot of things that we look for in many of our businesses would be the cash flow, free cash flow. And then you you do a business valuation. And then you say, okay, here's a stock that maybe is trading at $100 and we think it's actually worth um $125. And so, we would look at that. We say, okay, there's a there's a 25% discount um to what we think it's worth. And then we'll look at it and say, is that worth going into and buying and taking a position with the idea that over time it's going to grow and continue to compound and that $100 uh you know valuation which you know we you know we think is worth is worth more uh is going to continue to grow and things like that. So that's really value investing thinking like a business person looking at all the fundamentals of the business putting a valuation on it and trying to buy it at a discount to where it's trading in the marketplace. uh so that you have a what we call a margin of safety and then staying with that stock over an extended period of time. That's really I think some of the key elements of value investing. >> And when you say staying with the stock over an extended period of time, can you define that? How long of a time period? >> Well, you know, Warren Buffett says his favorite holding period is forever. And um so this is this is I think a very important issue. If a company continues to grow and continues to compound, uh there's no reason to sell it unless a couple of things arise. Number one, it becomes maybe grossly overvalued. So that you could run the risk of uh the stock coming back quite a bit and maybe it just made five 10 years of return very quickly. And we've seen that in some stocks. They'll run up to ridiculous levels and taking some profits uh can be wise even though it might be a great long-term business. The second issue is you run into trouble in the business. The fundamentals start to change. One of the things that you're doing when you're value investing is you're following the company. You're you're on all the earnings uh reports, so quarterly earnings reports. You're usually uh talking to management from time to time. And if things get off track and you're concerned about the growth going forward, then of course you would sell. And the other reason that we might sell and uh and interrupt the long-term holding period is that we just have a better opportunity arises and we don't want to be continually adding stocks to our portfolio. So we like to keep our portfolios at, you know, 20 to 25 stocks. So if we're at 25 stocks, we're not we don't want to go to 26. We don't want to go to 27 28. So you don't want to continue just adding more stocks to your portfolio. So we'll trim off uh the companies that we think are the least uh least have the least opportunity going forward in growing but otherwise we stay with companies for long periods of time and we can talk about this later but you have a huge tax advantage when you can compound in a business for an extended period. >> Before we discuss the benefits of investing uh or value investing, why don't we first talk about speculative investing or or what some might call day trading. Maybe you can just touch on that and how that is that approach is different from value investing. >> Yeah, it there's of course many different ways that people will day trade, but it I would suggest that the shorter your time horizon, especially 24-hour day or or market within, you know, six, seven hours. Um the the shorter your time horizon, the more you're really speculating because there's so many things that are out of your control at that point. So that's someone who's focusing more on short-term price movements. uh maybe news in the market that they think is going to move the stock inordinately in one day uh and create some volatility. Um it could be more momentum investing. So there seems to be momentum in a certain area then they'll you know they want to jump into a stock and take a short-term trade and sort of ride the momentum. Um some uh can use technical analysis. Now technical technical analysis can be used for value investors also if they're looking at different you know trading um patterns and so on. A lot of technical analysis can be quite shortterm in its orientation and um and therefore they'll make trades uh very quickly. They'll buy and sell and try to run the momentum, see if the news has a big impact and so forth. Um so they'll have high turnover and and typically again you're going to get uh I mean turnover for a value investor might be five years. Um you might have you know one turnover in five years on a stock uh on a speculative investment you could have it you know trading a couple times a day or certainly a couple times a week and uh and so forth. So, yeah, they're really looking more at short-term volatility in the marketplace and uh and then playing that volatility and trying to work that to your advantage. >> Throughout the month of September, we're shining the spotlight on gold with a lineup of expert conversations, sharp market analysis, and practical investment advice. Be sure to grab our free gold investing report using the link in the