Even though investing isn’t the core interest I had during my early teens, I have recently returned to the love of discussing, analyzing, and exploring businesses that flourished so naturally through the Fool and this community.
Reflecting on the past eight years, and in particular the Fool years, is a remarkable thing. A lot of it seems like it just happened, and in many ways it strikes me as a bizarre but highly entertaining dream. I actually went to Fool headquarters and met Tom and David G, Bill Mann, and a host of other Fool analysts.When I was 15. For the life of me I can’t remember what we talked about. Michael Read really nominated for the Feste Award six years ago?! At one point, I think in my junior year of high school, I talked over the phone with a group of HQ Fools, and all but had a job guaranteed at the Fool upon high school graduation. It’s incredible for me to think that these experiences were just a few years ago.

My father, Tim, who is responsible for supporting and cultivating my interest in stocks and the Fool, suddenly and unexpectedly passed away on August 6, 2012, after less than a year of experiencing the symptoms and being diagnosed with prostate cancer. He was just 61 years old – even more shocking considering I can count on one hand the times I remember him being sick when I was growing up. This pencils2 account and moniker, that at one point I began infamously using to give (well-received) investing advice despite being 13 years old, was the one that my Dad started around 2004.

My dear father’s passing has given me the opportunity to help manage his IRA, as well as my mother’s. This year I also had to transfer my account from being a custodial account with my Dad, to my sole individual account. This year, for whatever reason, has led me to the direction of resuming my interest in investments, and it has led me back to the Fool community. Part of me feels like I cut the ties that I did have to the Fool, but perhaps a portion of me hopes that people will understand that teenage boys can be unpredictable and sporadic. (Sorry, should have braced you for that revelation.)

Aside from resuming my passion and interest in investments, I am still enrolled at Berea College in Kentucky – currently in my third year as a Business Administration major (concentration in Marketing). One more year to figure out where to head next. I am Student Government President at Berea, which has been a blast. I’m heavily involved with a multi-year program at the College as well, Entrepreneurship for the Public Good, which has helped me cultivate skills related to entrepreneurship, community development, and other ground-up endeavors.

Enough about me. My investing mannerisms are largely what they were when I was 12 and 13, albeit a bit more refined and grounded. With my personal portfolio, I will not invest in any company I am not familiar with. I don’t care who endorses the stock – I simply can’t risk my own money investing in a company I either don’t know about or don’t care about. If I don’t use the product or like the product, how can I expect others to use the product? The best investments are not obscure companies waiting to be found in a rare vortex of formulas – the best investments are companies whose products and services we use, enjoy, and recommend.

Thus, I am comfortable investing in Netflix, Chipotle, Starbucks, and other such businesses. Companies who I am confident investing in for the next 5-10 years minimum. I’ve found that companies who I don’t fully understand tend to be lousy or very volatile investments, which would lead me to make buy/sell decisions based on emotional frenzies rather than through a calm, grounded approach. I’m a firm believer that we don’t have to actually look all that far for great investments. Start by analyzing the products and services you utilize on a regular basis – chances are there is a solid company (and potential investment) behind those offerings. Start there and expand the scope of your research based on what products/services you, your friends, relatives, coworkers, etc. are excited about. Remember, successful investments can’t be all that obscure because successful companies need either A) lots of customers, or B) high-level clients. People will know who these companies are and utilize their services.

“Snorefest! Can this kid just leave again alrighty?” Okay, okay, I know this has been a bit much. I hope this post finds you all well, and perhaps willing to rekindle the community that I remember from a few years back with old and new friends alike. I’ll be here, at Pencils Palace, posting my investment musings and questions as time allows. I look forward to reconnecting with old friends and developing relationships with new Fools.

Best regards,
David K

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IMAX Corporation, which founded the motion picture format known as “IMAX”, officially began in 1967 and opened its first theater in 1970. The company is best known for its gigantic movie screens that average eight stories in height, 117.2 by 96.2 feet in dimension, totaling nearly 11,000 square feet in all. (Compare this to the typical movie screen size of about 70 by 30 feet.) Approximately a third of the company’s theaters fall into the “institutional” category, meaning the theaters are located in education-themed institutions (museums, parks, etc.). The rest of its theaters fit in the “commercial” category, which has featured commercial movies such as Dark Knight, Toy Story 3, and Avatar, among many others.

