It happened a whole career ago, but Tom Stanley remembers the epiphany as if it were yesterday. On a warm Friday evening in June, 1982, the young retail broker was watching Wall Street Week, paying particular attention to host Louis Rukeyser's guest, legendary fund manager John Templeton. Stanley was awed by Templeton's long-term thinking, his flexible approach to the market and his evident thrift. Stanley resolved to study Templeton's style. He also set his sights on some other proven giants, including Berkshire Hathaway's Warren Buffett and Charlie Munger, and Fidelity's Peter Lynch. What he learned, he would apply to his retail brokerage clients, and later to fund management. "It was a great inspiration. My ultimate career dream was to run a mutual fund," Stanley says.
It was more like a nightmare at first. Despite his solid record running managed accounts in the early 1990s, Stanley couldn't get a job as a mutual fund manager. And after he anted up his own cash and that of long-time clients to start his own Resolute Growth Fund in late 1993, he endured an uneven record for five years. It was only after he refined the lessons he'd gleaned from the masters that returns headed into the double digits.
Today, the 50-year-old Stanley proudly stands in front of Resolute Growth's precipitous "mountain chart." It shows that an investment of $10,000 made when the fund opened in 1993 is now worth $161,664. Resolute Growth has the best 10-year performance of any fund in North America, if not the world. Its one-, five- and 10-year rates of return are 122.6%, 40% and 30.9%, respectively.
"Good investing is quite simple," he says. "Like Warren Buffett said, it's kind of like going to divinity school for four years and finding out that all you really needed to know was the Ten Commandments."
In Stanley's case, though, there are 14 commandments, handed down by the great market prophets (see "Tom Stanley's 14 Commandments" at right). The four most important are: Be a long-term investor; be flexible; hunt for ideas; and invest alongside your clients. These fundamentals, coupled with his maverick style and a decision to stick to the Canadian market he knows best, have led Stanley down what were at first some lonely pathways. He eschewed high-tech stocks in the late 1990s because he was "uncomfortable" with the valuations, favouring instead pharmaceuticals and biotech companies. By 2000, he was switching into oil and gas stocks because he sensed a long-term rise in inflation and oil prices. More recently, he's built holdings of uranium stocks because he believes the long-term rundown in international inventories, coincident with rising demand for nuclear power generation, bodes well for the element's prices and the share prices of producers.
Energy, including uranium, currently accounts for more than 90% of Resolute Growth's holdings (13 companies and one income trust). But that's today. "If we ever reached a point in the cycle where I could say we're able to find better opportunities elsewhere, I would not hesitate to sell every energy stock," Stanley says.
Like his mentors, Stanley is to the point and free of pretense. The mountain chart is virtually the only artwork that graces his Spartan north Toronto office suite, which houses just two full-time employees and assorted used furniture. The day of our interview, Stanley is dressed in faded black shorts, a grey golf shirt, white socks and jogging shoes--no better appointed than his pre-owned-Ikea surroundings. A trim six-footer who sports a crew cut and a five o'clock shadow, he looks more suburban soccer coach than market sage. His office is only a few blocks from his home (and wife and six children), but it's light years from Bay Street. Stanley seldom goes downtown, preferring to let his "vice-president of everything," Irina Yakhnin, put in face time with brokers and other fund managers. The low profile is deliberate: Stanley reasons that publicity and the potential self-aggrandizement it entails can only distract from his ultimate purpose--making money for his unitholders.
His performance and his operating style have not gone unnoticed, however. Randy Oliver, who manages Calgary-based Norrep Fund, a small- and mid-cap public and private equity fund with one- and five-year returns of 56.3% and 30.2%, respectively, talks to Stanley periodically and likes what he hears. "He tends not to overdiversify and in many ways puts his money where his brain is," Oliver says. "He's done that consistently and achieved high returns relative to most investors."
Bill Bonner, who manages Dominion Equity Resource Fund in Calgary (with one-year returns of 54.8% and five-year returns of 32.4%), is another admirer. When Bonner worked at investment dealer Peters & Co. in the 1990s, Stanley was a client who impressed with his creativity. "I think that people who know him would recognize him not as a contrarian, but as someone who does take a little bit different approach to finding value. He's not afraid of small enterprises, and a lot of managers are."
Stanley's achievements stand in contrast to an unremarkable background. The youngest of seven children, he was raised in Mississauga. His late father was a chemical engineer who worked in the pulp and paper industry, eventually specializing in the design of cardboard boxes. His mother was a teacher turned homemaker. Despite his size and athletic look, Stanley was more enthusiastic than gifted on the playing field, finding greater success on the high school chess club and in the spare-hours pursuits of Monopoly and bridge. Given his ultimate calling, he figures his teenage years were time well spent. "The market," he says, "is like a big board game and, amazingly, you get paid to play it."
After high school, Stanley took 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. He devoured inspirational books like Richard Bolles's job-hunting bestseller, What Color Is Your Parachute?, and he badgered every market-savvy person he met for advice. The most fruitful of these contacts was Bill Burt, who piqued Stanley's interest in the securities business. By 1980, 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 licence. Still, no one would hire him to run a fund--so, in 1993, with his 40th birthday looming, he left Deacon to start his own.
He had already learned some hard lessons. In 1980-'81, with markets trending southward, Stanley had followed the crowd and produced only average results for his retail clients. In 1984, he played a short-term hunch that oil prices would collapse in six months or less. They did collapse, but it took a year. At other times, he recalls, he didn't do his own homework and was misled by information from others.
Armed with these lessons, he started Resolute Growth Fund in 1993, using his own money and funds from long-time clients. He started small and did no advertising. "If it was successful, fine. If it wasn't, nobody would know about it and I wouldn't be embarrassed."
By 1995, his fund performance was running flat and Stanley felt he was stretched too thin from also running his own brokerage firm, Stanley Investment Management Ltd. So he dissolved the firm and headed back to Deacon to devote himself to building Resolute and serving his retail clients. He then had to move under the umbrella of no less than three other firms in sequence (two of them, Thomson Kernaghan and Yorkton Securities, went through troubles that meant his job no longer existed). He finally severed his ties to brokerage altogether in 2004. Through this period, he also developed the trading expertise essential for a fund that has many holdings in stocks that are small-cap, and hence illiquid. Says Norrep Fund's Randy Oliver: "He's moving maybe 10% of a company's stock at any time. . . .What he's doing are often very tough trades because of the volumes that he deals in."
After 1995, Resolute's performance shifted from horizontal to vertical. Last October, in fact, it was closed to new investors because Stanley feared that its rapid growth in net asset value ($367 million as of July 22) would erode returns. This June, however, he began Resolute Performance Fund as a private fund with a $150,000 minimum investment requirement. It has so far bought the same stocks as those in Resolute Growth. The commandments, after all, are working, so why change?
Of the 14 commandments Stanley has derived from his models and mentors, the ultimate is John Templeton's advice to treat mutual fund investing as a spiritual fiduciary undertaking. "Since 1994, I have been praying for wisdom, to be able to serve my unitholders. I really think it works."
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 favourite 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 favour.
© 2007 The Globe and Mail. All rights reserved.
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