How do top investors decide when to buy, sell, or hold a stock, and stick with it for decades? In this deep-dive interview, Jonathan Wellum, CEO of RockLinc Investment Partners, breaks down the exact investment process he’s used for 35 years to deliver long-term wealth for clients.
Wellum walks us through:
- How to identify durable and great businesses in the right industries
- Why discounted cash flow (DCF) is his go-to valuation tool, and how he applies it conservatively
- The power of compounding and tax deferral (the Buffett formula in action)
- When to sell a stock, from mistakes to overvaluation to better opportunities
- How he sizes positions, builds portfolios, and navigates market hype with discipline
- Real-world examples from Amazon, Burford Capital, GROY, and Franco-Nevada
Get a free portfolio review with Jonathan Wellum at https://bit.ly/4erNlRd
Get To Know: Rocklinc’s Jonathan Wellum https://youtu.be/ezMiX0FtZ7g
Hard Assets Alliance – The Best Way to Invest in Gold and Silver: https://www.hardassetsalliance.com/?aff=WTH
Jonathan Wellum 0:01
Trey, you should not fall in love with your stocks. They do not know that you own them.
Trey Reik 0:11
Greetings and welcome to our wealthion show. My name is Trey Reich of Bristol Gold Group, and we’re visiting today with Jonathan wellem, CEO of rocklink Investment Partners in Burlington, Ontario, and the reason for our visit today is less about reviewing current events than about reviewing some of the basic decision making and investing. So we’re going to take advantage of Jonathan’s 35 years or so in the business on the buy side, and probe him on how he and his team at brocklink approach the investment decision to buy and sell individual equity. So I’d love to just start with, you know, a general understanding at Rock plank, when you look at the available options, you know, what makes you want to buy a company? What are the, you know, the situations, the triggers, the inputs into a buy decision?
Jonathan Wellum 1:18
Yeah, it’s a great question, and good to speak with you again. Trey, it’s, it’s fun to sort of maybe go behind the scenes, into the kitchen, so to speak, and actually see what’s happening. How does the, how does the whole, the whole product, come together when you’re actually creating a fund to invest in, or discretionary management account, like, how do these companies get in there? Where do they come from? It’s a great question, and it’s, it’s really what we love doing, and that is ferreting out great investment opportunities. One of the first things we do is we try to look at industries that we understand, that also are growth industries where there’s, you know, there’s good progress in the businesses underlying secular growth in the overall economy and the industries themselves are pretty profitable industries. I mean, there’s some industries that are really tough industries. The economics don’t make a lot of sense. I mean, you know, use the typical example of, you know, airline industry. If you’re a long term investor and you want to take a five to 10 year position, typically you’re not going to be buying airlines, right? So, so, so industries matter, and we try to get industries that are growing, expanding, that are well positioned, because it’s much easier for a company to grow if the overall tide is rising, the industry is expanding, and there’s opportunities. Having said that, then you’ve got to get into the industry and sort of look at companies. What are you looking for in companies? And what we try to do if we’re going to take a three, five, hopefully even a 10 year position in a company, I mean, like Warren Buffett says, the ideal holding period is really forever. The problem is there’s lots of other things that intervene, and there’s reasons why you do sell, and we’ll talk about that in due course, but we’re going to look for companies that have a competitive advantage. So, you know, typically, the word in our industry is a moat. There’s something protected around them. In other words, they have a sustained presence in their market. They have a good market position, great brand equity, and they’re not going to disappear tomorrow, because if you’re going to again take a long term position, you want to be in a company that’s well staked out well known people like buying their products and services. They’ve got an entrenched base of business, if you will. Well, then look for companies that have a consistent earnings profile. We’d like companies where the earnings are not all over the map. Because again, if you’re going to value a company, we’ll talk a little bit about how we value companies in a few moments, you can’t value companies if they’re making a lot of money this year and no money the next year and so forth, those are difficult companies to value. It doesn’t mean you can’t buy them, but it’s not the typical company we’re going to look for. So consistency in earnings power, the next thing we’ll look for is actually high returns on the investing capital. So if you have a company that’s investing capital into their business and they’re generating one or 2% on that capital, I mean, that’s a terrible rate of return, they’re destroying capital. And so better just to go buy treasuries at four or 5% than to invest in a company that can’t reinvest its capital at a higher rate of return than, you know, fixed income, for example. So we’re going to be looking for companies that typically are going to be generating 1215, 18, even up to 20% returns on equity and sometimes higher. But we definitely want companies that are going to, you know, know how to invest and know how to put that money back into their business and generate high, high rates of return. That’s the whole secret of creating wealth. Is compounding, compounding your earning stream over time. The management team, as you know, Trey, you’ve been in this business, is critical. The people that run the company. We try to get to know the people. If we can, some large companies, it’s hard to get access, but we’ll look at their. Resumes. We’ll look at their bios, look at their backgrounds, their experience in their industry. Do they own the stock? We really love companies where the executives are also owners, owners, operators. Is really the best, best kind of companies to invest in. That’s because they eat their own cooking. They love, you know, they’re they’ve got the risk, they’ve taken the risk in the business, and we like that, rather than guys who are just loading up on options and not really into the business. And then we’ll, you know, look at companies. The board will look at the board governance issues quickly. We don’t, we don’t spend, I would say, a lot of time on that, but we do go over the