description below. And if you're looking for a simple, secure way to invest in physical gold and silver, check out Hardass Assets Alliance at hardassetsalliance.com. Speaking of silver, Wealthon will be in Toronto in October for the SCP Resource Finance Global Silver Conference where Eric Sprat will deliver the keynote address. If you have an interest in silver, you want to be there. If you want to attend in person, sign up for our accredited investors list by going to wealthon.comacreditited. For virtual conference tickets, follow the link in the description below. Now, let's get back to the show. Something you said that really resonates with me. I know when, you know, of course, there's been times over the years when I I focus on short-term trading or short-term strategies, but you get caught up in all the noise in the markets. And this year has been you know a perfect example of that right there's been so much going on just in from a political point of view and economic point of view and global trade etc. And uh because of this there's been a lot of volatility in the marketplace in the marketplace and so you get these massive draw downs in the market or big pullbacks and you might think oh my god okay I got to go all cash and then next thing you know the market stabilizes and it takes off again and we've had that this year and now the S&P is trading at all-time highs. So maybe you can just speak to that and how um the value investing basically does away with all the short-term noise. Yeah, I think value investing and uh lower turnover investing, taking longer term periods of time when you're in the stock rees risk because now you're looking at the longer term fundamentals. looking at, you know, the executives that are running the company, the industry, the the brand of the business, its moat, it's, you know, franchise value. And so, yeah, the stock, the stock price might bounce around, but those things, a really well-run company, the true value of the company does not move around the way the stock market does. And so, that's why Buffett has this expression is, you know, time is your friend when you're in a good business. Because you can be in stock market and all of a sudden it gets manic. as we know it gets manic and depressive uh gets depressive. It sells off on news. Uh that news really doesn't materialize and um you panic, you sell out. But if you have a great business, you go, you know what, this short-term news is not going to affect the long-term franchise value of you know, Birkshshire Hathaway or Apple stock or, you know, you can name all sorts of businesses. Um and so therefore, I'm going to actually take advantage of the downstroke and actually buy more if I've got cash coming in. And so it gives you a much more, you know, much stronger foundation upon which to build and have confidence so that you're not spooked because one of the toughest things about uh day trading or shorter term investing is controlling your human behavior. It's a psychology which can just take over um and that fear of missing out. There's all sorts of terms that people use, but uh again, I've been a professional investor since 1990 and even I and can be heavily influenced by what the market's doing. But if the market is dictating that is the volatility of the market is dictating your investment decisions, then you're no longer in control and you're really not a disciplined investor anymore. So we don't we can't let the market dictate um our investment decisions. Um but that's what happens in a shorter term time horizon and you can easily get spooked, leave a lot of money on on the table. Yeah, there's a there there's a there's a stat that um that's really interesting. You go back to uh u Peter Lynch. Peter Lynch was an amazing investor at Fidelity and from 1977 to 1990 he ran the Mellin fund and he he really popularized mutual fund investing. I mean he really was a was a an in tremendous uh leader and u and so his average return from 77 to 1990 was 29.2% 2% according to Fidelity. And yet if they they did an analysis on the average return of investors in the fund and it was basically under 7%. And so what you had again is people buying it when it was moving up and then selling when it was going down and so forth. And so um it's very hard to control your emotions. And uh if you're a shorter term investor and you're not based you're basing your investments on fundamentals which are rock solid um then I think you can get spooked at the wrong time. buy when everyone else wants to buy and sell when everyone else is panicking. >> And I think you touched on a very valid point because a big part of investing or trading, whatever you want to call it, it's this psychological component. And I often think this is one of the reasons why Warren Buffett has been so successful is he's unemotional about what's happening in the markets and throughout the world on a day-to-day basis. He's thinking 5, 10, 20 years out. and uh he doesn't get caught up in this all the noise and um when he does see a big pullback like we saw earlier this year that we've seen here in the last five years, he takes