As of June 30, 2010, IMAX operated 325 commercial and 122 institutional theaters (totaling 447 theaters) in 47 countries around the world. This provides a stable international base of theaters for the company to build upon, and IMAX is rapidly expanding its “theater system signings” (meaning theaters that have been signed on to build). Through the first six months of 2010 IMAX signed contracts for 98 theater systems, nearly a 1000% increase from the 10 theater contracts the company signed in the first six months of 2009. To put it in perspective, the company signed more theater contracts in the second quarter of 2010 (57 contracts) than it did in the entire year of 2009 (35 contracts).

In July, IMAX CEO Richard Gelfond announced that management estimates the worldwide market potential for IMAX theaters to be closer to 1,250 than the previously expected 1,000. This expanded estimate represents approximately three times the amount of theaters the company currently operates; it’s safe to say that management is quite optimistic. A large portion of this growth is expected to take place in emerging markets such as China. In fact, on September 21, 2010 IMAX signed its largest Asia contract to build 15 new theaters in China. IMAX has a grand total of 96 theaters planned to be built in China, so you can see that this is becoming a major worldwide attraction.

Of course, any business can rapidly expand, the question is whether or not a business can expand in a sustainable and profitable manner. As can be common with many young and growing businesses, IMAX had its fair share of trouble during the middle  part of this past decade. Between 2006 and 2008 the company reported net losses, negative cash flow production, and managed to accumulate $180 million in long-term debt. In an effort to cut costs and expand profits, during these years the company began transitioning to the digital format in existing and planned theaters, which played a big role in its return to profitability in 2009. By the end of 2009 all long-term debt had been paid off and the company remains free of long-term debt today. IMAX holds a total of $37.01 million in cash as well, more than it ever had between 2006 and 2008.

In the first two quarters of 2010 management paid off $20.15 million in short-term debt while the company generated $39.12 million in cash flow. During the same period IMAX earned $39.88 million in profits and $128.38 million in revenue. This represents a profit margin of 31.06%, a major improvement from the 2.09% profit margin in 2009.

Let’s remember that this is still a relatively small business that is rapidly expanding in many countries around the world. I find it highly impressive that the company is expanding at record levels, generating high levels of cash flow, and all long-term debt has been eliminated. The financials of IMAX are becoming rock solid in 2010, and if management continues at this pace the company will be in a strong global position for the long haul. Any business that can expand itself without loading itself in debt is a business worth noting.

What I find especially unique about IMAX is that it has opportunities both in North America and in the developing economies of the world. People of all backgrounds will enjoy a good movie experience, and IMAX has thus far proven to be the leader in providing breathtaking theater experiences with groundbreaking digital technology. A huge plus for the business is that there are no major competitors challenging IMAX’s market, which likely explains why the company has already rooted itself in 47 countries. As wealth in developing economies continues to increase, more people will find value in the special entertainment IMAX provides.

IMAX has an advantage over traditional theaters because it has more control over how it can market movies. People go to IMAX for “the IMAX experience” whether it be with a documentary or a 3D action flick. Smaller theaters can’t attract audiences in the same way. IMAX is doing to the theater industry what Netflix has done to the home entertainment sector: providing a name brand service that is so unique, recognizable, and well-managed that it will be extremely difficult for other businesses to compete. IMAX is creating its own niche in the theater business.

IMAX’s global shift and growing name has largely been a product of CEO Richard Gelfond, who bought IMAX in 1994 with Bradley Weschler (current IMAX Chairman). When Gelfond acquired the business, IMAX was only used in museums and not for commercial movies. When asked to see 2001: A Space Odyssey on an IMAX screen, Gelfond proclaimed, “We have to figure out a way to do that!”

