Stacey Muirhead Captial Management

INVESTMENT PHILOSOPHY

Principles

Our investment approach utilizes time-tested principles of intelligent investing. Achieving a superior investment record is a lot harder than most people think and developing investment wisdom comes from both direct experience and a willingness to absorb lessons from others. We have been fortunate to learn from the experiences and writings of super investors such as Benjamin Graham, Warren Buffett, Sir John Templeton, Prem Watsa and others.

Over time, we have identified the following enduring principles, which we judiciously apply to all of our investment efforts:

  • Think about stocks as part ownership of a business.
    When we buy stocks for our investors, we have a mindset similar to that if we were buying into a private business.
  • Maintain the proper emotional attitude.
    It is often the case that fear and greed drive stock market prices. We strive to tune out the daily noise that is swirling about and attempt to use market fluctuations to our advantage.
  • Insist on a margin of safety.
    We only make purchases when we judge that the companies we are interested in are available at prices significantly below their intrinsic value.
  • Establish a thorough understanding of any proposed commitments.
    We fully acknowledge that we are incapable of understanding every business and its prospects. While we constantly study businesses to expand our knowledge and improve our insights over time, a key component to our success has been the ability to stay within our circle of competence in selecting investments for purchase.
  • Do not diversify excessively.
    We believe in concentrating our holdings in a limited number of companies in the belief that we will have a chance at superior results only if we take risks intelligently. Good investment ideas are rare and when we find one, we prefer to make a significant commitment.
  • Invest for the long term.
    Attempting to invest based on guessing short term swings in individual stocks or the overall stock market is not likely to produce consistently good results. Furthermore, frequent trading in stocks can have two major disadvantages: transaction costs and taxes. We believe that investment capital will grow more rapidly if the interruptions for commissions and taxes are kept to an absolute minimum.

Activities

Stacey Muirhead is a global, value oriented, multi strategy investment firm. We pride ourselves on our independent, fundamental, research driven investment process. The investment mandate for the capital entrusted to our care contains few restrictions. This flexibility enables us to allocate capital to any attractive opportunity that presents itself unconstrained by considerations such as geography, market capitalization, industry sector or capital structure position. Our sole objective in all of our investment activity is to generate consistent real absolute returns over the long term.

At Stacey Muirhead, we allocate capital to investments using a multi strategy approach. This includes making commitments to a limited number of Long Term Investments. We look for companies with outstanding business economics, that are run by capable and honest managers, and which are available at attractive prices. We describe this concept simply as “Great Business, Great People, Great Price”. We also allocate capital to Event Driven Investments and Distressed Credit Investments as circumstances warrant and opportunities present themselves. Because we are disciplined and risk averse, we are willing to hold cash, usually short term treasury bills, when we are unable to find enough attractive investment opportunities. We are also attentive to ways that will mitigate risks for our investors including the purchase and sale of various derivative instruments from time to time.

Long Term Investments

In accumulating our long term investments we are guided by the following criteria:

  • Does it possess outstanding business economics?
    We look for businesses that have a sustainable competitive advantage. Over time we have found that excellent businesses will demonstrate most or all of the following attributes:
    • High returns on shareholders' equity
    • A strong balance sheet with minimal or no debt
    • Attractive operating and profit margins
    • Dominant position in its industry
    • Significant brand recognition
    • Pricing power for its products
    • Growing revenues and earnings over time
    • Consistent free cash flow generation
  • Does it have honest and capable management?
    Making judgments about the integrity and ability of people is an important and vital component in our approach. We want to align ourselves with principled managers of proven ability who think and act like owners. We have found over time that it pays to invest in companies where the managers have made a significant investment in the company with their own capital on the same basis as us. We also look for reasonable compensation practices and managers who are effective at allocating excess capital.
  • Can it be purchased at an attractive price?
    The price you pay matters. Even the world's greatest business is not a good investment if you pay too much. An attractive purchase price creates a margin of safety in the event that a business encounters unexpected difficulties. In theory, the precise value of any business is equal to the net present value of all the cash it will generate for its owners over time. In practice, this value is nearly impossible to calculate with any certainty. In making judgments about what price we can pay for a long term investment, we consider the ratio of price to earnings and price to free cash flow. We also compare the earnings yield of a company to that available from investment alternatives such as risk free government or high quality corporate bonds.

In summary, we are looking for a great business, run by great people, that is available at a great price. We strive to be disciplined in the application of our stated investment criteria to all purchase decisions. We also recognize that a key component to long term investment success is knowing when to sell opportunistically. While we agree with Warren Buffett when he says that his favourite holding period is forever, we understand that there are times when it may be appropriate to sell some or all of an investment holding in order to maximize our returns.