advantage of that pullback. He doesn't see it as oh my god, I got to sell and raise cash. I'm going to go in and buy more of these stocks or companies that I really like. >> Yeah. And in fact, as we've seen recently and also really 2007208, um he made sure he had quite a bit of liquidity when he thought the market was expensive. And so, uh when things did drop, as we saw with the great financial crisis, he was able to step in and support all sorts of businesses. And he got sweetheart deals. I mean, you know what he did with with GE? He got it with Goldman Sachs. He got with some of some of the banks where they gave him these preferreds uh where he's making a a boatload of interest, but they're all convertible into stock at very low prices. And so he just, you know, can wait for these opportunistic times because he is a disciplined investor. I mean, part of being a value investor should be tremendous discipline and patience. And uh as you know, you can make a lot of money in short periods of time when everybody else is panicking. But that requires a, you know, a psychological strength. It requires really knowledge of where you're investing so that you have the confidence to step in when other people are, you know, hitting the panic button. And that's not an easy thing to do. I can tell you having been in this business for 36 years. Um, when you're going against the market, you feel it. You know, you feel it in your stomach. And of course, you're managing other people's money. So, you're trying to be a tremendous fiduciary. And, um, and and you know, people are putting pressure on you often. And uh so you have to again get back to the fundamentals and your knowledge. If you're taking a value investor, know what you're buying, know why you're buying it, and that'll keep you in the stock I think for longer periods of time to get the benefit of this long-term compounding. >> You mentioned Peter Lynch, very successful investor uh at Fidelity and his performance. What about Warren Buffett and Berkshire Hathway? Can you speak to their performance? Yeah, I mean Buffett uh Buffett's uh absolutely amazing uh performance over the long term. Uh when I got into the business uh in 1990, the stock was at $5500. You know, today that same share is worth $735,000. I mean, it's it's astounding. It's absolutely astounding. So, if you look at the Birkshshire over last just just look over the last 30 years, that would be from 1995. Um the stock was 21,000 back in 1995. again 735,000. So that's a 3,400% gain over that period of time. And um you know there was some ups and downs there. Uh people in 1999 I went to the annual meeting for quite a few years and throughout the 90s and early 2000s and in 1999 um in particular he was being almost yelled at by investors. You know you're crazy. You've missed the tech bubble or the tech. They didn't call it tech bubble of course he thought it was tech bubble the tech the tech upswing and he was taking so much flak his stock had gone from I think 70 or 80 80,000 down to 40 45,000 at the time and uh he you know was out of touch with reality etc etc um and then of course he had his best years right after that when the NASDAQ you know dropped 80%. Um and so again you you have to be prepared to buck the trend and uh Buffett is I think one of the greatest investors of all time uh his discipline and I would always encourage retail investors go back and read his annual reports. You can get just the annual reports. You don't have to look at the financials and you get his uh letter to shareholders and um it is it is a wonderful read and go back and you can read 30 40 50 years of these letters to shareholders and you see the discipline, the focus, the consistency. Not perfect. He admits when he's made mistakes, you know, u errors of omission and commission. Um but over time, if you're right 70% of your time or more, but you can make a lot of money. And if you learn from your mistakes and you're honest, um, then you can do very well. >> All right. So, you touched on this earlier and that were some of the benefits of, uh, this long-term or value approach and you mentioned one of them was taxes. So, maybe you can just discuss that and and what are the different tax uh, consequences associated with value investing as oppo as opposed to short-term trading. >> Yeah, and this is really important particularly in um, in non, you know, in fully taxable accounts. if you're in RAS like in the US or RRSPs, this of course is a little bit less relevant. But um if you're if you're in a taxable account and this will explain why if you look at the Forbes 500 list and you say, you know, who are these people? Virtually all of them on that list are long-term business owners and they're focused also. They only have a couple holdings they've made their money on and that's basically the the the predominant way that wealth is created. But if you look at the tax issue, so here's here's an example. Um Warren Buffett uh has used this example in the past and I'll I'll convert it to uh uh Canadian tax, but the point is is similar when it comes to capital gains. If you start with $1 and you