board and look at the governance. We want to make sure they have a board that’s of strong merit and competency. We hear a lot in the last number of years about dei diversity, equity, inclusion and all this ESG and all of these sorts of things. Our view is, look, we want the best people. We want merit based companies. We want companies that are more concerned about their shareholders, not their so called stakeholders, and stakeholder capitalism, all these terms that you hear about when we look at companies, we are concerned about companies with the best people. They hire the best people, they’ve got the best boards, they’ve got competent people, and they run their companies for the shareholders to maximize the value for shareholders over time and again. So those would be some, some some items that we would look at in terms of the business. A couple other quick points I would just make would be understandable business. I think you know when you when you when you’re investing in different industries, you have to realize there’s some industries you don’t know a lot about, and they’re tough businesses. You can think of biotech. If you’re going to get into biotech industries, you need a science degree, in my view, you need to have a good backing and understanding of that industry and trends and what’s happening in the business. Otherwise you shouldn’t be going into that sector, even some mining companies, I mean, junior mining companies, if you’re not a geologist and you really can’t understand a lot of the reports, be careful. I mean, you can invest if people, and sometimes you can go into companies that are maybe more risky if you really understand the people and people running it. But we really want to be in industries where we have developed a certain degree of competence, and so we try to stay in that circle also, otherwise you get bamboozled. And, you know, executives can tell you all sorts of stories, and you can’t be discerning, and it’s easy to make mistakes in terms of that and and then we again, try to take a long term perspective on the business. So you can see if you’re if you’re a value investor, and you want to take a five year position or longer, then you can see those are the kind of things you want to know. You know, what industry is in, who’s running the company doesn’t have a good brand, you know, is it compounding? Is it reinvesting back in its business? Well, these, you know, sharp people. Is the industry itself growing? Those are some of the dynamics of of the the the economics of the businesses we’re going to be looking for. And of course, then we’ll spend a lot of time sort of valuing the company. You know, is this a good value? Can we buy it? You know, below what we think is, is sort of intrinsic value, or the value on the business. So those are some of the dynamics. I think it makes sense, I think, to investors, those are the things you would be looking for if you’re going to, as Warren Buffett, say, invest in a company. And then if the stock market were to close down for five years, would you be worried? And so again, we don’t. We’re not perfect in making our judgments, but that’s the kind of business that we are going to be looking at. Once we find an industry that we like to invest in. If
Maggie Lake 8:36
you have any questions about how to navigate the current environment, wealthion can help connect you with a vetted advisor to get a free portfolio review, just click the link in the description below, or head to wealthion.com/free there’s no obligation, and it will just take a few minutes of your time. Again, that’s wealthion.com/free thanks so much for joining us. So one
Trey Reik 8:55
of the things I was wondering is, how important are market conditions in your buy decision, do you pick a company and are if a new account comes in and there’s X amount of capital, does it go to the model? Or do you worry about entry points based on market conditions? Or does that influence the allocation?
Jonathan Wellum 9:17
Yeah, excellent question, and we definitely look at the market conditions. So we do have models so that we can make sure that people with similar risk profiles are getting similar exposures. That’s very important, just from a regulatory point of view, and consistency and being able to maximize our efforts. But there are times, as you know, Trey where the market might be incredibly enthusiastic in some sectors, and we just say, hey, no, we can’t really add money at this point in time. We’re going to have to wait before we can put the money in. So what we’ll do, typically, we’ve got a couple clients right now that I’m sort of feeding into the market, if you will. And so they’ll come in, we’ll establish a few base positions for them, so we’ll get in back. Invested, but we’ll hold back and have quite a bit sitting in short term securities, interest bearing securities, so that they’re making some returns. And then we’ll wait for market volatility, and then if there’s some volatility, the marketplace will dollar cost, average. So what that means is it could take six months, eight months, to get someone invested the way we would like to have them invested for the long term. But, yeah, I have serious challenges in my thinking about investing in companies I know that are at the high range just simply because they might be in our model. We can’t do that, so we’re very selective. If you’re in you know this is, this raises the whole issue that the best time from, from a value investors perspective, to invest is when other people don’t want to invest. I mean, I think it’s one investor who said it’s, it’s you want to buy from pessimists and you want to sell to optimists, right? And so when everybody’s enthusiastic about the market and there’s the FOMO fear of missing out, that’s when you actually want to be a little more cautious and just careful and pull back a little bit. The market has a way of correcting and valuing companies properly over time. And so if there is excess enthusiasm, we back off and we try to be very disciplined in our positions. We might only take a quarter position, half a position, and then wait in the dollar cost average, yeah.
Trey Reik 11:17
So and then my last question sort of on the buy side. Mr. Prince over at Bridgewater, who certainly has a pretty good view on how to invest successfully over time, points out that when markets are rich, it’s very important not to try to orient your portfolio. You know, all in all out big moves, which essentially is the parallel to being properly invested, to benefit from the range of probabilities that may occur in the future. So I guess my question to you is, are you generally fully invested, or is there a range below which you wouldn’t be invested?