Because digital technology is beginning to catch up to the ideas Gelfond has had since 1994, IMAX has been able to expand its commercial movie offerings with wonderful success. Gelfond has also headed up a major effort to slash costs; by 2005 IMAX developed a lower cost theater system that could be installed into an existing multiplex (rather than constructing a brand new multiplex), saving the company 70% in expenses. (Prior to this approximately $5 million was needed to build an IMAX theater, with the new system about $1.5 million.)

IMAX is transitioning from its status as a small business based only in certain movie markets to a global competitor changing the ways people see movies. Personally, Avatar presented in IMAX 3D tops my list of most memorable movie experiences. In the remainder of 2010 and 2011 IMAX will be showcasing Harry Potter, The Green Hornet, Pirates of the Caribbean 4, with a variety of many others. I see bright prospects for IMAX even in a shaky economic setting because it is led by a creative and inventive management team, has growing financial stability and opportunity, and the company is quickly picking up contracts to build new theaters around the world. With a reasonable P/E ratio of 25, I believe the stock is at reasonable levels for patient investors focused on the long-term prospects of this blooming business. It won’t be long before everyone is talking about “the IMAX experience.”

Written for College Stock Picks. David Kretzmann owns shares of IMAX.

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I am a long-term investor and encourage people to consider the idea of finding quality, well run, financially stable businesses with great products, with the expectation of hanging on for many years. This philosophy made the most sense when I got interested in stocks five years ago, and it has been the foundation of my stock investing since I started investing in 2005. I find the strategy of focusing on the long-term strength and potential of a business much more appealing and realistic than focusing on the short-term volatility and movements of a stock.

Coca-Cola is a great example of a quality business remaining a fine long-term investment even in the harshest of conditions, during the Great Depression. Coca-Cola stock hit its then-high of $191.38 in June, 1930. After the stock market crash and downturn lasting a couple years, the stock hit a low of $68.50 in December, 1932. One might expect that in the Great Depression the stock would falter, lose steam, and probably not perform that spectacularly. Just three years later in November, 1935, the stock reached a new high of $298.50, a quadruple from its low just three years earlier. Considering the times, this is nothing to smirk at. Some stocks absolutely did provide financial stability in difficult times.

You might notice that the vast majority of the greatest investments over the past century have been businesses with household products, not even necessity products. Cigarettes, soft drinks, household items, and other simple products are what have brought success to long-term investors over the past century, good times and bad.

Investing great Peter Lynch has often mentioned that if you invest in twenty businesses, you only need one or two superb winners to make investing worthwhile. Lynch also preaches an “invest in what you know” style. The companies that survived, and even expanded, through the Depression were companies with products that nearly anyone could understand on their own, without the help of a financial analyst. These are the types of businesses you want to look for and the types of businesses that have turned into great long-term investments.

Look at some of the businesses weathering the storm today. Chipotle Mexican Grill is opening roughly 130 locations a year (and today operates more than 800 locations in the U.S. and Canada), increasing cash flow production and profit margins, growing the cash on its balance sheet, and doesn’t carry a dime of debt. Hansen Natural (creator and owner of the wildly popular Monster Energy brand) is expanding into new countries, launching new products, and every quarter gains market share and gets one step closer to overcoming top energy drink competitor Red Bull. Google, Netflix, and Apple (three of the most common names today) have all doubled since 2005.

You don’t have to find obscure companies to do well in the stock market; stock history proves this is not the case. It makes no sense to invest your money in a business that you don’t fully understand, because if a situation like we have today comes along, you have no idea how that business will function or how to tell what position it is in. However, if you invest in a business whose product(s) you know and love, you will have a much easier time deducing the strength of the company.

Investing in stocks does not have to be complicated. I have several things that I look for. A business that I already love or understand is key. When there are smart and experienced people running the business, I feel a lot more comfortable with an investment. I much prefer businesses that who have a strong position of cash, and little or no debt. As we saw with the examples of the Great Depression, the companies who spent and advertised during the rough times often came out ahead of the competition. A strong balance sheet provides a cushion for hard times and gives any business a tremendous advantage over competition. In a nutshell, I often look for three things to narrow down the list of companies I’m interested in: products I know and love, smart and experienced management, and a financially secure and growing business.