double it 20 times, so I'm talking about 100% each time. So 1 2 4 8 16 32 and so forth. At the end of 20 doubles, you have a million48,000. Okay. So you okay what's the tax implication here? So in Canada tax capital gains are approximately 25% if you're in your highest tax brackets. Let's just use 25%. The rates are not unlike that in the US and you can apply whatever rate uh is applicable. So you pay your taxes and at the end of that period of time you'll have about $786,000 because you'll give up virtually 25% of your million48. Now, if you start with a dollar and every time you double it, you do a turnover and you sell the security and you pay the taxes owing and so you're not building up any tax deferral and allowing that deferral to compound. If you ask somebody after 20 doubles, what would your after tax number be? Very few people would tell you that it's less than 10% of the 786,000. It would actually be about $72,000. Now going from a dollar to 72,000 is a an astounding rate of return obviously but going from a dollar to 786,000 is a much better return and that's the power of deferring the tax and then that deferral is working in terms of compounding more more money for you and that is why the most the wealthiest people in the world are business owners because they defer the tax and they compound it for extended periods providing they can grow and reinvest of course back in their business. That's exactly what Warren Buffett has done is in his own stock. He's tried to keep taxes low and take the cash flow that are generated from his insurance businesses, his investment holdings, dividends, and so forth, pounds it back into his company, and he continues to compound the the cash flow stream in the business. So taxes really matter. And uh so when you're doing short-term trading and giving up a lot of money to the government, in particular the US, if you're doing short-term trading there, the capital gains tax is actually higher. They penalize you for short-term trades. um then you have to factor that into your after tax rates of return because from from a value investor's perspective all that matters is your after tax rate of return not your pre-tax and those can be quite different based upon your investment behavior. >> Jonathan you mentioned that the tax rate in the US for speculative trading is higher than that for value investing. Uh what about in Canada? >> In Canada our capital gains are all the are taxed the same. Yeah. basically uh at this point one half of the gain is taxed at your marginal tax rate. So that's the way that that works. So but again as I just caution people always look at you the tax implications of of your investment decisions and that will I think influence you to maybe look for longer term holds and uh your ability to compound without uh giving it up to the government every year. >> Yes, the less we give to the government the better. >> We're much happier that way. I think it also helps in our uh our mental sanity. Another element I want you to touch on is risk management, volatility and and this is once again going back to this year. Uh we've had a very volatile year and risk management is very important when it comes to managing your wealth and growing your wealth over time. Can you just speak to that? >> Yeah, and of course people will um use different approaches when it comes to risk management. And I'm I'm definitely I'll put uh my my my card my uh placard out there and say that look I'm biased because I'm more of a value investor. So for me the risk ris protecting your risk is knowing what the business you're in and the risk of the underlying business itself. Um not the way it's going to trade on the marketplace and there's a big difference. So people can look at volatility on a stock but is that really the underlying b risk of the business? And in many cases it's not. And so if you get into a market where there's a lot of volatility and you don't know what you own, then you can really get spooked in and out of these businesses and chase things and you know and you know new businesses come out all of a sudden this is an AI stock. I'm just going to buy it regardless of the valuation because I think it's going higher. If you're more disciplined investor you'll sit back and you'll say no I want to control my risk. I want to make sure that if I'm going to buy this AI stock, uh, that the fundamentals will support this price today and the growth that I'm paying for in the future is not ridiculous and is actually, you know, tied to some some reality uh that that can that can take place. So, a lot of I think risk behav risk management really comes from under understanding the business. uh Warren Buffett says the the more you know um and the the less ignorant you are about your investing the less you have to diversify because you can focus your attention. So I think a lot of again just managing risk is understanding the business and um and not getting sucked into just the volatility or the momentum or the headlines and uh you know chat groups and different meme stocks and things like that. That's a whole different way of investing. And