The other day I posted a news bulletin about Tom Stanley shutting down his stellar Resolute Growth Fund.  The following is an article I wrote, well more like mashed together from bits and pieces of other articles (see references), about Mr. Stanley and his investing style.  Enjoy!



Introduction

Tom Stanley is easily one of the top money managers around.  His Resolute Growth Fund’s 33% ten-year performance is the best of any fund in North America, possibly even the world.  A $10,000 investment in Resolute Growth ten years ago is now worth $173,187.

So why have you not heard of Tom Stanley before?  Probably because Mr. Stanley shuns the media to avoid distraction from his ultimate purpose – making money for his unitholders.  Despite his phenomenal track record, for instance, I was only able to uncover a handful of articles written about him over the past decade.


Resolute Growth Fund:  Annual Average Performance

1 yr %	3 yr %	5 yr %	10 yr %	Incep  (mm/yy)
100.48	52.14	43.76	33.07	27.72 (12/93)

Resolute Growth Fund:  Yearly Performance

YTD %	2005 %	2004 %	2003 %	2002 %	2001 %	2000 %	1999 %	Incep  (mm/yy)
25.75	100.48	38.42	26.89	40.17	24.40	76.24	29.89	27.72 (12/93)

Biography

Mr. Stanley completed an undergraduate degree in psychology at the University of Western Ontario.  He found, like so many others with similar degrees in the mid-1970s, that he couldn’t get a job in his field.  On the advice of his mother, he took an MBA at York University.  After he finished in 1978, career opportunities still weren’t forthcoming.  Eventually, however, his interest was piqued in the securities business.  By 1980, Mr. Stanley was a trainee at Richardson Securities, a predecessor to RBC Investments.  Over the next seven years, he built a loyal retail clientele.  He left Richardson in 1987 to gain investment management experience at Deacon Morgan McEwan Easson, and he also qualified for a portfolio manager’s license.  Still, no one would hire him to run a fund.  So in 1993, after a mid-life crisis near his 40th birthday, he left Deacon to start his own fund.  “As I approached 40, I said, ‘it’s now or never.’”  The initial investors were mostly people he already knew, and they stuck with him through the first couple of rocky years.  The rest is now history.

Currently, Mr. Stanley’s office is located in North Toronto, far away from Bay Street.  Like all the best investors, he is thrifty.  His office sports assorted used furniture and, although running a $367 million fund, it houses just two full-time employees.


Investment Style

“I don’t have an original bone in my body,” Mr. Stanley says.  When he started, he studied John Templeton, Warren Buffett, Charlie Munger, and Peter Lynch.  Although Mr. Stanley’s investing style borrows from all of them, it is clearly distinct.  Only after he refined the lessons he had learnt did returns head into the double digits.

For example, like Templeton, he follows a ‘flexible’ investment strategy in buying both value and growth stocks.  But unlike Templeton and Lynch, and more like Buffett and Munger, Mr. Stanley does not believe in large diversification.  Typically, he holds just 10 to 20 stocks.  “Why should I buy anything other than my very best ideas?” he asks.  This also means he may concentrate on certain sectors and avoid others entirely.  Right now energy, including uranium, currently accounts for more than 90% of Resolute Growth’s holdings.  Lastly on diversification, unlike Templeton who scours the world, Mr. Stanley sticks to the Canadian market he knows best. 

Mr. Stanley is reluctant to be pigeon-holed as either a value or growth manager.  Rather, he is buying what makes sense at any given time.  This could mean overlooked companies that are not followed widely, or those that has become unpopular, but still has good fundamentals.  Like Buffett and Lynch, he also buys growth stocks at reasonable prices (GARP).  “All I basically do,” he says, “is look for inexpensive stocks relative to their growth potential with competent management.”  Of course this is harder than it sounds.  Mr. Stanley often looks through hundreds of annual reports before he finds a hidden gem.

