Thursday, 9 August 2012

Profile - Tom Stanley

From 1993 to 2006 Tom Stanley's Resolute Growth Fund returned a staggering 29.63% per annum.  The lucky and grateful investors who were carried along for the entire ride enjoyed a total return of better than 25-to-1.  Over the same span, the TSX returned a touch above 10% per year, or about 3.5-to-1.  Importantly, only about half that timeframe straddled the long bull run that lasted from the early 1980s to the late 1990s.  Between the Dot Com bubble and the current crisis, stock market performance overall was distinctly mediocre, while Stanley's performance was outstanding.  Indeed, over the eight-year period from 1999 through 2006, he returned 46.25% per year (1).  To be sure, his performance since has been more pedestrian, but whose hasn't?  Such impressive returns put Stanley among North America's finest investors. 

Despite such impressive performance, few students of investing are likely to have heard of him, particularly if they reside outside of Canada.  Stanley doesn't do much media, and will not be found revealing his top picks on BNN Market Call or similar forums, so his ideas, alas, aren't readily available to copycat investors.  Even investors situated within the corridors of Canada's financial power might not know him.  Instead of operating out of a glitzy Bay Street high-rise, Stanley's shop is in a nondescript office far from the heart of Toronto's financial district.  However, there's much to learn from his experience and philosophy.  Though Stanley is justifiably tight-lipped about the specific stocks that he's invested in, he openly shares his principles of investing, and has posted them on his website.
It's not just his performance that distinguishes Stanley from most other investors.  He has conviction.  Everyone talks a big game about their undying commitment to clients; Stanley backs up his words with honorable actions.  He charges a paltry 2% management fee (which includes all expenses), an anachronism in the era of 2-and-20 hedge fund managers, most of whom charge fees of 2% of assets per year, regardless of performance, plus 20% of any gains.  He launched a fund that catered not to rich investors, but to ordinary ones, and held Town Hall-style meetings once per year to engage with them face-to-face, not all that different from one of his major influences, Warren Buffett (Stanley cites Charlie Munger, Peter Lynch and John Templeton as his other role models).  Most notably, when interest in his fund soared, he made the self-uninterested decision to close it to new investors.  The bigger a fund is, the harder it is to grow at above average rates, after all.  Stanley preferred to give clients the chance to gain outsized returns, even if it meant earning less himself. 

Buffett's influence is apparent elsewhere, too.  Stanley has a knack for catching trends before most other market actors know there's a pattern at all.  For example, he understood more than a decade ago that oil was likely to rise significantly, and outlined his reasoning in a letter to clients dated October 11, 2000.  His case was straightforward: inflation-adjusted oil prices were low, which depressed industry profits, and spare capacity was limited, meaning that new supply was unlikely to both replace depleting wells and meet growing demand unless prices rose (2).  He was able to find small-cap energy producers that were trading for just two or three times cash flows (3).  During the same period, many investors were wild about high-tech stocks, and some of Stanley's own clients encouraged him to add Dot Coms to his portfolio.  He refused.  However, contrarianism sometimes masquerades as independence, and Stanley understands the difference.  Indeed, one of his principles is: "You don't have to win by being original, you win by being right" (4).
Stanley concentrated heavily in a few ideas - sometimes his entire fund is invested in less than 10 stocks - and ignores the conventional advice to rebalance his portfolio constantly, so that positions are evenly weighted.  In fact, in 1996 one name - and not a household name, either - accounted for 36% of his fund's assets.  Predictably enough given such concentration, his fund has dropped by 25% or more on several occasions.  However, he credits much of his success to just a few ideas.  On the other hand, he's one of the rare money managers who's admitted that he would liquidate his entire portfolio and sit on 100% cash if market conditions warranted it (5).

Citing Buffett's notion of staying within one's "circle of competence," Stanley rarely strays outside of Canada when making investments.  Though he doesn't have a firm rule against investing elsewhere, he believes that he has access to better information about local businesses, and a more in-depth understanding of political and economic issues, in Canada.  His sterling record is all the more impressive, given Canada's more limited pool of public companies than there are in, say, the US.
One surprising area where Stanley appears to differ from Buffett is in the quality of the businesses he invests in.  Many of the names that Stanley has invested do not appear to be of the highest caliber.  The Oracle of Omaha insists on buying only the best businesses, ones that enjoy a durable competitive advantage; Stanley has little to say on the matter, but many of the names that he's invested in that are public knowledge would be unlikely candidates for Morningstar's "Wide Moat" index.  At least, the last time I checked, UTX, International Uranium and Cangene weren't on that rarified list.  Most of them were bought on the cheap, however, rather like the companies Ben Graham - and the pre-Munger Buffett - preferred to buy, though they don't seem to be as dismal as the "cigar butts" that Graham scavenged for.  Stanley finds undervalued stocks largely by searching for ignored small cap stocks that have fallen under the institutional radar.

Like many formidable investors, Stanley doesn't fit in any conventional mold.  For example, he proves (again) that it's a myth that investors must have an accounting background, or a formal education in business, to have success.  Charlie Munger studied Law (he didn't receive an undergraduate degree at all, but was admitted into Harvard's law school thanks to the intervention of a family friend); Bill Miller studied Philosophy at the graduate level; and the late Barton Biggs majored in English Literature.  Stanley, for his part, focused on Psychology as an undergraduate, though he later supplemented his studies with an MBA.  He's of the view that most people's brains are not wired to invest well, and he pays close attention to the research that explores the psychology of investing (6).  The insights from behavioral finance, combined with what he has gleaned from investors both prominent and private, with a lot of independent thinking, too, have produced a rare and special investor in Tom Stanley.

Sources: (1) (2) (4):
(3) Thompson, Bob. Stock Market Superstars: Secrets of Canada's Top Stock Pickers. Toronto: Insomniac Press, 2008, p305
(5) Thompson, p319-20
(6) Thompson, p293

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  1. Nice summation! Although I think you meant Cangene and not Cengene. ;)

  2. Thanks for the comment - and you were right about Cangene (I made the correction).