I think if you're going to go down that road, realize that you're speculating and realize that the market can move against you even with all the best information in short periods of time. And you know, time is not your friend and you can end up losing a lot of money and it's very hard to recoup that. You know, if you're buying some meme stock or you're day trading and your stock drops 30 40%, it's very hard to get that money back. You got to really really struggle. Um, and that's where I think uh, one of the things about buying stocks with value and fundamental, you know, balance sheet strength underneath them and cash flow is you avoid torpedoes. And, uh, you've been in the business a long time, Jimmy, and you know what I mean, that sometimes you get these torpedo stocks where where you can just almost lose everything very quickly. Um, and recouping that loss money takes time and it's very difficult. And, uh, and so I I tell people, um, you want to avoid torpedoes. unfortunate really never to have have a true torpedo in my portfolio. But then I'm very careful. I've had, you know, stocks that have underperformed and haven't done well. Um, but haven't wiped out all my money in that particular stock. And uh, I think that's uh, you know, better much bit much better risk management for people. And we've seen that many times over the years when you look at the tech bubble of the early 2000s. Many of the stocks that were doing well in 989 got completely obliterated in 20201. They got wiped out. Never to return. We saw it again in the great financial crisis of uh 0809. >> Yeah. And that's one of the things survivor bias. So when you go back and look at numbers, I mean I was looking at some of the hedge fund returns. E so if you look at hedge fund returns um just over periods of time uh like over 10 year over a 10-year period only about 7% of hedge funds actually outperform the uh the market index. And if you go 20 20 years it's it's it's it's abysmal. It's it's just a really just a couple percent. But what you don't factor in there is that you've lost a lot of hedge funds, they've disappeared, you're actually looking at the ones that survived. And so, um, if you are again taking a shorterterm view where you have high feed, you know, some of these hedge funds have two and 20 things like that. If you actually look at hedge funds that are that are more short-term traders and they have a high, you know, 2%, you know, minimum fee and then 20% performance, um, very few of them are able to perform over time. um and uh to add the kind of value that just long-term ownership in a stock or you know handful of great stocks can do. So again they have great sales you know sales guys and gals and uh they've got great marketing and it's slick and they'll market uh you know a year performance, two-year performance, threeear performance but investing I think again you're talking we're talking to uh investors retail investors it's all about repeatability and sustainability. The only to return that really matters for most of us is your 20 and 30 year rate of return. Um because you got that's what matter you know you can have a great three year return two year one year six months and so forth but then if you blow it out because you're not disciplined um you know in year four or five you're back to square one. So that's why you again we talk to investors have a s a sustainable repeatable strategy that's rooted in fundamentals and protects you from you know tremendous volatility uh in the marketplace or permanent losses in businesses that are you know ridiculous in value because you you mentioned the the u the um uh the NASDAQ going up and the tech bubble of the you know 2000 um situation. I mean you had businesses that were trading just in ether in the ether world. I mean they were just crazy valuations and they're gone. And then you've had tremendous business like Amazon where also trading at high valuations and then it took you know 10 15 almost you know years or more to get back to the valuation. So you can still have great great companies um and they can do very well in in the long term but you could underperform for 10 years 15 years if you if you really overpay and sit on them. So, um, again, these are things you've got to really get back to understanding what you're buying and what you're paying for the businesses. >> So, I want to take the other side of this argument. Now, we've talked a lot about the benefits of value investing, but I want to play devil's advocate. Now, especially in the last 5 years, we've seen tremendous growth in the US stock market, also the Canadian stock market, but not as much. And a lot of the growth in the US has to do with this whole MG7 AI, etc. And that can be quite challenging for a value investor because you're watching these stocks that might go up 50 or 100% in a year, but meanwhile your your value stocks don't go up nearly as much. And um and I guess the second question I want to ask is the world we live in now like it's changed so much in the last 10, 15, 20 years, right? and and it's like there's less and less fundamental analysis going on, more