Unlike most of his peers, Mr. Stanley is not afraid of small cap stocks with poor liquidity.  “The big companies were once small.  I’m trying to find the little companies that will be tomorrow’s winners.”  He also expounds, “Because small stocks are under-followed, they can be inefficiently priced.  And that’s when you get the real bargains.”  “In the short-term we underperform often,” he admits.  But, “We’re long-term investors.  I’m not buying a stock with the intention of punting it in a week.  [Instead of liquidity,] I’m more concerned about the valuation of the stock and the prospects for the business moving forward.”  Moreover, “I like to invest in businesses that make rational sense.  They also make sense from a valuation perspective.  And these businesses will be around for a while.”

After reading all his past recommendations, it seems Mr. Stanley employs all the usual ratios when valuing stocks: Earnings (EPS), P/E, Price/Cash Flow, small relative to large cap or industry, Price/Book, share buybacks, insider ownership, dividend yield, wonderful products, and growth.


Ahead of the Crowd

Tom Stanley always seems to be way ahead of the crowd.  In the late 1990s, for example, he shunned Internet and high-tech stocks because of their high valuations and unsustainable businesses.  Instead he favored pharmaceuticals and biotech companies.  In the second quarter of 2000 he made a big bet on oil, based on long-term demand/supply imbalance, even though public sentiment was very negative.  (On March 6, 1999, the Economist trumpeted: “The world is drowning in oil.”)   In general, says Mr. Stanley, you can make a lot of money betting against commonly held beliefs – provided you do your homework.  In 2004, when oil stocks became recognized, Mr. Stanley concluded the best value was rather in oil sands; he bought UTS Energy Corp. (UTS.TO) in a big way, and is still a holder even though it has since tripled.  Finally, in 2003, he zeroed in on uranium – again, same reasoning: Demand is rising (more reactors being built) while supply is depleting.  Even Russia, having run out of bombs to dismantle, is prospecting for uranium.  Yellowcake prices have risen more than 40 per cent annually over the last few years, and in next five years there is a possibility of a buying panic, says Mr. Stanley; so uranium producer Cameco Corp. (CCO.TO) is a favorite holding.


5 Simple Commandments for Smart Investors:

1. Get info directly – do not rely on others for factual research.  It’s dangerous.
   
   
2. Look for conflicts of interest: What people lie about or fight over is often important.
   
   
3. Take notes of everything you do, and go back to see what worked and what didn’t.
   
   
4. Look at what the smart money does – as defined by those whose actions have worked.
   
   
5. Tom tracks physical supply and demand meticulously.  And although he prefers to invest in Canadian companies, where his access to information is best, he tracks supply and demand globally, then makes a few big bets and stays with them, disregarding quarterly – and even yearly – declines.

Tom Stanley's 14 Commandments:

1. Be a long-term investor. Stanley decries the market's obsession with short-term returns, arguing that it's far easier to anticipate longer-term trends. As he says, "I can't tell you what oil is going to be next month, but I think that by 2010, it will be significantly higher than it is now." Thinking long-term means you can also consider investments in less liquid stocks. "You're not going to be worried about punting it out next week and taking a loss because it's too thinly traded."
   
   
2. Be flexible. Inspired particularly by John Templeton, the idea is to buy whatever stocks provide the best return to unitholders, regardless of sector. Stanley will buy growth issues, but if the market starts paying too much for them, he'll change his focus to value. Resolute Growth, while often classified as a small-cap fund, will buy large-cap stocks if Stanley sees something he likes. Whatever works.
   
   
3. Hunt for ideas. Investments should not be made on the basis of "readily available information"—i.e., what everyone on the street knows as well as you do. Instead, do your own wide-ranging due diligence, evaluating companies, management and markets. "There's roughly 4,000 stocks in Canada and we have looked at just about every one of them," Stanley says.
   
   
4. Be skeptical of information sources. Always check the facts you have (it helps to have a sound fundamental knowledge of accounting) and strive to understand the biases and potential conflicts of interest among the sources that provide them. Such caution led Stanley to avoid investing in tech stocks before the bubble burst.
   
