Make sure you read how Tom Stanley created the best mutual fund 10-year record.  All it takes is a few good ideas and the guts to bet big.  I really liked his logic buying uranium stocks when the price of uranium was $7.10 which subsequently rocketed to over $40.  And how he bought UTS energy with reserves valued in the market at $0.08 a barrel.  Talk about margin of safety!

Uranium is an essential commodity primarily used to supply the nuclear power reactors that produce 16% of the world's electricity. Mine production has been lower than demand every year since 1985 driving inventories dangerously low. Demand is still rising particularly in five Asian countries, China, India, Japan, South Korea and Russia who are on reactor building sprees. We heavily overweighted an industry that was virtually unfollowed on Bay Street. Uranium prices subsequently skyrocketed to over $40 from their 2001 lows of $7.10, with of course enormous benefits to the underlying stocks.

We made an even bigger investment in the Canadian oil sands, containing arguably more oil than Saudi Arabia. Our reasoning was simple: if oil prices remained much higher than the price that was forecast by Bay Street, the oil sands companies with their massive reserves of admittedly higher cost oil would benefit enormously. Pessimism about oil remained rampant; the Street was continually forecasting far lower prices for oil than currently existed. In the summer of 2003 our favorite was UTS energy, a small cap with proven oil reserves that were valued in the market place at $0.08 a barrel! There was no current analyst coverage of the company at that time. Our strategy worked.

I've posted his philosophy before.  But here is a revised list from Tom Stanley's website:

1. Be a Long Term Investor
   Too much emphasis is placed on short-term fluctuations. It is easier to anticipate long-term trends.
   
   
2. Have a Flexible Approach
   Change is the only certainty and as markets change, one should change as well.
   
   
3. Actively Look for Ideas
   I find many of my best ideas; they don't find me.
   
   
4. Be Skeptical
   Check facts directly. Strive to understand the bias and potential conflicts of interest among the sources that provide them.
   
   
5. I Eat my Own Cooking
   My only stock market investment is the Resolute Performance Fund. This aligns my interests with the rest of the unitholders.
   
   
6. I Buy my Best Ideas
   I prefer to buy only my best ideas.
   
   
7. Filter out the Noise
   One of the greatest challenges is to filter out the noise and use only what is relevant.
   
   
8. Be Thrifty
   Moderate costs facilitate moderate fees. Moderate fees facilitate performance.
   
   
9. Outperform by Being Different
   To have a chance of outperforming the market, invest differently than the market.
   
   
10. Know Your Limits
    It is just as important for me to know what I don't know as it is to know what I know.
    
    
11. Stay Humble
    Stay humble or the market will make you humble.
    
    
12. Being Small is an Advantage
    It is easier to outperform being small.
    
    
13. Apply Spiritual Principles
    An important measure of one's success is how much he benefited his fellow man.
    
    
14. Investing is Not a Team Sport
    The best decisions are rarely made by committee.
    
    
15. A Good Card Player Does Not Show His Hand
    Confidentiality is essential for successful small cap investing.
    
    
16. Too Much Emphasis is Placed on Precision
    I don't need exact numbers to make decisions.
    
    
17. Be a Contrarian
    Being a contrarian is harder in practice than in theory.
    
    
18. Strive for Effective Rationality
    Do the homework; know the facts; and make decisions based on the facts.

Tom Stanley's Resolute Growth Fund has the best 10-year record for any public fund in the world.  Here is a combined chart of Resolute Growth (which ended last year) and Resolute Performance (his new and only fund) from December 3, 1993 to December 31, 2006:

While I was at it, I thought I would collate all the stock recommendations Tom Stanley has made in the past.  Personally, I find it way more helpful learning from examples.  The following gives you an excellent peek into how the world’s best portfolio manager thinks, and how he values stocks.



1996-09-04 – Mutual funds Small size no bar to fat returns

Scintrex Ltd., a scientific instrument maker in Concord, Ont., is one of his favourite stocks. It makes up 32 per cent of the fund. He bought shares for $3.81 and they closed yesterday at $25.15 on the Toronto Stock Exchange.

"The company makes a very good portable bomber sniffer and it has just developed a portable narcotics sniffer," he said. "It currently trades at about 15 times earnings and I think there is a lot more potential."

Mr. Stanley also likes pharmaceutical company Cangene Corp. (CNJ.TO) of Mississauga, which is 87 per cent owned by generic drug maker Apotex Inc. of Toronto.

And he is keen on pharmaceutical company Dimethaid Research Inc. (DMX.TO)  of Markham, Ont., which is developing a prescription arthritis pain reliever and another drug to stimulate the immune system of AIDS patients. Not listed on the major exchanges, it trades on the Canadian Dealing Network.



2000-10-14 – Hot Hand

In mid-September, Mr. Stanley bought Sherritt International Corp. (S.TO), a Toronto-based firm with a $360-million market capitalization that mines nickel and cobalt in Cuba and produces oil and gas. Purchased at $5.20 a share as a opportunistic play on its low valuation, at $4.90 it's priced at four times earnings of $1.29 a share for the past four quarters, and 60 per cent of book value of $8.20 a share, Mr. Stanley says.

"This stock is cheap because people worry about the stability of its Cuban operations," he says. "Some discount for the Cuban base is reasonable, but this discount is just too large." Earnings are zooming because of skyrocketing prices for oil, gas and nickel, he says.

