Between Friends I like Americans. I had to get that off my chest. I’m not saying that I like all Americans or all things American (the McGriddle and that TV show about Tiara’s come to mind as American things I don’t like ). And rest assured, I still love being a Canadian. But I do like Americans. So how did a kid from the Canadian prairies come to like America so much? Growing up in Alberta, I didn’t come from the kind of family that traveled to the US often (if at all) so what I knew about the US I learned from TV. And given that my favorite movie as a kid was The Planet of the Apes, one can only imagine how warped my understanding of the USA in fact was. However, in 1976, the US was celebrating its Bicentennial and somehow I got hold of Can ada’s birthday gift to America, which was a book. In fact, it was a book of photography that celebrated life in the various border towns that lie along the Canada/US border that stretches for thousands of miles. The book’s title was “Between Friends” and i t celebrated among other things the fact that the Canada/US border was the longest undefended border in the world. At that time, I thought that was pretty “cool”. I still do. In 1978 I had a chance to visit Halifax, Nova Scotia where I was playing in the Canadian Lacrosse Championships. It was also at this time that I learned about the Halifax Explosion of 1917 when two ships full of ammunition collided and exploded in Halifax harbor and created the largest explosion known to mankind up to that point in time. The explosion killed more than 2,000 people and injured another 9,000 and what I also learned was that that much of the disaster relief and aid that came to Halifax following the explosion came from the Boston Red Cross and the Massachusetts Public Safety Committee, not from elsewhere in Canada. Appropriately, each Christmas the people of Halifax send a large Christmas tree to Boston (it resides on the Commons) to say thank you. It goes without saying that I like Bostonians a lot! About a year after my trip to Halifax, a bunch of thugs took over the US Embassy in Tehran. Six of the US diplomats were able to sneak away and find VOLUME XX OCTOBER 2012 INVESTMENT ISSUES • STRATEGIES • INSIGHTS FROM DONVILLE KENT

2 ROE REPORTER | DKAM refuge in the Canadian Embassy. Canada did the right thing (just like the people of Boston did in 1917). This is how friendships are forged – by doing the right thing when the chips are down. The trip to Halifax also inspired me to join the Canadian Navy and in the late 1980’s, I was posted to a Canadian Destroyer (HMCS Fraser) and suddenly found myself floating around the North Atlantic and Caribbean in a flotilla of ships from all of the various NATO countries. Throughout these overseas excursions, I began to see patterns or styles in each country’s navy that ranged from very positive to very negative. Of course, the Americans always had the biggest and newest ships, but that’s not what I remember most about “the Yanks” . What I remember was that any time a Canadian ship needed a spare part, or access to a doctor (we left ours behind) or some other piece of equipment , it was always “the Yanks” who signalled back first , and usually with something bigger or better than we had asked for. The same could be said about “the Yanks” when we arrived in port. The Brits, the Norwegians, the French, the Spanish…. they were all very good hosts. However, when the fleet pulled into an American port, “the Yanks” were always the most generous hosts . By the time I was 26, my naval career was over…but my infatuation with Americans was only just beginning. Shortly after I left the Navy I became interested in investing. Have you ever stopped and asked yourself how many great books on investing have been written by non-Ameri cans?” I soon learned that Benjamin Graham was to investing what William Shakespeare was to literature. After Graham came the likes of Buffett, Munger, Lynch, Merrill, Mauboussin, Chernow, and Stern- Stewart, just to name a few. Indeed, I fell so hard for Buffett and Munger that there were times when I felt like I knew more about Omaha, Nebraska than I did about Calgary, Alberta. Beyond Buffett Readers of my newsletter will know that I am a huge fan of Warren Buffett and Charlie Munger. However, when it comes to investing in difficult times, Benjamin Graham and Charles Merrill (co- founder of Merrill Lynch) are perhaps the ones we should pay particular attention to because not only did they remain invested during one of the most difficult economic periods in our history, (the 1930’s) but they did very well financially as a result. Charlie Merrill was born in Florida in 1885 and founded Merrill Lynch in 1915. He prospered as an investor in the coming years, particularly through the heady 1920’s . However, Merrill was one of the few to anticipate the stock market crash of 1929 and sold many of his more speculative investments ahead of the crash. However, Merrill stuck with and added to his investments in two companies, namely Safeway and Kresge Corporation (the forerunner of Kmart), and it was from these investments, which he held throughout the depression, that made him an extremely wealthy man. He never actually made much money from being a stock broker – the good years were always offset by

