“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
So says Benjamin Graham, one of the pioneers of the investment profession and Warren Buffett’s professor at Columbia University.
Following on that theme, BloombergSen has been managing money for investors since 2008, but traces its roots back to legendary Bay Street financier, Lawrence Bloomberg, who is Chairman of the firm. Lawrence, who sold his investment dealer to National Bank for over $700 million in 1999, along with co-founders Jonathan Bloomberg and Sanjay Sen, have almost 100 years of investment experience between them.
The World Financial Review sat down (virtually) with Lawrence, Jonathan and Sanjay to get their advice on investing in the current, very uncertain, environment.
“We are bottom-up, concentrated, long-term value investors,” says CEO, Jonathan Bloomberg. “We buy only our best ideas, and only when they are cheap, and do not diversify just for the sake of diversification. When we buy a stock, we consider ourselves to be purchasing a fractional share of a business, not a piece of paper that trades or a quote on a computer screen.”
Lawrence Bloomberg added, “When you hold fewer securities, each one is a more significant proportion of the portfolio, which allows you to reduce risk while boosting your return potential. It reduces risk, in our view, because taking larger positions requires the companies to jump over a much higher bar and forces you to know each company better. The potential return is greater because your money is concentrated in your best ideas.”
“Our investment approach and principles are the same regardless of what’s going on in the world,” says Chief Investment Officer, Sanjay Sen. “We believe if you follow a few key tenets, they can guide your investment decisions through any market.”
So what are these guiding principles? Here’s a summary from my discussion with the three professionals:
First, invest in businesses that possess strong balance sheets, wide profit margins and earnings that are less sensitive to economic activity. Such businesses usually sell products that are more non-discretionary in nature, are purchased with high and recurring frequency and have a limited number of substitutes. A slower growth economy carries a greater risk of negative shocks, and when such shocks occur, the stock prices of these types of businesses may be volatile but their earning power should remain intact.
Second, focus on return on invested capital. Though the BloombergSen portfolio’s earnings yield is high, on average, its holdings pay out only a portion of their earnings in dividends. So it is critical to determine management’s incentives, philosophy and track record in allocating excess capital. While investors seem to love receiving dividends, where company management has utilized retained earnings for buybacks or acquisitions, they may create more value for shareholders than they would by simply paying out all of their income in the form of dividends.
Finally, invest in companies that produce abundant free cash flow. From a defensive standpoint, these businesses continue to do well when banks and capital markets become jittery because they are not at the behest of either. In a slow growth economy, they have a major advantage in that they can use their free cash flow to augment their organic earnings growth through acquisitions and share buybacks and are better positioned to increase their market share. Many of BloombergSen’s holdings have made highly accretive acquisitions in the last few years.
Lawrence summarized all the above with a metaphor: “when you get on a plane, you may experience some turbulence, but most of us stay calm and always reach the final destination. Our approach to investing is to seek the best planes with the best pilots and to ignore the turbulence along the way – which is very hard for most investors to do.”
“As business owners, we realize that time is required to build and realize value. We remain confident that buying cheap, staying focused on a limited number of companies, being patient and approaching investing as a business owner rather than a speculator will yield solid long-term results,” concluded Jonathan Bloomberg.
If you follow the principles BloombergSen’s partners have described, we think you will have a better chance of reaching your investment destination…you might even make it into first class!