Jonathan Wellum 12:02
Yeah, I mean, fully invested to me, and I know, since we have this conversation with our clients, fully invested in me would be, for most of our clients, we would be 90% or so 92% I’m always holding a little bit back. Now, we do have some clients who say, Jonathan, I’m 100% or, you know, there’s a few that want to have a little bit of leverage. We don’t have very much margin on our accounts, but there are those are aggressive people and and they have other assets that that will buffer them and so forth. But no generally, we will carry some cash in the account, small amount of cash, and we will let that go up when we are concerned about market conditions and valuations. So for example, today in the market, we would be carrying probably about six to 10% more in cash than we we normally would simply because there’s a lot of volatility, there’s activity going on in the world, and we believe that we can buy things cheaper, and we’re prepared to move when they do. So we have price points, and so it just gives us flexibility. We’re not trying to be too smart for ourselves, because you can, you know, try to predict things way more than you should, and you’re going to make more mistakes. Our view is, the less decisions we make, the better they’re going to be and make them when we have high, high conviction,
Trey Reik 13:21
a rock link investor would never expect to have a 50% cash position. No,
Jonathan Wellum 13:27
not for not for very long, not for very long and again, unless that was a widow, a retired person who didn’t have a lot of room in terms of volatility that could arise in a situation like that, that would be very specialized asset allocation for a particular client. Now we like to get invested in. What we’ll try to do is we’ll look at different sectors. Are there sectors that are underappreciated, unloved? Can we find some businesses in that sector? Over the last number of years, we’ve had up to 20% in the gold, silver, sort of precious metals area. That area, obviously has done very well over the last year, year and a half, so that’s rewarded our clients significantly. But that was an area that no one really cared about up until more recently, and even now, it’s probably underweighted in most people’s portfolios, but we were committed to that area because of valuations and also concerns over just government spending and debts and deficits and money printing and all of the things that you’re you’re very much aware of, and most of the clients here are aware of that are watching the programs, but you know, so we’ll try to shift and we’ll try to look for opportunities. For example, one company I think I’ve mentioned on the network before, we have some investments in Burford capital, and that’s a well run finance litigation company. Well, yesterday it came out that in the big, beautiful bill that Donald Trump is trying to get passed through the Senate and through the house, that there’s a provision that. The Senate wants to add that might tax litigation finance companies at a higher rate, the stock dropped 15% so what do you do? I mean, there’s a very practical question. Well, we think the stock is very inexpensive. It’s trading about 11 times earnings. Actually probably about 10 times earnings now, and so something like that comes out of the blue, and we like the business, we like the players. So we look at that and we say, you know, we hold tight. We did add a little few shares yesterday to some of our portfolios, just nibbled away because we want to see what’s going to happen here. But to us, when something’s trading at book value with the quality of a business like that, and it’s now hit a bit of an air pocket because of taxation potential changes and so on. You know, that’s not going to cause us to run away from the stock. It could provide us with one of the best opportunities to build even a larger position in the business. So that’s a case where it’s an exogenous factor hits one of our stocks which we like, we think it’s already cheap, and there’s a really good upside. We stay the course. We probably, as we said, we dollar cost averaged a little bit yesterday, and we’ll be nibbling away going forward. So that’s the way we approach the market when you’re a longer term investor.
Trey Reik 16:11
Well, thanks for all of that. That’s great input, I think, both for folks, folks assessing your approach, and individual investors. And now we’re going to turn to the hard part of the equation, selling. So I think if you take our decades together in the business, buying is much easier than selling. That’s that’s just my opinion. And you know, as you mentioned earlier, if you trade stocks, that means you have to do three things correctly. You have to buy it, you have to sell it, you have to buy it. If so, it’s very, very difficult to get all of those decisions right in a row. It’s almost impossible. But anyway, if on the sell side, what’s, you know, what’s rock links, perspective on the types of things that might make you a seller of a company that you’ve owned for some time?