A rough economy is not the time to run from stocks. It is precisely these times that great businesses are put in the sale bin at the front of the store. The short-term movements of a stock do not define the long-term success or failure of a business. Focus on the fundamentals, management, and other important factors of a business to judge a stock. In the long run, those factors count the most for the success of a business and investment.

I am not predicting an easy ride from now on with stocks. I’m watching with interest many companies who I may potentially invest in, but I’m certainly not rushing in. Patience is essential to an investor focused on the long-term, always be sure you are 100% comfortable with the business before you make an investment. Today is the time to look for quality businesses hit down with the stock market, whose long-term fundamentals and strength remain intact. In the world of stocks, never let short-term troubles blur long-term potential.

David Kretzmann owns shares of Chipotle, Hansen, and Netflix.

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My stock portfolio has never really made money. I can remember only a couple times in the past four years that I was worth more money than what I put in. However, this isn’t something that frustrates me, because now is the time when I can afford to make mistakes and (hopefully) learn from them. I made mistakes and really I think I got careless, and I take responsibility for a losing effort so far with my investments. I’ve always believed and written about long-term investing with individual stocks, and there is good evidence from past investing legends such as Warren Buffett and Peter Lynch to show that this is a very worthwhile method. I still strongly believe that the philosophy of finding businesses you know, love, and understand is the way to go if you want to invest in businesses through stocks.

In early 2007 I watched an online video of the 2008 Republican presidential debates. Ron Paul was among the candidates, and at first I wrote him off as a loon who was simply being overly pessimistic about foreign policy and the U.S. economy and didn’t really know what he was talking about. After months of job growth in the economy and jumps in U.S. production and exports, it sounded crazy when he talked about a major recession being not too far off. However, he just wouldn’t go away! He stuck in the presidential race, and in October of 2007 I decided to take a closer look at what he was saying. I watched his speeches, read his articles, and researched his voting record. He was not simply a pessimistic looking to get attention. He analyzed everything, and that’s something that drew me in to research him further. And most impressive of all, his objections to both foreign and domestic policy weren’t based on only his personal opinions, but rather on the Rule of Law and what the Constitution says on every issue. It wasn’t long before I was a full fledged Ron Paul supporter, but I still couldn’t help but wonder if his predictions and constant warnings of a deep recession were a bit far fetched and overdone.

“We are at the verge of bankruptcy; we are moving into a New Era, believe it or not, with the dollar and our economy and the world economy. This is a New Era.” — Ron Paul; January 24, 2008

The economy seemed strong. Unemployment was dropping, exports were rising thanks to a lower dollar, and companies were reporting strong earnings. But over time I started to realize that his reasoning actually made a lot of sense to me and, evidently, a lot of other people around the U.S. and the world.

The Federal Reserve was something that got me scratching my head once I looked into it more myself. How could we call the U.S. a “free market” economy when we have a couple dozen people at the Federal Reserve controlling money and credit with no oversight from Congress? Under the Constitution, money is Congress’s reponsibility and only gold and silver can be legal tender. Yet somehow in 1913, Congress passed its monetary duties onto a central bank. Today, the Federal Reserve prints and hands out trillions of dollars, even though none of its members are elected nor is the Fed regulated and overseen by Congress. A central bank has no place in a free market and there is no way to call a market free when a massive central bank has a monopoly over money and credit enforced by the government through Legal Tender laws.

On top of the central bank, we have a fiat monetary system. The only thing that makes our dollars not worthless paper is because the government says it is legal tender. The credibility of the government is really the only thing that backs the dollars we use every day. I find it very questionable and discouraging that people, especially economists, don’t know the full story of the Federal Reserve and monetary history in general. No country has had a fiat monetary policy that lasted. Every time throughout history, paper money has failed miserably and crashed and burned. Even the Founding Fathers got to experience it firsthand with the failure of the Continental Dollar, which was a paper money started by the Colonies in an effort to pay off debts from the Revolutionary War. The painful and quick collapse of the system prompted the Continental Congress to put in the Constitution that only gold and silver could be legal tender. They knew that paper money failed and they surely did not want to experience that pain again.