and more passive investing. This whole ETF world has really exploded. Can so can you just speak to that? Um, one, how do you deal when you go through this high growth period like we've seen in the last few years? And two, what are your thoughts on whether or not fundamental analysis and um value as value investing is it still relevant? Yeah, I mean we we haven't been we haven't been shaken from our principles and we've done very well and and kept up uh um quite quite well with the indexes although you know clearly the S&P 500 is one of the tougher ones. the TSX not as hard. The Dow has been easy. Of course, some of the smaller cap companies indexes, the Russell, uh, you know, 2000, so those are much easier indexes to compare yourself against. But you, you're quite right. I mean, you can go through periods of time where you got the Mag 7 and, uh, these are amazing businesses, too. I mean, these are powerful powerful businesses. So, when you look at the modes, the brand, the franchise, the the ability to generate free cash flow and to compound that, it's all there. And so it's, you know, they they're they've got great futures and so on. What do you pay for them? That's the question. What do you pay for them? So we've we look at them. We scour them and we have owned and we still have on our books um we have some Google on our books and we also have owned Amazon through this period. We've been able to buy it. Um it got beaten up a little bit 20 2022 2023. It was down a substantial amount almost 40%. And I think when we look at that business from a price to sales, a price to cash flow, uh there's still metrics that are at least intelligible and can make sense um there. So we've been able to participate in again some of these fantastic businesses. Uh you know, Meta or Facebook, it just hammered a few years ago and of course it's up like 10 times from its low. Um but that was cheap there for a period of time also. So even with the Mag 7, there's been some opportunities to to participate in some of those names. uh if I think if you're reasonably you know value investor and you're having some flexibility there. So um but otherwise yeah you just look harder and look for businesses underneath the uh underneath the skirt that other people aren't looking at. Now when you come to passive investing yeah this is really intriguing for us because you are getting um sort of businesses being reinforced and less and less companies dominating the indexes and then the money continues to pour into that. We view that as an opportunity for discipline. It means that um we're trying to look for companies that are not influenced as much by the index. Therefore, uh they are cheaper. And our fundamental belief is that over time, people will pay um reasonably, you know, a there'll be a correlation between, you know, the price to cash flow across businesses that maybe are big in the index and and companies that are not index that people will far it out uh these undervalued opportunities over time. And so, we continue just to look for companies that aren't as influenced by the index. I think the index is skewing the um uh the valuations of some companies more and I think that's only means we're going to have a larger downstroke at some point and uh adjustment. I mean we have to you just can't run these things up uh completely to valuations that are totally ridiculous. So um it doesn't change us. We continue to look for companies below the surface and um and you know I we can be quite successful there and sectors that are out of favor. Um, as you know, uh, we, you know, we've been in some of the precious metals sectors and things like that. You know, for the last couple of years, no one wanted to be there. I mean, Canadians have almost no money in that sector. The U, Americans, the same thing. Europeans maybe a bit more. And so, we look for sectors where even if you have index, you know, for, you know, for precious metals companies, no one wants to buy those either. Um, and so you can find valuations, you know, good valuations in that space. So, we we stay disciplined. We're not going to throw out our fundamentals just because there's some shorter term trends that might be uh obscuring those or making them more difficult to be successful. >> Yes, the precious metals have really come alive here in the last few months. Jonathan, as we wrap up, why don't we spend a few minutes just summarizing the benefits of value investing? Yeah, I think the benefits of um of taking a uh a more disciplined approach and keeping the turnover uh you know lowering the turnover so you're not flipping through stocks as rapidly is I think it it it fits with historical returns. I think over time the sustainability and repeatability of higher returns are those individuals who are disciplined who take a longer term disciplined approach to investing. Again, you look at the day trading numbers. There's studies that have been done. Uh, you know, I I went through like five different studies that looking at shorter term uh investing and uh only over time if you get a 10 15 year period, there's about 1 to 2% actually outperform uh