Jonathan Wellum 17:04
Yeah, there’s a number of things that can arise which cause you to sell a security and you’re quite right. It is definitely one of the hardest things to do. You should not fall in love with your stocks. They do not know that you own them, right? It’s what they learn. You think somehow you’re going to hurt the feelings of the stock? No, you’re not, and you should get rid of it under certain circumstances. It’s not like a spouse, right? So number one, there’s a fundamental deterioration in the business. Something comes along where the fundamentals have changed. There might be a competitive factors, change in technology that’s impacting the business, and you’re looking at structural change, well, that is going to change your investment thesis, and so you should be aware of that, and you should be prepared to sell the business and move on to another business if there’s a fundamental deterioration in the fundamentals, basically a reversal, the reasons why You bought in the first place, second overvaluation. Now we will typically hold on to a company if it’s just a little overvalued, but some companies can become quite excessively overvalued, and then I do think you should take some money off the table. Now that could mean the whole position, or it could be an asset allocations or the portfolio management decision where it becomes maybe 678, percent of your portfolio, and you go, let’s trim it back down to five. Let’s take some money off the table because of overvaluation. So you know, you can’t lose money from take by taking a profit. And I’ve certainly learned over time, when things get just crazy in valuation, back off. Take some money off the table. We do that in a very disciplined way. Now, as an organization, even though, as a value investor and a long term investor, it kind of grates you a little bit, because, you know, if it’s a great company and it continues to grow, you’d love to own it over time. Now, a couple of years ago, an example of that, just to again, put some flesh on this for people, Amazon. We have owned Amazon for quite a few years, like the business, like the diversity of it and so on. And in 2022 you might remember, and into 2023 I mean, lost 40% of its value. It was crazy. And that’s one where we had actually trimmed a bit off some of our larger clients accounts. In 2021 it ran up an awful lot. And then we were able to step back in and pick up more shares when it was down 40% for really no good reason at all. I mean, interest rates went up and so forth, but the underlying business continued to grow quarter after quarter after quarter. And so you can get exceptional volatility, even in a leading company like Amazon, which is a good example. So overvaluation better opportunities. We typically will run 20 to 25 stocks in our portfolio. So we are focused investors. We like to understand the companies well and not deworsify, which Peter Lynch, the old fidelity investor many years ago, used to use that word, dewersify. And so if. Keep buying more and more companies, you just become like the index. And we don’t want to be like the index. So what will happen is we’ll come across a company that we want to own, and we go, we just can’t keep adding companies to our list. We have to get rid of something. And so we call it pruning. And so really, a process of pruning, we’ll take off the company that we think has got the the least best prospects going forward, even though it might be a great company. Maybe it’s valuation, maybe it’s just slower growth in its industry, things like that. And we’ll trim that and or get rid of it out of the portfolio, and then we’ll add another company so better opportunities, and then the one that we, of course, no money manager, likes to talk about, and that is, you just plain made a mistake. You know, you just, you just miss something, and boy, you find out about it once you own it, and once you’re living with it, and if you’ve missed something on the stock, you made a mistake, own up to it, get out of the business quickly. It doesn’t make any sense. I’ll give you one example of a company that I really had a tough time learning this lesson. And it was a company back in the in the 1990s late 1990s it was a finance company. We had been doing exceptionally well in Canada, high flying company, big on the TSX in Canada, called new court credit. It was, it was a well run company, but the company was financing a lot of its credit with short term money, and they didn’t have long term capital, so they had a mismatch. They were providing medium to longer term capital, but they were funding themselves on short term capital. And back in 1998 when Long Term Capital Management got into trouble, there was a Russian ripple problem and so forth. There was a number of exogenous factors that hit the global market. Short term funding costs skyrocketed. They skyrocketed, and the markets became very illiquid. And here was a business that all of a sudden its whole margin disappeared. It basically had to sell the company, and eventually sold to Tyco, and that’s a whole story in and of itself, and so on. But the lesson I learned was, when you’re buying a company, I didn’t really incorporate the way they were financing their business and the balance sheet side of it as well as I should have, and that went that meant the business went from highly profitable to basically no profits, almost overnight. So again, you learn the tough way you miss. You make a mistake like that. So that’s that’s an example of just making mistakes. So those are the key reasons why you’d want to sell, and you should stick to a sell discipline. It’ll protect you over time.
Trey Reik 22:33
And I would underline one of the things that you mentioned in my experience, if management ever appears to have not given you the full story or has changed their story, that’s an incredibly important thing, because it’s, it’s, it’s an indicator of, you know, what will be coming in the future. So anytime I think management oversells or isn’t particularly forthright on on problems that are coming. That’s a that’s a red flag sell signal. Would you agree
Jonathan Wellum 23:07
it is? And you learn over time, as you talk to management teams, some are very transparent, and they really lay things out well for you, and you can see that they have a tremendous track record. And those are the ones you do gravitate over time. There’s no question about that. There’s others, yeah, you just don’t feel as comfortable. And sometimes you get the sense they’re not telling you, telling you the full truth. And over time, if you go back and look at the story, in fact, just yesterday, I remembered a guy that a gentleman who had been phoning me a CEO of a mining company here in Canada. He’d been phoning me as a small mining company wasn’t very large, but he’d been phoning me, and I thought, You know what happened to that fellow? It just popped into my mind. So I went back, and basically he had raised capital, and two days after he raised the capital, he was fired, and he was just promoting. He didn’t get the sense that there was a lot of honesty and integrity there, and that’s why. And you have to go back and look at the management. Look at their track record. Who’s some of the large often, we’ll look at who are the, some of the largest investors in the company, too, because that’ll also give you a good handle. We’ll look for other value investors, people who spent a lot of time researching the company. If they’re we’d like to hang out with other smart, you know, value investors in businesses. And there’s nothing wrong with that. Learn, not learn from other people. Stand on the shoulders of other people, look at what other people are buying, and we learn a lot from that. In our research team, of course, we have to do our own research, but at least helps us ferret out companies and management teams that we can trust.