We will normally dispose of an investment holding in the following circumstances:

  • When we deem the market price to be in excess of its underlying intrinsic value.
  • If we see evidence of factors that are likely to significantly lessen its sustainable competitive advantage.
  • Where we believe that we have been intentionally deceived by company management either through their comments or in the financial statements.
  • In circumstances where we have an alternative investment opportunity that we judge to be better than an investment holding we already own and where we have no excess capital available for deployment.

Event Driven Investments

While our Long Term Investments often account for the largest portion of the capital we manage for our investors, participation in Event Driven Investments has also been an important part of our operations.

Event Driven Investing involves the pursuit of profit from an announced corporate event such as the sale, merger, recapitalization, reorganization, or liquidation of a company. It can also involve spinoffs and self tender offers by a company or other event specific special situations. Financial results from Event Driven Investments depend more on a proposed corporate action rather than on overall stock market behaviour. This activity features securities with a timetable where we can predict, within a reasonable probability, when we will get how much and what might prevent that from happening. Essentially, to properly evaluate a potential Event Driven Investment, we must answer four questions as follows:

  • How likely is it that the promised event will indeed occur?
  • How long will our capital be locked up?
  • What chance is there that something still better will transpire? (An example would be the emergence of a competing takeover bid)
  • What will happen if the event does not take place? (Examples would include anti-trust action or financing glitches)

We only participate in Event Driven Investments that have been publicly announced. Also, where possible, we attempt to reduce risk through some sort of hedge. An example of this would occur in the situation where an acquiring company is offering some form of exchange of its shares with a target company. In such a situation, we may sell short the proper ratio of shares to be received from the acquiring company in order to lock in a spread.

The gross profits from most Event Driven Investments are normally quite small. However, the predictability of the return coupled with a short holding period usually produces acceptable rates of return. Event Driven Investments typically produce more consistent profits from year to year than our Long Term Investments because the returns are to a large extent irrespective of the course of stock market averages.

Distressed Credit Investments

Commitments to high yield and distressed positions have also been an important part of our investment activities over time.

High yield commitments involve purchasing a security that is meeting its interest or dividend obligations at the time of purchase and is likely to continue to do so with a reasonable probability. However, because of some perceived or actual difficulty with the company or overall market weakness, the security is available for purchase at a distressed price that provides us with an extremely attractive annual yield. Perceived or actual difficulties affecting a company that can lead to an investment opportunity include reduced access to credit markets, poor short term operating performance, deterioration in the value of assets or an unexpected increase in on or off balance sheet liabilities. The key consideration in any high yield commitment lies in making a determination that the company will continue to be able to meet all of its obligations over time in all likelihood.

Distressed position commitments involve the purchase of a security in an issuer that has already defaulted on one or more of its obligations. In these situations, the primary concern is purchasing the investment in question with enough of a margin of safety to ensure an attractive return when the issuer reorganizes its affairs, whether formally or informally. Such reorganization usually results in the issuance of a package of cash and one or more new securities to replace the defaulted obligation. A key consideration in the purchase of any distressed position is its seniority in the capital structure as senior obligations are almost always more favourably protected than junior obligations.

While our preference is to make high yield commitments because of the attractive yields generated, we believe it is important to remain flexible and consider any high yield or distressed opportunity that presents itself. As with Event Driven Investments, the returns from Distressed Credit Investments are to a large extent irrespective of the course of stock market averages. We also believe that the ability to make such investments results in an improved overall discipline in allocating the capital we manage for our investors. Having another page in our investment playbook gives us an extended universe for attractive investment selection.

Cash and Other Net Assets

While it is our least preferred option for allocating capital in most circumstances, from time to time we find ourselves with more capital than good ideas. Rather than deploying our capital into opportunities that we would consider of inferior quality or with unfavourable risk versus reward characteristics, we will park such excess capital in cash and cash equivalents, usually short term treasury bills, while we continue to search for superior return opportunities into which to allocate capital. On occasion, we may purchase longer term government bonds as well. When holding such investments, our overriding concern is to both minimize interest rate risk and credit risk to the greatest extent possible. We are also attentive to ways that will mitigate risks to the capital we manage for our investors in a measured, thoughtful and cost effective fashion. We actively consider all viable methods to reduce the risks associated with adverse movements in foreign exchange values, equity prices, interest rates and any other risks that can be identified. This may include the purchase or sale of various derivative instruments from time to time.

Some Final Thoughts

We have many years of experience in applying this investment philosophy for our investors. We know that proper execution of this approach will lead to satisfactory results over time. That is not to say that we don't seek continuous improvement in our ability to analyze and select investments. We set incredibly high standards for ourselves and are never totally satisfied with our results. We owe our investors nothing less.

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.  Operations not meeting these requirements are speculative.”

Benjamin Graham

 

Web Design by Eyelight (Waterloo, Ontario).

Delivering creative marketing services
for over 20 years.

www.eyelight.com ▪ 519.743.2600