June Update, 2020: Our Equity is Integrity

Last week we received a letter from a BNN viewer. He reminded me of a comment I had made almost 2 years ago on TV about Spartan Energy, a company we had previously recommended and owned. The management of Spartan had a good track record of success, they had made all the right decisions, and managed well in the down draft of the energy crisis. Suddenly, they sold the company when there was no compelling reason to do so except one—management would make a quick $30 million on their soon to expire options. It was a disgusting act of corporate and managerial greed. I said so on TV.

The gentleman who reminded me of this expression of disgust wrote:

John,

Recently I read some comments by an analyst I have followed for some time.  This time I was astounded by the way he casually dismissed a company’s entry into bankruptcy protection, a company he had advocated for years.  Not the first time I’ve seen him sidestep a bad recommendation, I’m afraid.  

 This reminded me of your comments two years ago about Spartan Energy.  I was stunned by the terms of their sale to Vermilion, yet I watched in amazement as former Spartan advocates tried to defend the deal.  It was good for Vermilion and for Spartan management, but no one else.  In a depressed market, to collect on their performance warrants before they expired, Spartan management gave away the company.  

You were one to say this, in no uncertain terms.  Not everything works out as we expect, even with the utmost carefulness of study.  To admit a mistake, in my experience, brings credibility, especially when no one else is willing to do so.  

It’s been two years and most of us have forgotten all about it now.  My recent experience reminded me though, and I just wanted to reach out to you to express my appreciation.  

Thank you for being honest, when few others would.  

I have recently been doing a class at the Rotman School of Management and we were tasked with a ‘values’ exercise. The process involved sorting 53 words into 3 categories—always, sometimes and never. Once sorted, you could take only 15 from the always category, and prioritized them in order of importance to you. While sometimes they changed based on your mindset during the activity, invariably, my top word always seemed to be integrity. This word is at the center of my core belief system. At Davis Rea, we believe that our equity is our integrity. It’s a statement that can easily be thrown around, but one that I hold to be the absolute truth and to be fundamental to the survival of our company. Our clients rely on our integrity first and foremost, and without our clients there is no business. Simple. 

I am painfully aware of my short comings as an investor. It’s a tough space, and the batting averages can be low while still resulting in a rewarding career. That I have survived 35 years doing this business of investing probably proves that the bar is low! What I cannot brook is being around, supporting, interacting, or associating with anyone who lacks basic integrity and breaks their duties to others. Too many in our community—buy side, sell side, and the companies we can invest in—lack this most basic of values. It is disgusting, and while I know that is a harsh indictment, I’m getting old and opinionated. 

Some time ago, I made it a practice to eliminate companies from our possible purchase list. The less you must pay attention to, the more time you can spend on quality businesses and the people that run them, which should make for better long-term investing outcomes. Unfortunately, it’s hard to find character flaws until after the fact. Weakness of character is often not exposed until adversity presents ethical dilemmas. Once exposed though, it must be called out as a harbinger for all to know. The brokers won’t do it. The buy side usually just remains silent, seeing little to be gained by calling out bad behavior. There are a multitude of confirmation biases and compromised incentive structures that often overwhelm this industry and its users. It is why I could no longer work for a bank being paid handsomely but having to compromise my integrity. Money or the attainment of wealth is not on my priority list of values.

I am privileged to be afforded the opportunity to expose our ideas through media channels such as BNN. The first directive in that privileged position and to mitigate these above noted weaknesses, is to tell the truth, admit mistakes, and call out poor behaviour. I think it also allows for our firm to be noticed as honest and trustworthy. This should reinforce our brand values and may lead to a successful enterprise. Truly though, the best reward is to have unsolicited acknowledgement like the gentleman did in his e-mail to us.  

Business news is a flawed process for many reasons. To try and rectify this, we will soon be launching our own ‘media channel’ to offer insight in an unbiased, informed, educational, and conversational format. We hope to collaborate with others whether they be investors, management teams of companies we may or may not own, or other thought-provoking and leading members of the investment community. Our goal is to explore opportunities or discuss problems in an environment that fosters a more insightful and meaningful exchange of information. The goal is to make the viewer more informed than before. There is a void, and whether we have the skill and resources to pull it off remains to be seen. However, at my core, I need to at least try because media as it is presently constructed is unable to and has no interest in changing. Stay tuned for the launch of Uncommon Sense and if you want to subscribe, then please click the button in the newsletter, or sign up with your information below. 

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