Trey Reik 24:36
And I would say no industry is more important in this regard than mining. It’s just critical. Management is critical in mining. So flipping things over, sort of the Rubik’s Cube, we’re going to roll it over on its side and look at valuation. So we have buying, we have selling, and then in the middle we have models, and we have a. Methods of valuation. So how does you know? How do you guys value companies? Do you have a one way you do it, or a couple of ways you do it?
Jonathan Wellum 25:11
Yeah, we have a couple of ways, and it will vary a little bit by the business and the sort of the industry, but our preferred method would be a discounted cash flow model. And that makes sense, because when you think about it, why do you want to own a business is because it’s going to produce excess cash at the end of the day, it’s got, it’s got to produce a cash flow stream that it can give to shareholders, either through dividends or through reinvesting back in the company and making the company more valuable, driving up the capitalized value of the business itself. So that’s what it’s all about. I mean, ultimately, you’re in a business because you generate cash. So if you’re going to measure a company, you’re going to look at its cash flow. So what we’ll do is, we’ll look at it, you know, an accounting terminology, sort of free cash flow, which is the, you know, cash flow after making your maintenance expenditures, maintaining the business, you’ll look at the cash flow measure off the cash flow statement, and you’ll take that and this is one of the reasons why we like to buy companies that have generally a pretty predictable business, because if you’re going to take a cash flow modeling approach, it only is valuable if there’s predictability in the business and there’s a certain degree of of of consistency in the company. Otherwise, if you can use some of these valuation techniques, I would not use a discounted cash flow basis. I would go to a balance sheet and look at a net asset value or a price to book value, or something like that, which I’ll mention in a second. But the preferred method would be the cash flow. So we take the cash flow and we’ll say, you know, what’s the tip? What’s it’s, you know, what’s the growth rate over the last five years? 10 years, how have they been growing the cash flow? Then we’ll sort of look at the future opportunities, talk to the company, get a sense on where they’re deploying the capital and the growth rates in the industry, and then we’ll put a growth rate on that cash flow. And typically, we’ll put the growth rate over a five year period and then another five year period, so maybe a 10 year period in total. Often do it as two stage, because remember, the further you go away from your point today, the more you’re speculating, the more more guesswork gets into it. It’s harder to predict. And so we’ll put a growth rate on the company. Typically, we’re looking for companies that can grow their cash flow, 6789, 10% a year, some, some faster, but certainly high single digits, if not into the low double digits. And we’ll put that growth rate on for the next five to 10 years, and be very careful about it. And then you’ll put a perpetuity value on it after that. And typically we’ll just do one or 2% something quite small. And so the key factors there is, get your free cash flow today, the growth rate that you think it’s going to have for the next five to 10 years, and then you want to knock that growth right off and just put a perpetual value on it. And then the other key factor is, what are you going to discount the cash flow streams? And so, you know, some people, you know, they’ll use, like, 10 year treasuries, different things like that. We typically will use at least 9% I don’t care if it’s a really safe company, you know, very low risk. We try not to adjust our interest rate, our discount factor down that much simply because we’ve been in a low interest rate environment, we want to keep it at a reasonable rate so we’ve never gone below eight or 9% typically, we’re gonna use 9% as a discount factor because we’re buying solid companies, good companies. But we don’t want to fool ourselves. You can if you put a lower discount factor, of course, you’re going to drive up the value of what you think the business is worth, but you’re only fooling yourself. And so there’s no use doing that, because that’ll be a painful thing when you get to the market, because the market Won’t Get Fooled right over time. And then, if it’s a riskier company, we’ll use discount factors that go up to maybe 12 to 14% now those would be a much riskier companies, you know, potentially mining businesses, things like that. You want to use a higher cost of capital. But we don’t get into, you know, again, I have my MBA and my CFA and all of that. And you get into, you know, all these cap M, you know, capital asset pricing modeling and all these sorts of things. We just stick to reasonably decent interest rates and apply those to the businesses and and then we’ll value the company. Then we try to buy the company in this market. We want to be able to buy them at least at a 1515, 15% discount. Now, ideally, if you can get them at a 30% 40% of course, 50% discount, that would be great. Those are very, very hard to find, especially in a market where everything’s been, you know, sort of looked at, and there’s lots of investors out there, but we want to be able to buy at what we think is a discount to the value of that business, and that’s what we’ll do. So we have, I have a sheet I that we print out. It has all the companies that we own, and then our watch list, because we have a number of companies that we’re watching that we’d love to own, maybe. Be a little bit too expensive, or we’re looking to find room for them in our portfolios, and then they’ll be listed by discount. And so that ones with the height that traded the highest discounts be the top of the list, and then it goes down to those that are trading at premiums. And of course, we’re always trying to add companies with that are, you know, high in that list? In other words, have the largest discounts, trading at the biggest discounts. So that’s the discounted cash flow. Now some companies will
Trey Reik 30:27
do Come on. Let me just give one footnote that, in my experience, your discounted cash flows applies. I keep coming back to Mining because that’s my specialty. There’s no business for viewers that that discount assumption matters more than mining. And quite frankly, in my experience, there’s no industry on Wall Street that improperly discounts future cash flows. They’re using five and six and 7% when it should probably be 20 in terms of the parts of the world in which the mine is is being built. So I think it’s really, really important just to look at that discount rate in any valuation of a mining company, especially on the sell side,
Jonathan Wellum 31:12
