Sitting in the Shade
March 2, 2017
Image used with permission: iStock/DDieschburg
Sitting in the Shade
Those of you familiar with Nexus will have witnessed our occasional peppering of presentations, blogs and personal conversations with quotes from Warren Buffett (“Investing is simple, but not easy” is a favourite). Warren Buffett is well known as a great author, philanthropist and, of course, arguably the finest investor of all time. The “Oracle of Omaha” was heavily influenced by Benjamin Graham, a scholar who is often referred to as the “Father of Value Investing”.
In basic terms, a value investor chooses stocks that are trading at a price that is well below the “intrinsic”, or true, value of the company – typically because the market has overreacted to bad news. Nexus is not a “value” manager and this piece is not intended to showcase the similarities between our and Buffett’s investment styles. We are different in a number of ways. But, we love a good quote, and Buffett provides an abundance of them. Some of his quotes resonate within the walls of Nexus, and apply to how we think about investing.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
Those of you who have been Nexus clients for a long time know that portfolio turnover is low. Turnover by definition is the frequency of purchases and sales of securities in a portfolio. If turnover in a portfolio is high, that means the manager is only holding the stocks for short periods of time. If turnover is low, the holding period is longer. Since Nexus started tracking the turnover in our North American Equity Fund in 2006, the average annual turnover has been 9%, implying a 11-year holding period. Most recently, our average has been closer to 5%.
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: you can’t produce a baby in one month by getting nine women pregnant.”
There are stocks that Nexus has watched for years, but has so far stopped short of making an investment for one reason or another. Due diligence is irreplaceable when it comes to investing our clients’ money, and to do it well takes time. We would rather be patient and right, possibly giving up a little upside in the short term, than be quick and disastrously wrong.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Nexus’s security selection process is based on identifying “quality” companies. The stocks that Nexus chooses have high calibre qualitative profiles, such as experienced management and industry leadership, as well as high calibre quantitative factors, such as stable earnings, a solid record of paying dividends and a prudent level of debt. And the price we pay is just as important. Although we are typically willing to pay more for a stock than a traditional value investor would, we like to buy them at a discount to their true value. Nexus believes nothing improves long-term investment performance more than purchasing a quality company and not overpaying for it.
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
Berkshire Hathaway has a majority ownership in over 60 companies and a minority interest in another 461. These companies span the entire industry sector universe. Buffett invests in Europe, emerging markets and even owns Canadian companies. This sounds like he’s quite diversified. So we think the spirit of this statement is in regards to overdiversification, and is the same sentiment we reflected in Nexus’s 2016 white paper In Search of Simplicity. “We believe an investor can be properly diversified across sectors and geographies with a limited number of asset classes, achieving appropriate risk-reduction, but not at the expense of expected returns.”
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
In any type of goal setting, you must begin with the end in mind. Investing is a lifelong journey, but if you don’t know where you’re going, it’s hard to know which direction to take, and how fast or slow you need to move to get there. That’s why we put so much emphasis on financial planning. We believe it is vitally connected to a client’s overall investment strategy, as it provides a path for our clients to reach their financial goals.
And finally, in closing, I leave you with my personal favourite Buffett quote:
“People always ask me where they should go to work, and I always tell them to go to work for whom they admire the most.”
No interpretation necessary.