I forget where I read this phrase, but it caught my attention. In my opinion, it sums up our “value” investment philosophy.

In the 1990s and early 2000s, at COTE 100, we managed the COTE 100 RÉA-Action Fund, which invested in Quebec stocks eligible for the Régime Épargne-Actions (RÉA) or Equity Savings Plan. As this fund invested in young Quebec companies, we had the opportunity to see many companies, several of which were losing money. Our strategy in the fund was to concentrate our investments as much as possible in eligible companies that were profitable, which significantly limited the range of companies in which we could invest.

The observation I drew from this experience is that it is difficult to make money by investing in companies that are not yet making a profit. Most of the time, these companies present great stories, interesting potential on paper and, often, the claim to revolutionize a sector of the economy. I would say that it was also at this time that I realized that most business leaders were excellent “salespeople”.

To me, companies that have yet to turn a profit represent a speculative bet. The challenges and risks for any business are multiple and high; imagine what they represent for a company that does not make a profit. Besides seeking to increase its revenue quickly by investing in the development of its activities, such a company must financially absorb its losses and constantly ensure that it has sufficient capital available to continue its development. Unless they manage to break even quickly, such companies become dependent on the generosity of others, whether banks for lines of credit or investors for the purchase of new shares.

Of course, some businesses achieve the improbable and eventually achieve profitability. But for every success, how many others have failed? If I rely on my experience with the REA, a small minority of companies have succeeded (some of them have actually created a lot of value for their shareholders – Couche-Tard, CGI, Van Houtte, MTY, Richelieu, Lassonde, etc.).

Even today, although we invest mainly in large companies, we only invest in profitable companies. Most of our companies have been profitable for many years, even decades. We avoid unprofitable companies.

There are always periods when certain sectors of the stock markets become popular. Many investors are then attracted to stocks in these sectors in the hope of hitting the home run and making a quick buck. I am thinking specifically of the period, a few years ago, when stocks in the cannabis sector were the subject of great enthusiasm. The majority of these companies were largely unprofitable. Today, who still talks about these stocks?

I believe that the techno bubble of the late 1990s remains the best example of unbridled investor enthusiasm for a popular sector, the Internet. At the time, hundreds of companies were betting on this sector of the future and most of them suffered financial losses. Twenty-five years later, we see that investors were right to bet on the Internet, but that only a handful of companies have really benefited from it.

I would add two elements which, in my opinion, justify investing mainly in profitable companies. On the one hand, such discipline significantly reduces the risks for the investor. A company that has been profitable year after year for several years is less likely to experience financial difficulties (you must still ensure that its debt level is reasonable). On the other hand, I believe that it is much easier to evaluate the stock of a profitable company than that of an unprofitable company.

Promises have always made us dream of a better world. In reality, it is profits that put bread on the table, that provide the oxygen that propels the stock market higher in the long term.


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