Value Interview: Charles Fournier

This interview is with a retiree from Canada whose blog, Financial Freedom Is a Journey, focuses on building wealth and achieving financial independence through better investing.

He and his wife reached financial freedom in their mid-40s but they decided to continue working until their early/mid 50s so they could further build their investment portfolio of common stocks in high quality companies. Their investments now generate income well in excess of their expenses.

Tell us a little bit about yourself.

I am 61. My wife and I have been married almost 33 years.

After graduating with an undergrad degree in Economics in 1980, I accepted a position with one of Canada’s major 5 banks. After working 4 years, I returned to university to complete a Master of Business Administration (MBA).

Upon completion of my MBA I returned to the world of banking where I remained employed until I retired at 55; my wife retired a year before me at 52.

How did you get interested in investing?

The very day I started full-time employment in 1980 I realized I did not want to work until the typical retirement age (65+).

There was no real ‘Ah Ha!’ moment where I decided investing in equities was something that could help me achieve financial freedom.

When I started investing, the internet was non-existent so gathering information to analyze a company was much more cumbersome.

In 1988 I completed the Canadian Securities Course. At the time, course material was couriered and all assignments had to be completed and returned by courier or registered mail. The final exam was held in a hall which seated over 2000 people!

Recently, our daughter completed the Canadian Securities Course. The entire course was completed online!

Online discount brokerage accounts did not exist when I started investing. I do not, however, recollect how I made investment contributions or initiated trades.

I recall that one of my wife’s former university professors left academia and started a service where retail investors would invest in a handful of companies. The service was primitive in that any investment contribution or trade instruction had to be mailed/couriered.

The list of companies in which investors could trade was extremely limited.

Some companies were high quality but some ended up being outright ‘toxic’ (ie. Nortel and Lucent). I strongly suspect that if I were able to look at the list of companies for which we could acquire shares, many of those companies might no longer be in existence.

Eventually, the internet improved the entire self-directed investing process.

What book influenced your investing style the most?

There is no particular book that has influenced my investing style. I have read so many books that my investing style just naturally evolved.

The most enjoyable books I have read are not ‘How to’ books. I like the following: 

I also listen to interviews with well respected investors and senior executives of highly successful companies.

What has been the most defining moment in your investment journey?

I cannot think of a ‘most defining’ moment. There have, however, been a few which have helped shape the manner in which I invest.

  • The stock market crash of October 1987
  • The bursting of the .com bubble
  • September 11, 2001
  • The Financial Crisis

I think periods of turmoil are where we really learn about investing and our tolerance for risk. Everyone looks like a ‘pro’ when times are good. The true test comes when most investors are panicking.

The following are some experiences that are etched in my mind.

Experience # 1

One of my former MBA classmates was employed with Nortel during the .com craze. He told me that he had invested most of his savings in high tech companies including shares in his employer and suggested I invest in high tech companies.

Not long after his ‘recommendation’ the .com bubble burst and he lost a ton of money.

I retired years ago. He is still working. Enough said.

Experience #2

While on vacation in Florida in early 2007, our daughter was playing with another girl her age and I struck up a conversation with that little girl’s father.

He had purchased his parent’s real estate appraisal business. Business was brisk and he was looking to acquire investment properties in Florida; he ended up buying a couple of rental properties.

I never met this person again but with income generated from a real estate related business and investments in real estate, I suspect his personal circumstances took a turn for the when The Financial Crisis hit.

Experience #3

A widely followed analyst who worked for a firm in which people pay good money for investment advice recommended investments Wachovia, Bank of America, BB&T, and US Bank several months before The Financial Crisis.

This lesson taught me that nobody values your money as much as you. Do your own homework!

What was your biggest investment mistake, and what have you learned from it?

My biggest investment mistakes have been from an act of omission as opposed to an act of commission.

I suspect many investors can think of companies in which they intended to invest that went on to generate significant investor returns but they never acquired shares. My list is lengthy!

I have invested in high quality companies but sold shares following a run-up in the share price to capture a capital gain. I would have been far better off holding the shares for the long-term.

My worst investments through an act of commission have been nominal in value. Many years ago I acquired a few shares in Cameco, Lorus Therapeutics, and SNC Lavalin. I lost a little money on the first two and broke even on SNC.

Over time I have learned:

  • I hate losing money more than I like making money.
  • Invest only in high-quality companies.
  • Invest for the long-term if you have conviction in a company. Jumping in and out of positions is a fool’s game.

What do you think is the most common mistake investors make, and how should they deal with it?

A common mistake is that many ‘investors’ really have no idea what they are doing and ‘investing’ is a form of entertainment.

