By Jean-Philippe Legault, guest contributor

In a recent blog,Philippe Le Blanc explained that COTE 100 has developed a checklist over the years. Before any purchase decision, our investment team must answer the questions on this list, which has been improved following errors that we have made or observed.

In the stock market, it is inevitable to make mistakes. The important thing is to learn from your mistakes and seek to improve your decision-making process. The checklist allows us to write different questions that we do not want to forget. Here are two examples.

Question 25: Do the company’s products and services have a “WIN-WIN” model for all stakeholders?

In 2009, we purchased Apollo Group stock in some of our clients’ accounts. Apollo was the largest for-profit post-secondary education provider in the United States. Its main asset, the University of Phoenix, accounted for nearly 90% of its revenue.

The company seemed to have all the characteristics we look for in a long-term investment. It had a good track record of growth and profitability, an impeccable balance sheet, a reasonable valuation and offered good growth potential. Unfortunately, we made a mistake when evaluating its  business model. The model was profitable for shareholders and managers, but not necessarily for customers. The University of Phoenix invested heavily in advertising to attract a large number of students. The latter did not necessarily have the right profile. After going into debt through the government loan program, many students did not complete their studies or get jobs after completing them. Therefore, the government imposed new rules on private universities to restrict this type of activity. As a result of these changes, revenues and profits dropped significantly.

A few years later, we sold our shares at a loss. Nevertheless, we benefited from this negative experience and added this issue to our checklist so that we no longer invest in situations where not all stakeholders come out ahead.

Question 72: Is the company’s strategy clearly defined?

In 2021, in a text for our management clients, I used the example of Freshii restaurants to discuss strategic pitfalls to avoid. Among other things, I explained that the company seemed to have no clear priorities. In 2017, when it went public, Freshii had approximately 240 restaurants in more than 15 countries. Specifically, it owned 100 restaurants in Canada, 100 in the United States and 40 internationally. There was one restaurant in Ecuador, one in Austria and three in Saudi Arabia. It also sold its products in sports stadiums and on airplanes. The company didn’t seem to know where to prioritize its growth. In our view, its strategy was not clearly defined. The stock experienced a total negative return of 80% between its IPO in 2017 and the time of its privatization in 2023.

COTE 100 has never held Freshii shares in its portfolios. However, we were able to observe this strategic error on the part of management and add it to our checklist.

The world of investing is a complex environment. An investor should accept making errors resulting from a lack of experience, knowledge, or difficulty in analyzing a complex situation. However, he should do everything to avoid repeating the mistakes he has already made or observed in other investors.

The creation of a checklist supports the investor in this process. For us, it is also a great way to pass on the knowledge of our experienced managers to our younger employees.