   
5. Invest alongside your clients. Stanley invests all his own money in Resolute's two funds because he believes he should be one with his unitholders. For the same reason, he prefers to buy companies in which management and directors own shares themselves.
   
   
6. Buy your best ideas. Stanley concentrates his holdings in comparatively few stocks, in the style of Warren Buffett, so that he knows each of them intimately. "Today, the Resolute Growth Fund has 14 great ideas, 14 stocks," he says. "I don't have 150 good ideas, so I'd rather buy my best 14."
   
   
7. Strive for "effective rationality." A favorite mantra of Berkshire Hathaway's Charlie Munger, it simply means that it's vital to sort and grade the quality of information that bombards an investment manager. Or, as Stanley says, "filter out the noise."
   
   
8. Be thrifty. Stanley prides himself on Resolute's minimalist office because it saves money. Similarly, Resolute Growth Fund's fees are less than average—a 2.14% all-inclusive management expense ratio—which means more money in the unitholder's pocket. "It's a tough environment out there and you have a much better chance of getting superior returns for your investors if you're charging reasonable fees."
   
   
9. Outperform by being different. To produce above-average performance, you have to build a fund that doesn't mimic key indexes. Says Stanley: "We consciously position the fund to be very different from the TSX Index."
   
   
10. Know your limits. Stanley is convinced that you can be a more sure-footed investor if you aren't too big or growing too fast. His two funds, Resolute Growth and Resolute Performance, manage slightly less than $450 million in assets between them. Stanley feels he can make fewer and better choices managing this amount than he could if he was handling several billion. Likewise, Resolute Growth was closed to new investors last fall because Stanley felt it was growing too fast for him to continue making thoughtful investments.
    
    
11. Stay humble. Templeton once exhorted members of an investment audience to "work at being a humble person," and Stanley subscribes to the virtue wholeheartedly. Hubris, he says, leads to investment failure, but humility breeds an open mind that continually seeks good ideas and is prone to heeding good advice.
    
    
12. Stay in your circle of competence. Buffett has often said that investors should stick to what they know. In Stanley's case, that means he stays in the familiar Canadian equity market. "It's easier for me to find opportunities that I can understand here," he says.
    
    
13. Be a contrarian. Stanley thinks some of the best buying opportunities can be found in sectors that lack a following or are unpopular. Bull markets, he says, can take a long time to develop, and if you sense a distant upward trend in an industry or sector—as he did with energy—you have to be prepared to buy in and wait, even if your peers look askance.
    
    
14. Apply spiritual principles. Templeton teaches that a daily prayer for wisdom can help you avoid making investment mistakes—that those who approach investing in a spiritual way are likely to find greater success. Stanley believes this too, although he also prays to be able to serve his unitholders well. Why? He figures they showed a lot of faith in him in Resolute Growth Fund's first rocky years and he should try to return the favor.  “Since 1994, I have been praying for wisdom, to be able to serve my unitholders.  I really think it works.”

One of his best decisions?  Shunning high-tech stocks during the dot-com mania.  “Many technology stocks had sky-high valuations.  There is a lot of competition and the technology changes so quickly.  I didn’t know if their businesses were sustainable.”

His biggest mistake?  The fund’s first two years were “not too great,” because he broke rule No. 1 and relied on facts supplied by others.  Since then he has done his own research, and results have followed.



References:

1. 1996-09-04 – Mutual funds Small size no bar to fat returns
2. 2000-10-14 – Hot Hand
3. 2001-05-29 – ‘Mid-life crisis’ fund outdoes peers
4. 2001-09-28 – Tom Stanley
5. 2003-01-06 – 25 ways to play
6. 2005-07-09 – Five simple commandments for smart investors
7. 2005-08-15 – Tom Almighty
8. 2005-12-08 – Morningstar Canada Fund Manager of the Year