Many people should not even consider, for a variety of reasons, investing in individual equities. They would be far better off investing in a broad based Exchange Traded Fund. 

The following is a list of other common mistakes that readily come to mind.

  • Failure to invest for the long-term.
  • Disregarding the tax implications of investments.
  • Having a gambling mindset.
  • Chasing dividend yield.
  • Minimal understanding of financial statements.
  • Heavily reliance on stock screeners.
  • Thinking stock price movements is an appropriate method to make investment decisions.
  • Overlooking, or downplaying, risk.
  • Diworsification – this occurs from investing in too many assets with similar correlations that add unnecessary risk to a portfolio without the benefit of higher returns.

How has your investment strategy evolved over the years?

I spend far more time analyzing a company before initiating a position. In addition, I spend more time analyzing companies in which I have exposure.

I prefer to have a relatively concentrated portfolio. Over 73% of our investment portfolio is in 20 companies.

I know some investors have a few hundred thousand dollars spread over 150+ companies. This, in my opinion, is like throwing mud at the wall.

How do you approach risk management?

  • Losing money brings me greater grief than making money.
  • I typically restrict my investments to companies whose debt is investment-grade.
  • I look at the existing credit ratings and outlook (ie. stable or under review for a possible upgrade or downgrade).
  • When a company’s debt is not rated, I spend far more time analyzing the financial statements.
  • I read the 10-Ks and 10-Qs, Earnings call transcripts, Investor presentations, look at News Releases and also familiarize myself with industry trends and the company’s key competitors.
  • The companies in which I invest have a section in their financial statements that address the key Risks. This section typically follows the Business Overview at the beginning of, for example, 10-K reports.
  • I look at the schedule of long-term debt, the interest rates assigned to various obligations, and covenants associated with the debt.
  • I look at key metrics such as Operating Cash Flow and Free Cash Flow.

As an investor it has become increasingly difficult to find undervalued and fairly valued stocks in this market environment. How has this affected your investment process?

It has not really affected my investment process. If I deem a company to be overvalued then I look for another investment and wait for the overvalued company to become more reasonably valued.

What do you think is the single most important quality investors need to have?

I don’t think there is a single most important quality an investor should have. A successful investor must have various important qualities.

What good is it to have only one of the following: investment knowledge, discipline, patience, focus, goals, or money to invest? You need all these qualities.

What has been the most important piece of advice you have received as an investor?

There is no one most important piece of advice I have received.

The following are a few important pieces of advice I have received over time:

  • Never compromise on business quality. It is better to invest in a great business at a fair price than it is to invest in a fair business at a great price.
  • Truly understand an investment before investing money.
  • Think like a business owner. Have a long-term mindset.
  • Investing properly is not ‘Easy’.
  • If it sounds too good to be true then it probably is.

Warren Buffett aptly states:

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”

What advice would you give to investors?

Investing in individual equities is not for everyone.

Learn how to analyze industries and financial statements before investing real money.

Investing properly and successfully in individual equities requires a lot of work. Investing in low cost broad-based Exchange Traded Funds (ETFs) is often the best investment strategy for many retail investors.

If your intent is to take up investing as a hobby…STOP! Hobbies cost money.

The following are a few random thoughts that come to mind.

If becoming a successful investor were easy then more investors would be successful. A huge segment of the retail investor universe likely underperforms the broad S&P500 index.

If an investor decides to invest in individual equities then step #1 is to set goals that are:

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-bound

Once you have a goal then define your short, medium, and long-term objectives.

Value is about the intrinsic values of the cash flow in a discounted cash flow analysis. If something does not have cash flow, it must have a very strong probability of being able to be converted into a cash flow stream at some point in time. Some assets in this world do not fit this characteristic (eg. cryptocurrencies). Since cryptocurrencies have no intrinsic value I, therefore, do not view them as assets.

Assets should, at the very least, not be a drain on your cash flow. Shares in a high-quality non-dividend paying company, such as Berkshire Hathaway, is an asset because it has the potential to provide a positive investment return and does not require a continuous cash outflow.

It is pointless to invest in individual equities if you have high cost debt. If, for example, you are paying interest on outstanding credit card balances, you can generate an attractive return with 100% certainty simply by eliminating this high-cost debt.

Limit your equity investments to high quality companies.

Think like a business owner.

Do not day trade.

Monitoring stock price trends is not investing.

Imagine you have a punch card with ~30 punches and every time you invest in a company you use up one punch. You will make wiser investment decisions.

An investment consists of potential returns/potential risks. Know your risk tolerance.

If you manage your family’s financial affairs and could suddenly no longer do so, could someone step in and easily figure out what you have been doing?

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