As well, he bought Benson Petroleum Ltd. (BEN.TO), a Calgary-based upstream oil and gas producer with a small, $42-million market cap. Purchased in late summer for an average cost of $1.85 a share, the firm, which is trading at $1.98, 4.2 times trailing cash flow of 47 cents a share and only 1.8 times net asset value per share of $1.13, is a victim of its low visibility. Revenue, which rose 47 per cent in 1999, compared with 1998, should rise even further in 2000 as oil and gas prices remain high, Mr. Stanley says. The firm is also buying back its stock, which supports its price, he says.

In the summer, Mr. Stanley also bought Tethys Energy Inc., a Calgary-based oil and gas producer, at an average cost of $1.80 a share. With a $50-million market cap, the firm is a play on rising oil and gas prices. "Tethys is trading at $1.71, 6.3 times trailing earnings of 27 cents a share and 4.3 times trailing cash flow of 40 cents a share." It's another oil company that's selling at a big discount because of its small size, he says. "If this were a large oil and gas producer, its ratio of price to cash flow per share would be appreciably higher. And if this firm gets to be larger, it will be more appealing to the market."



2001-09-28 – Tom Stanley

Among the $34-million fund’s holdings is TSE-listed Continental Home Healthcare Ltd., a Vancouver-based consolidator and manager of health-care equipment retailers.

“It's cheap, well-managed and in a fast-growing industry,” says Stanley, adding that Resolute Growth’s small size allows him to take meaningful position in Continental, which recently had a market cap of only $12 million.



2003-01-06 – 25 ways to play

Stanley likes to concentrate on stocks that are below most investors’ radar. This usually means investing in smaller companies (often, management of the companies he’s bought into have told him he’s been the first institutional investor to make contact or take a position) though Stanley says he won’t hesitate to put money into a larger-cap stock if it fits his philosophy and comfort level. Currently, only two stocks among his holdings—nickel, coal and oil producer Sherritt International Corp. (S.TO) and insurer Fairfax Financial Holdings Ltd. (FFH-SV.TO)—are large enough to be found on the S&P/TSX Composite index. He is also careful not to load his funds with too many companies. In mid-December he had only 15 stocks in his portfolio, the ones “that make the most sense” to him. “I might hold 12; I might hold 20. I would never expect to hold 100,” he says.

Stanley also says he doesn’t mind investing in a company that’s become unpopular, if, after due diligence, he feels it’s a sound choice. Sherritt, for example, trades at less than half of book value, in part because of what Stanley calls the “Cuba discount”—the nervousness surrounding the company’s hotel operations there. As for Fairfax, the stock, which once topped more than $600 a share, dropped to less than $120 recently. But Stanley says Fairfax “is still a strong company,” with its book value growing at an average annual rate of 30% over the past 15 years, yet trades at half its book value of $240 a share. He also points out the company’s chairman and chief executive, Prem Watsa, and other Fairfax insiders have been buying back shares. This fits into another strategy Stanley employs: favoring companies “where management eats its own cooking.”

One low-profile stock that Stanley took an interest in is Morguard Corp. (MRC.TO), a real estate holding company based in Toronto. It trades at about two-thirds of book value and three times cash flow. It also pays a 3% dividend. “There’s tremendous value here,” Stanley says, noting the stock softened after it was taken off the S&P/TSX index, mainly because it didn’t meet liquidity requirements. But Stanley isn’t afraid of stocks with little liquidity, saying he’s quite prepared to slowly accumulate “a meaningful position” if the company meets his criteria.

Another holding in the Resolute Growth Fund is Pulse Data Inc. (PSD.TO), a growing Calgary-based company that specializes in marketing and licensing “high-quality” seismic data to the oil and gas industry. It trades at about $1.20, a discount to its book value, and at a single-digit price-to-earnings multiple. Stanley has also bought into Dimethaid Research Inc. (DMX.TO), a pharmaceutical company based in Markham, Ont. Dimethaid’s two technology platforms focus on transcellular drug delivery and immune system regulation, with applications in such areas as relieving osteoarthritic pain and combating opportunistic infections associated with AIDS.  Stanley had previously owned shares in the company, but sold out of it in 2000. Even though he knew that Dimethaid, which had no earnings yet, had wonderful products in development, the stock (which had climbed to the mid teens) had “gotten way ahead of itself. Dimethaid, which now trades about $2.20, came down to levels that made it attractive again, says Stanley, who started buying it in the $2 range. “It’s a company I liked for its growth prospects, at a price I could feel comfortable with.”



2005-07-09 – Five simple commandments for smart investors

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.

For example, 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 Tom, you can make a lot of money betting against commonly held beliefs -- provided you do your homework.)

In 2004, when oil stocks became recognized, Tom 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 Tom; so uranium producer Cameco Corp. (CCO.TO) is a favourite holding.

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

Resolute Growth - Canada’s top mutual fund - is shutting down!  This is truly a sad day for Canadians.  Portfolio manager Tom Stanley decided to terminate the fund because of escalating red tape and regulatory costs:

Resolute Growth fought for an exemption to the new disclosure requirements that force the fund to reveal its 25 largest holdings every quarter. Typically, the fund holds less than 20 equities and Mr. Stanley believes privacy is key to his success.

Mr. Stanley is known for total secrecy.  Since he typically holds just 10 to 20 stocks, it takes awhile for him to build a meaningful position.  If he has to publish his holdings every quarter, copycat investors rush in and bid up the price.

His performance over the past 12 years has been phenomenal.  Actually, it’s out of this world.  Since inception, Resolute Growth has averaged 27.72% per year.  Its 10-year average is 33.07%.  Its 5-year is 43.76%.  Its 1-year is 100.48%.  Yes, in case you thought you were seeing things:  a 100% increase in 2005.

Mr. Stanley says his decision to close is final.