Mr. Kelly: Formula Growth was founded in 1960 by someone generally considered the Dean of growth stock investing in Canada, John Dobson. He started the original Formula Growth Fund with ten individuals. Each guy put up $10,000 for a total of $100,000. John decided that they would invest anywhere other than Canada to diversify away from the resource and bank stocks that dominated the Canadian stock market. Essentially they said, "Let's find some other interesting aggressive growth stock somewhere else in the world". The obvious place to look was in the United States. Initially, at times the group invested elsewhere around the world but eventually it settled in on the United States markets.
That original $100,000 represented a price per share of $9. Today these same shares are worth $3,000. We have compounded very handsomely at two times the Standard & Poor's rate of return. The Standard & Poor's over the last 49 years has compounded at 6% and we have compounded at 12% for 49 years. An original investor who put up $10,000 in 1960 today has over $3,000,000
As I said, we focus today and for the past thirty years on only the United States. We like the American markets because they offer an almost infinite amount of ways to play all sorts of different businesses. Frankly these same US companies give you world wide exposure as well as many of them operate with big international businesses. You do not need to take large risks investing in far flung markets with uneven laws and strange customs and languages to get international bang for the buck. You can simply buy US listed stocks. We like to focus on growth stocks or companies that grow their earnings quickly. We want stocks that can grow their earnings per share at above the average rates and we like to pay below average multiples for these above average rates of growth.
It is tricky to find these aggressive growth stocks. You have to beat the bushes to find them. They can be either newly emerging growth stocks that come out of the new initial public offerings or they can be simply companies that are re-emerging with a new product or a new set of management or a new business line. The trick for us is to determine whether the story is believable, whether it's going to happen as scripted and be in front of the story so we are there before the Street is. Often we're betting against some of the skepticism that normally surrounds growth stocks. You have to be careful as many of the business plans don't come true. In order to help our batting average we do a lot of "kicking of the tires". We do this due diligence with a team in New York and a team here in Montreal. Both teams travel extensively. The headquarters of Formula Growth is still in Montreal. Our New York office opened recently. With the recent crash in the markets we felt it important to be aggressive about our own internal growth plans when others in the investment business were being conservative and retrenching. As result we went ahead at the lows in the market and opened our New York office last year. The intention was to deepen our research efforts even more as well as sharpening our business development efforts in the States.
There are about 10,000 public companies in the States. Probably, 6000 or 7000 are really not investable, they are dollar stocks or they are companies losing money or companies with market caps that are tiny. On the other hand there are probably 3000 or 4000 stocks that are investable. At any one moment we are looking at all of those stocks. We comb through them to find the 100 or so stocks that might form a portfolio for us.
There is never a shortage of good ideas to invest in. Because we've been in business for 49 years, we have a very deep database on many of the investable companies in the States we can cull from. Additionally we deal with a 100 different brokers on the sell side from the largest all the way down to regional brokers that might be located away from New York City in Minneapolis or Little Rock and so on. It is important to talk to everyone as you never know where the next great growth stock will come from. Likewise, because we have been in business so long we have a very large buy side network of friends and associates we talk to. These are people with whom we compete I suppose, but really it's mostly friendly competition as it's quite a fraternity among the people who buy growth stocks. We share ideas and trade information with our peers on the buy side as long as it is a two way street. All of these ways form the basis for our idea flow. Essentially, Formula has a tremendous information network that allows us to quickly get to the bottom line of a story.
We have an in-house team of about ten people who do nothing but research stocks, model stocks, screen for stocks and talk to management teams in order to discern whether we are in front of a good stock. Our New York office spends obviously a lot of time in New York meetings chasing down management teams that go through New York. We also spend a lot of time on the road visiting companies at their headquarters when we feel they are interesting.
Growth stock investing is very volatile. Usually these companies have higher beta or in other words greater price moves, up and down. Growth stock investing is like trying to hit home runs as opposed to singles. In growth stock investing diversification is critical. Our own results in our long only Fund have been certainly very volatile over the years. We are not like investing in an index. Our long only Fund will continue to have a lot of volatility. As in the past, we are going to do very well in bull markets and we are going to do poorly in bear markets. But we know that in the aggregate these bull and bear market returns will strongly out perform the market as we have over the past 49 years.
For the first 40 years of its history, Formula was simply a long-only shop investing in aggressive growth equities. Given the inherent volatility in our long only process and with the culmination of the bubble stock valuations in the year 2000 we came to the conclusion that we needed to offer our clients a different less volatile product. We needed a product that took less risk and therefore would have less volatility.
We developed a hedge fund platform. We came up with a long/short equity Fund where we avail ourselves of the research process we use to buy stocks long but also use the same research to sell stocks short. We sell stocks short when our research indicates that stories are unspooling and the stock is likely to decline.
Our focus for the last 8 years has been on building out our long/short business. Our Formula Growth Hedge Fund is a wonderful complement to our long only business or the original Formula Growth Fund. We simply have added to the hedge fund process an element of market timing and a portfolio of shorted stocks in order to mitigate the risk that's associated with investing in the stock market. Additionally we control risk by strict use of price stops to help avoid large losses in any one holding.
Today we manage about $500 million. Of this amount about 60% is in our long/short hedge fund. Certainly the customers are voting with their feet these days and seem to prefer the relative safety of our Hedge Fund.
A hallmark of Formula is we believe slow growth in the asset base is best for all the customers. Most of the growth in assets under management has been through capital appreciation, not from marketing. We don't like to dilute our best ideas over a very broad base of assets as you won't get much bang for the buck or ROI from the investment unless you own a ton of the stock. Owning too much of anything can be a big mistake if you are wrong hence why we believe in diversification and a nice tight asset pool.
We like the CEOs of those companies we own to own a lot of their own stock so they have a very vested interest in making sure the company does well. We do the same thing at Formula. Of the assets under management 15% are owned by the people who work here. This goes from the secretary all the way up to me the President. We all eat our own cooking.
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