very much so, and I think the last now interest rates have come up more recently, but they’re still not very high from, you know, normal, from normal rates. But for a few years there, when the, you know, the 10 year, was trading at, you know, 2% or, you know, less than 2% you know, that does not mean you could just drop your discount factors down to 2% then you could, you could justify buying almost anything, and that would be crazy. You’d be losing your shirt. And so yes, you have to be disciplined in terms of when it comes to the discount rates, and that’s why we don’t want to move them around very much just based upon what the Federal Reserve is doing and if they’re repressing rates and keeping them unusually low. We don’t want to get stuck by by overpaying for companies. There’s no way you want to do that. Yeah, right,
Trey Reik 31:56
because it’s never going to be a 2% risk to develop a mine in Tanzania. Anyway, I interrupted you. You were going on,
Jonathan Wellum 32:03
yeah, no. And even if it’s an industrial company or a very well run financial business and so forth, you don’t want to be using two, 3% discount rates. I don’t care if it’s if it’s apple, for pity sakes, apples got, you know, risk in its business over time also, and and so you don’t want to that’s being naive, and I think, very foolish, if you’re doing that and you’re only going to end up hurting yourself. I mean, you’re protecting yourself, the larger the discount rate. So to me, that’s that’s the wise thing and prudent thing, to do another area that we’ll look at in terms of valuation. We will look at price to earnings for some companies, if you look at banks, for example, we’ll do a combination of price to book so book value is very important for a bank, looking at their assets, lesser liabilities, and book value generally is what you could break the bank up on again, assuming the derivatives are reasonable and so forth. There’s a few assumptions there, but we’ll look at price earnings and then price to book value. And in particular, if you get into financial institutions, we’ll try to buy as close to you know, price to book as possible. But it’s difficult. Now, in this day and age, if companies are generating high returns on equity, so if you have a bank that’s generating 1617, 18% returns on equity, then you’ll be prepared to pay up to maybe two times book for that for that business. So your book price to book will be a good, good indicator of fundamental value. And then how productive are they with that book? How? What kind of returns can they generate off that book? If they can generate consistently, you know, as some institutions, financial institutions, can 18% or more returns on equity, then you’re prepared to pay a multiple of book, but you will be, you know, and you’ll also look at their earnings and dividends and so forth. So there’ll be a number of factors that will come in when it comes to, say, financials and other companies, and price to earnings, I think, can be important, along with price to book when you’re looking at a financial institution. And then the last area that you know, we would look at is you get into some of the mining companies, the royalty companies, you look at the net asset value. And so you’re going to look at the asset value minus the liabilities, and you’ll look at the, you know, the cash flow streams that are anticipated coming in based upon proven resources and so on. And then you can come up with a net asset value on those businesses, and that’s where you can see quite the range. If you just an area that you’re familiar with, I know and and that we’re very familiar with. And this also is instructive to how you can make some money and how you can allocate capital. Now, we’ve been big investors in a lot of the royalty streaming companies. So if you take a Franco Nevada, or a wheat and precious metals. These are great companies. They’re very well run companies. They’re incredibly profitable. They’re diversified, all the things that you’re going to look for, but they are trading at a high, you know, price to net asset value. They’re trading about two and a half times, which is on the higher end. So if you are buying wheat and precious metals, or you’re buying Franco Nevada in this market. You’re anticipating further growth in the price of silver, of gold, in the case of Franco good oil, you know, valuations copper, hopefully, if they can get the Cobra mine going in Panama and so on. But you’re betting that the underlying commodities and precious metals are going to continue to go up, if you’re paying two and a half times in NAV. So what we’ve done more recently is we’ve gone down the size scale, the smaller royalty companies. And you can look at, say, a sandstorm, which is getting its act together and doing a good job. That was trading just a little while ago, one times nav now it’s about one and a half and but still, great growth, great diversification. You can look at, we’ve got a position in in in growing gold royalty company, and which is stock code is G ROI. No one wanted to own that a little while ago, even though it has some of the best royalties and streams available in the marketplace, it’s really a well positioned company, but it’s not going to generate a lot of cash for about two or three more years. And so you can look at their properties and go, these are some of the best properties in the world. It’s probably one of the safest royalty royalty companies. When you look at its counterparties and the people that they’re working with, Agnico Eagle and other companies like that, are a lot of the are the miners that are developing their properties. But people look at and they go, you know, there’s really not much money coming in for the next for the next couple of years. That is a perfect opportunity for us. So we go in. We took a big position in it at half point five net asset value. Now, Franco’s trading at two and a half. Gray is trading at half, and no one cares. Well, more recently this year, you know, the stocks up 80% because all of a sudden people are sort of clueing in on that. So what will happen is, if you’re valuing companies like this, and you’re looking at them, then you can benchmark them. You can say, I like Franco, but yeah, it’s a little more expensive. There’s going to be less upside. Although it’s a powerful company. Let’s look downstream at some other companies that are can be really well run, and if they’ve got great royal you know, royalty streams off good assets and so on. Then let’s take positions in those we can buy them literally at one quarter and less of the value. That’s what we that’s what we have to do as value investors, and that’s the way we approach, approach it. And again, just trying to give some examples to people, so they can sort of get into their heads how it works for them, and they can understand the way we go about you know, how we think and how we go about investing.