and create you know excess rates of returns. It's very difficult especially just retailers retail investments. So that would be one is historical returns are better I think if you're more disciplined. Second risk control. I think you can again protect your capital better if you know the companies you're investing in and you're investing in really really strong companies with strong balance sheets that could weather you know the challenges of the the broader economy from time to time that we that inevitably will hit the marketplace. Third, I think it's better from a human behavior behavioral perspective. Um if you are a longer term investor, you're not freaking out with the market all the time. you're not uh you know watching the market every single moment wondering whether you should pull your money tomorrow or you know this afternoon type of thing and so I think again uh you can be much more stable in your approach and enjoy the market and enjoy investing and take a longer term view and then the tax efficiency you you know you drive up your tax efficiency if you're not trading all of the time so I just you know that's it's really my psyche I'm definitely biased and I understand that uh some people like the short-term buzz but you got to be careful that you're actually not a gambler and speculator and if you are uh the numbers show that it's very hard to repeat and it's very hard to outperform over time. Be honest with yourself. Um it does not work for the vast preponderance of people and the very few people you hear are successful in short-term trades, you know, are they successful over 5, 10, 15, 20, 30 years? Because really your time horizon and your overall uh returns, you've got to look at that over a long period of time. Don't look, don't cheat and just pretend, you know, you made a lot of money this year or, you know, trading stocks. Great. Um, you've got to repeat it, otherwise you're going to end up losing it at some point. Jonathan, when I hear you talk about value investing versus more short-term speculative investing or trading, it kind of reminds me of investing in your home. Uh, when you buy your home, you're you're not thinking about selling it in a year or two years down the road. You're you want to hold on to it for 10, 20, 30 years. And that's when the value of your home really goes up is over the long period of time. >> Yeah. Warren Buffett has this. We again go down to the annual meeting and he uses this example. He says if someone came to your the front of your door every day at your house and offered you money for your house and one day it was, you know, $800,000. And the next day someone goes, I'm only going to give you $675,000. And you go, oh my goodness, my house has just dropped $125,000 or something. And then the next day is up to 900. You go, I feel better. You got to be careful because that it's an auction. The market is an auction. And you know Ben Graeme has that famous expression that he has said that saying that he has is that in the short run it's a voting machine. Very emotional. In the long run it's a weighing machine. It weighs value. So yeah, one of the one of the downfalls of the of the stock market is it's flashing numbers at you constantly. Doesn't mean they're right. And what's your time horizon? And uh if you're getting all your cues just from the volatility in the market, it's almost impossible not to make all sorts of mistakes. So that is one of the benefits of the private market um because you're not getting your the valuation flashed in your face all the time. And I I I've been on endowment boards and uh you know with pension funds and things like that, a lot of them uh try to put more money into private investments because uh they say well it doesn't doesn't you know you don't get the price volatility. Now that's there's a whole different argument there. They're what they're trying to do is get away from this daytoday just pricing assets constantly and holding people accountable to just stock market moves and not really what's happening in the underlying business, right? Um and so I think yeah, there's there's some good points that people should uh should bear in mind when they're investing. >> Well, Jonathan, that was a great discussion and very insightful and I want to thank you. And if someone would like to get in touch with you or learn more about your firm, Rocklink Investment Partners, where can they go? Yeah, best place is the website rocklink.com. Link is spelled with a C at the end and not a K. So rocklink.com and you can just send us a note at info@rocklink.com and love to hear from uh the listeners and the viewers and uh if you want a free look at your portfolio, we're more than glad to do that. So by all means, reach out and talk to us. >> Jonathan, once again, thank you. >> Thank you very much, Jimmy. All the best. Don't forget to sign up for our free portfolio review with one of our partners at wealthon.comfree. With markets at all-time highs after a crazy year, now's a great time to review your portfolio and get prepared for what's to come. Thanks for watching and we'll see you back here soon. [Music]