It was 12 years ago when Steve Barban received a referral from an accountant. The prospective clients were uber-wealthy, well-known Canadian icons. They weren’t happy with their current advisor, and wanted to recoup some of the $38 million they’d lost when the tech bubble burst. And they wanted to invest exclusively in stocks.
Steve Barban, CFP, is principal, senior financial advisor at Gentry Capital, Manulife Securities Inc. He serves more than 200 households in the Ottawa region, and has $105 million in AUM.
It was 12 years ago when Steve Barban received a referral from an accountant. The prospective clients were uber-wealthy, well-known Canadian icons.
They weren’t happy with their current advisor, and wanted to recoup some of the $38 million they’d lost when the tech bubble burst. And they wanted to invest exclusively in stocks.
Barban, senior financial advisor at Gentry Capital, Manulife Securities Inc., started to sweat.
“I thought they’d be out of my office within 15 minutes because these were sophisticated clients, well past investing in mutual funds,” says Barban, who admits this had been his expertise since starting in the industry in 1988. He moved to Manulife in 2000 so he could offer stocks. Two years later he was both IIROC and MFDA licensed, but still didn’t consider himself an expert stock picker. While he’d attended meetings hosted by Warren Buffett, and come up with his own theory, he’d yet to test it.
But he knew if he didn’t present these clients with something fresh he’d lose them. “I was stammering over my words, but after they heard my idea they agreed to give me about $4 million to start,” says Barban. After investing that money, he watched the portfolio “like a hawk. It was 20% of my book at that time, and the first time I’d ever tried my theory.”
By 2004, the portfolio was over $7 million and the clients started drawing a $25,000 monthly income in year one. They remain his clients and currently have a $2.5 million portfolio (they’ve withdrawn millions to make business acquisitions). Also, they’ve referred five clients who have similarly sized accounts.
Back then Barban thought he might’ve gotten lucky. Still, he copyrighted his process: the Un-Common Sense Theory.
How does it work?
Companies must match three criteria. Barban admits the first two are similar to Buffett’s style, but says the third makes his process unique.
- The company must be a dominant player in its field: e.g., if there are eight manufacturers for a specific product, Barban only considers the top two.
- The company must be in a growth industry.
- The company must produce a good, or provide a service that consumers will pay more for than a competitor’s product.
12 years ago
To explain his theory in 2002, Barban used the example of ketchup. He asked the clients for the first company that came to mind. They responded, “Heinz.” When he asked for a second, they couldn’t answer.
So he put Heinz through his criteria (see “How does it work?,” this page). Was it dominant? Yes. In 2002, it had 60% of the North American market. Was it in a growth industry? Yes, because the under-18 population was growing, and he noted kids prefer ketchup to any other sauce. “Plus, when you go to a restaurant, a condiment staple is always ketchup,” says Barban. “And Heinz had dominated the entire condiment market—at restaurants, it’s usually their mustard and relish.” Will consumers pay more for it? Yes. Much of the population, he says, will reach past Hunt’s and pick up a bottle of Heinz.
Another consideration: people weren’t buying Heinz’s stock in 2002 because they thought tech issues might make a comeback. “People don’t buy ketchup [stocks] because it’s not sexy. But the stock in the last 10 years went up about 15% annually.” Barban bought Heinz in November 2002 for $32 per share. He sold in January 2013 for $72 when Buffett purchased the company and took it private.
He keeps about 80 companies on his radar, so when one no longer fits his process, he replaces it with another. For instance, he replaced Heinz with spice and herb processor McCormick, which owns well-known brands like ClubHouse. His logic? As people get older, they’ll have to cut down on salt due to health issues, and will likely load their food with other spices to substitute. Plus, the company owns 50% of the spice market share in Canada. He paid $61 per share in January 2013 and it now stands at $69*.
Client portfolios consist solely of stocks, a minimum of 15 to a maximum of 40. Barban’s team (consisting of a client service manager, office manager and administrative assistant) helps manage this process. And, he has two additional rules: no commodities, no penny stocks. Why? Penny stocks have low absolute growth, are volatile and won’t satisfy his wealthy clients. And commodities will never pass his third criteria.
“Say you need gas and there’s a Shell and Esso, they’re right next to each other and you have points cards at both,” he says. “One is $1.29/litre and one is $1.39/litre. There is nothing that’ll make you spend more.”
Barban’s practice experienced incredible growth last year. He was up $34 million, which is a 53% increase in book size. This was the result of portfolio growth due to higher returns and new clients through referrals.
He admits colleagues and clients are skeptical when they first hear about the returns (see “Steve’s picks,” this page).
And there have been times he sold a stock too soon. For instance, he bought Lululemon in 2007 for $7.60, and sold in 2010 for $21. When it went down to $9, he thought, “look how smart I am,” he says. But now it’s up to $52*.
The lesson? “I’m not in the share price business, and that’s where a lot of advisors make mistakes. Old school thinking is to sell [if a stock goes up] and buy something else. But if a company continues to match my criteria, I’ll hold.”
So when he bought MasterCard for $4.70 in 2006, it first went up to $32, then down to $12 at the height of the crisis, but he didn’t touch it. “It’s a dominant player in a growth industry because people are using plastic more than cash. Also, if a retailer opens a store, [they’ll] pay more to offer MasterCard.”
Today, the stock stands at $80*, with a 1.40% dividend.
*Stock prices current as of April 2014; All share prices have been adjusted for share splits; Dividends earned are over and above the share price movements.
Suzanne Yar Khan is a Toronto-based financial writer.