Trey Reik 37:23
So this just came to mind as you were speaking. What’s your sort of typical holding period and what’s your turnover?
Jonathan Wellum 37:31
Yeah, great question. I mean, our turnover last year,
Trey Reik 37:36
Max math matches from your answers, yeah.
Jonathan Wellum 37:40
Our turnover last year, we actually sold about seven companies on on a base of, say, 25 which was unusual. Typically, it would be maybe two, two on 25 or so a year. Last year, there was just so many different changes taking place in valuations that it just made sense. And we are our research team. We’re working night and day, and we found some good opportunities, and so we made changes. So generally speaking, I’d say our turnover rate would be under 15% per year. Consistently, last year was a little bit higher. Let me, let me just. Let me just. Give an example to the to the listeners about this, about compounding, and one of the reasons why we like to own for extended periods is we like to compound in a stock and this is particularly important if you’re in a a non registered account, or a non Ria, or in the US or RSP, they call it up here. In other words, if you’re in a taxable account, because this, this example, of what Buffett used this a number of years ago. And I’ve just, you know, I’ve just updated the numbers and give people a flavor of how important it is if you can compound a your defer and defer taxes, so that you’re compounding your tax deferral, and how powerful that is. Because, remember, the richest people in the world are people who know how to defer taxes. That’s their business owners. And they usually own a company for 20, 3040, years, and they become wealthy because they don’t pay tax on that whole, you know, period of growth over that period of time. But here’s this quick example, Trey, if you take $1 and you double it 20 times, so 1248, 1632, 64, and so on. So I’m talking about 100% each time after 20 doubles. That dollar is 1,048,000 Believe it or not, it’s now if you held one position and were able to have that kind of growth and then sold at the end of it and paid your taxes. Now in Canada, I’m using Canadian capital gains tax, which would be 25% approximately, on your on your gain, you would have, you would end up with $786,000 so you say, okay, that’s not too bad. Okay, I started, I went up to 1,000,048 I end up with 786,000 now think about this. So if you every time you bought a stock and went up by 100% and you were able to do that 20 times you sold after you went up 100% and reinvested in another business, paid the 25% capital gains tax each time your take out. The end of that 20 doubles would be 72,000 less, less than 1/10 and I think what people need to appreciate is, if you can find a great company, and you can compound with it over time and defer the taxes and let that deferral also continue to compound with it, you will drive up your after tax returns in a significant way. And so this is really something I think people need to appreciate. There’s nothing wrong with trading. There’s nothing wrong with trying to go in and out of stocks, but it’s difficult. If you can find real winners and stay with them, you actually don’t have to generate quite as high a pre tax rate of return, but it will drive up your after tax, rates of return. And that’s really, I think, one of the secrets that a lot of retail investors don’t think through and they try to make, you know, Fast and Furious decisions and market time, this, that and the other thing, and what’s happening. It’s difficult. It’s really difficult. Some people can do it. That’s not our game, but that’s why we want to find companies that we don’t have to turn over too fast and be more tax efficient for our clients.
Trey Reik 41:25
I worked with my father for a decade in the 80s at Mitchell Hutchins Asset Management in New York, and my dad buys franchise type companies. And I remember, you know, we owned a big position in Smucker, which is a classic example of a family run low, institutional ownership, no debt, company. And I, you know, went from sort of two to 10 while I was with my dad. And I remember, you know, at the end of the 80s, I said, I have to get a real life and go out and focus on things that aren’t like encrustables and Smuckers. About 160 today, so, you know, and my dad still has the stock he bought in 82 so when you find those types of companies, you know, William, Sonoma, Smucker, etcetera, that you’re comfortable with and growing with them over a decade or two, that’s really, that’s really where the real money is made. You know, in equity investing, and it’s almost impossible to do given all the stimuli that we have in the current environment.