3 ROE REPORTER | DKAM the bad years. It was his investment in a small number of superb businesses that made him rich. Benjamin Graham also remained an investor throughout the 1930s although his story was a little different. Graham did not see the crash coming, and his net worth fell by 80% from its peak before the crash to the point where things stabilised in the early 1930s. In the case of Graham, he quickly realised that once the crash occurred, US equities were trading at a fraction of their net worth and through a number of astute investments, he was able to rebuild his net worth “during the depression”. Graham’s experiences during the depression also allowed him to develop his theories surrounding “margin of safety”, which affected the types of companies he invested in and more importantly the price he paid – but he remained invested and prospered throughout the depression. Learning from Graham and Merrill The environment that we live in is nowhere near as severe as the one faced by Merrill and Graham. Yet we live in a world where risk aversion dominates our thoughts relative to our interest in investment returns. So what we can learn from the likes of Merrill and Graham is that we can invest profitably even in bad times by focusing on outstanding companies that trade at reasonable prices relative to their intrinsic value. Here is a short list of four companies that we feel are superb wealth creators that can grow in almost any environment. Constellation Software – Toronto based Constellation Software is still our largest holding. Constellation has an adjusted ROE of close to 30% which means that the net worth of the business is expanding by 30% per annum. Therefore, even if the stock faces some multiple compression, the stock should still be worth much more in 2013 than it is today. The company is also a beneficiary of low valuations as much of its growth comes from acquisitions. A bad market is good for Constellation Software. Figure 1- Constellation Software Share Price Source: Capital IQ

4 ROE REPORTER | DKAM CGI – Montreal based CGI is a global IT services company that continues to grow at a very steady pace of close to 20% per annum. IT services tend to become very entrenched with their clients and CGI therefore has a very high recurring revenue stream that enhances profitability while reducing risk. CGI has also been very aggressive at buying back its stock with its excess cash flows which further supports the rise in the stock. Figure 2- CGI Group Share Price Source: Capital IQ MTY Food – Montreal based MTY Food Group is a gem. The Company operates fast food franchises throughout Canada and is a model of consistency with its ROE exceeding 20% for each of the past 10 years. The company does this in part by buying or creating strong franchises with superior excess cash flow while managing expenses carefully. This company also has an extremely strong balance sheet which allows it to continue to acquire more restaurants. Figure 3- MTY Food Group Inc. Share Price Source: Capital IQ

5 ROE REPORTER | DKAM Paladin Labs – Montreal based Paladin Labs is a cash flow machine. We like the fact that the Company has relatively inelastic demand for its products. The Company also has close to $250MM in cash on its balance sheet. We expect a major acquisition sometime soon as the Company is sitting on close to $250MM in cash. Figure 4- Paladin Labs Share Price Source: Capital IQ Final Thoughts I’ve learned a lot from Americans. Their energy and “ can-do ” attitude are refreshing, some of their greatest leaders such as Lincoln, Roosevelt and King inspire me, and their investment gurus whom I have referenced earlier have taught me so much about what I do for a living. Americans and Canadians don’t see eye to eye on everything and indeed there are those who have ma de an industry out of playing up our differences. But when the chips are down, both sides seem to have little difficulty in doing the right thing …and that’s why, first and foremost I am drawn to them. I now cross the longest undefended border in the world on a regular basis and see it for what it is – a wonderful, ongoing and vibrant symbol of the friendship that exists between two nations, doing the right thing. The Capital Ideas Fund has performed well to date, with the fund up 6.7% vs. the TSX Composite which is up 3.1% in the same time frame. Call me if you want to discuss – J.P. Donville 416-364-8886.