One of the things that many people have lacked when it comes to economics is basic common sense. How can a fiat monetary system survive? Federal Reserve Notes are nothing but worthless paper, and sooner or later we, and all other countries with fiat monetary systems, will have to come to the realization that a paper currency is not a sound foundation for a sustainable economy to be built upon. We’re lead to believe that too much growth is bad for the economy and that recessions are just a natural trend of the free market to correct too much production and growth. This is such an absolutely bizarre, absurd belief in economics. It isn’t high growth that hurts the economy and creates bubbles; rather it’s cheap credit and inflating the money supply that are to blame. When people can borrow money for next to nothing like they have been able to, especially over the past twenty years or so, they will take risks that they ordinarily wouldn’t have. The Fed controls money and credit, and through the process of lowering interest rates to unsustainable, artificial levels, cheap money abounds through the economy as the printing presses work at full speed churning out new money to hand out. This inflates the money supply dramatically, encourages businesses to take risks that inevitably lead to malinvestment and failure, and creates the inflationary, bubble environment. This is what we saw in the 1990′s with the tech boom, and we’re seeing the major side effects of such policies today. One must act why the people, the free market, can’t handle adjusting interest rates on their own and why the Federal Reserve makes such crucial decisions regarding monetary policy without Congress raising a finger.

As I’ve studied the Federal Reserve in great detail, I’ve started to come to the conclusion that long-term investing isn’t nearly as simple as it used to be or could be. When you have artificially created bubbles come about through irrational monetary policy controlled by a few central bankers, you have to sit back and wonder. Had you invested in the S&P 500 10 years ago you would not be making money today, especially when you factor in inflation. 10 years is a long investment horizon, but when you have an unstable and unbacked currency and really an unsound economic system, long-term investing isn’t nearly as simple as it should be. I think the long-term investment philosophy is fantastic, but I don’t believe people realize just how damaging the Federal Reserve and government are to what’s left of the market. Every time the economy goes through the booms and busts created by the Federal Reserve, the same solutions are suggested: print more money (lower interest rates), borrow more money, and spend more money. Over the past year, these interventionist, central planning policies have expanded at a scary rate. We are told by both sides of Congress that if the government doesn’t intervene we’ll have another Great Depression. We are told that capitalism failed. Considering that we’ve essentially had worthless paper money shoved down our throats, considering that we have a ridiculous tax system that completely contradicts what a free society is all about, and considering that we’ve tried government intervention for nearly a century in economic affairs to no avail, I find it sickening when capitalism is blamed for this mess and government is said to be the only solution.

I haven’t given up on stocks. I don’t invest nearly as much in stocks now as I do in hard silver, but I think it will be an interesting thing to watch how individual businesses cope with such a massive intervention by the government into the market. I have no doubt that there are quality businesses out there that will ride this out and make investors money even through these tough times. There were quite a few stocks that tripled and quadrupled during the Great Depression (such as Coca-Cola) and I believe there will be some of those opportunities over the next few years. But, I am taking a much more cautious approach and highly encourage others to do the same. However much the government and Federal Reserve try to prop up this faulty system, a day of reckoning must come. The more money that’s pumped in to this mess by the government in an effort to stall a seroius recession, the more deadly the recession will be later on. Delaying the inevitable does not help a thing, and when looking for investments in any area I think people will have to be much more careful and consider many more factors than they used to. I may be wrong; I hope I’m wrong. Ron Paul said the same thing in 2003 when he warned about the mess we are in today.

Above all, it is time for people to analyze everything. Business, economics, public policy. The more involved and informed people are about these things, the more we can learn from our mistakes and really get a better idea of why and how things are happening in the economic and political world. I’m hoping to create a new web site built on a community of people determined to stay involved and interactive in an effort to become better informed about all these things. Above all, I want to create an environment that encourages people to have smart skepticism, analysis, and discussion on current events and policies on all levels. Please comment here or e-mail me at [email protected] if you would like to help get this started or if you have ideas, criticisms, or suggestions for this effort.

In Liberty,

David Kretzmann

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