Jonathan Wellum 42:25
You have to be careful with the stimulus. Stimuli, as you say, it can cause you to fear of missing out. You don’t have to make money the same way your neighbor made it. Just understand what you’re doing, and you learn these lessons over time. But that’s why someone like Warren Buffett, I’ve found to be a fantastic mentor. Gone I’ve, you know, I’ve been to 15 or 16 of his annual meetings over the years, and, you know, you read all his annual reports, and he again, think what we try to do anyway is Think like a business person. When we buy the company, we go into the stock we’re looking at as if we’re buying the whole business. Is this a company you want to own the whole thing? Would you want to again own it for if the stock market closed down for five or 10 years? These are the ways, if you ask those questions, it will help, I think, screen out companies, and you won’t be just jumping in, you know, into businesses that you think, actually, what was I thinking, you know, I’ll give you, give you one example. I was, I was vacationing last summer, and there was a gentleman that was where my wife and I were just going to go out and do some scuba diving. And so we’re going out. We were with this other person on a boat. He was also signed up for, for the opportunity to go out, and we’re chatting away. He’s a consultant from New Jersey and and he said, What do you and I see, he found out was an investment business. He goes, What do you think about Nvidia? I mean, I said, you know, a great company. It’s amazing. You know, Jensen is what he’s doing that. But it was kind of expensive. He said, Oh, you know, I just bought it a couple weeks ago, and this was down 20% Exactly, exactly. And I said, I said, Well, why did you buy it? And he said, it’s because I heard it became the most valuable stock in the world. I thought, that’s not a reason to buy it. Now, it could be and it could become, you know, could double and triple from there, but, my goodness, no. Fundamental Analysis didn’t really know what earnings were in the company so forth. He bought it simply because it had gone up a lot. It was the most valued company. That is not the way you’re going to make money over time. You You could, but then you’re just getting lucky. It’s not because it’s not a reproducible year after year strategy that you’re going to effectively put into place.
Trey Reik 44:35
So we’ve covered a lot of sort of methods for buying and selling and valuing. But do you have any sort of behavioral or practical suggestions for investors doing this on their own in terms of, you know, literally, investment behavior?
Jonathan Wellum 44:56
Yeah, you. Must understand what you’re doing, and you have to be disciplined in your thinking and in your approach. You cannot be compelled into investing based upon other people. You do not want to be pressured. You must, you know. You have to be really firm in terms of your thinking your process. That’s why I think the more you know about the business, the more you investigate a business, the more you understand it, then the more you’re going to be in control of your emotions. You must be able to control your emotions when it comes to investing. Look, I’ve been doing this for 3536 the year now, and I can tell you right now, even as a professional that does this day in and day out. Have to control my emotions, because if something’s going up and things are running, it’s amazing how you’re drawn into it. You go you have to go back to your spreadsheet. You have to go back to the numbers. Does it make sense? Not want to chase things. So you have to be able to control your emotions. You can get euphoric very quickly, and you can get depressed very quickly. And so as a professional or as any sort of retail investor who’s watching this, control your emotions. Stick to the facts. Go back to the facts, and remember that in many cases, the majority of the people are wrong the majority of the time. And so when people are running from stocks and they’re panicking, that’s really the best time to start looking more seriously at opportunities in the marketplace. It doesn’t mean you just run in if there’s negativity or there’s a problem, but that’s where the opportunities are going to start to surface. If everybody’s enthusiastic and the world’s just a great place and everything’s going up, there’s a cheery consensus, as Buffett says, you’re going to pay a pretty price for a cheery consensus, be very careful. And I’m telling you know the people that are watching this, I’ve been doing it for 3536 years, and it’s still hot. I still have to work at controlling my emotions. And I say my young guys. I’ve got several other CFAs that work with me, four other analysts, and constantly pumping that into them too, when it feels bad, when it really don’t want you know the pit of your stomach, you can feel it. That’s probably a better opportunity to be looking for value and wait places to invest. Yeah. So control of your emotions. You know, Buffett Charlie Munger used to talk about this all the time. Your you know, your disposition, your attitude towards the market is critical. The market is manic depressive, as Benjamin Graham said many years ago, and it’s definitely the case. And as he, I think, Benjamin Graham also pointed out, in the short run, the market is a voting machine, very emotional, in the long term, a weighing machine, and so you want to get the weights right, not not the votes.
Trey Reik 47:43
Well, Jonathan, it’s always fun to talk to you, because whenever I do so, it always makes investing seem so logical and easy, because you stick with you know your cooking and you really know what you’re doing. And along those lines, if folks want to benefit from your experience and your perspectives and perhaps get a free portfolio review. What’s the best way to interact with you and your staff? Yeah,
Jonathan Wellum 48:10
the best way is check out our website, which is just rock link, link, Li, n, C, C, at the end rocklink.com and info@rocklink.com you send an email in, and we also has all our contact numbers or phone numbers we love. We’ve got quite a few wealthy on listeners that are clients, and we really appreciate them. They add a lot to our business. And we love to work with anybody that wants to, you know, come and talk with us and we’ll give a free assessment. There’s no pressure would come on in we’ll tell you what we think of the portfolio and how we would manage it and and you can get to know us. And we’d love to contact us anytime, and those that’s probably the best way to track us down.
Trey Reik 48:55
Excellent. Thanks for your time. Great to speak to you, and we’ll catch up in a month or so.
Jonathan Wellum 49:00
Fantastic. Thank you very much, Trey. If
Maggie Lake 49:03
you have any questions about how to navigate the current environment, wealthion can help connect you with a vetted advisor to get a free portfolio review, just click the link in the description below or head to wealthion.com/free there’s no obligation, and it will just take a few minutes of your time. Again, that’s wealthion.com/free thanks so much for joining us. We’ll see you again next time.
