Up and to the Right: The Story of John W. Dobson and Formula Growth Second Edition [Second edition] 9780228001997

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Up and to the Right

UP and to the RIGHT The Story of John W. Dobson and Formula Growth Second Edition

cr aig toomey

Published for the John Dobson Foundation by McGill-Queen’s University Press Montreal & Kingston • London • Chicago

© McGill-Queen’s University Press 2020 ISBN 978-0-2280-0181-2 (cloth) ISBN 978-0-2280-0199-7 (ePDF) ISBN 978-0-2280-0200-0 (ePUB) Legal deposit second quarter 2020 Bibliotèque nationale du Québec Printed in Canada on acid-free paper that is 100% ancient forest free (100% post-consumer recycled), processed chlorine free.

We acknowledge the support of the Canada Council for the Arts. Nous remercions le Conseil des arts du Canada de son soutien. Library and Archives Canada Cataloguing in Publication Title: Up and to the right : the story of John W. Dobson and Formula Growth / Craig Toomey. Names: Toomey, Craig, author. | John Dobson Foundation, issuing body. Description: Second edition. | Includes index. | Published for the John Dobson Foundation. Identifiers: Canadiana (print) 20190205679 | Canadiana (ebook) 20190205709 | ISBN 9780228001812 (cloth) | ISBN 9780228001997 (ePDF) | ISBN 9780228002000 (ePUB) Subjects: LCSH: Dobson John W., 1928-2013. | LCSH: Formula Growth Limited. | LCSH: Capitalists and financiers—Canada—Biography. | LCSH: Philanthropists— Canada—Biography. | LCGFT: Biographies. Classification: LCC HG172.D63 T66 2020 | DDC 332.092—dc23

Produced for McGill-Queen’s University Press by Focus Strategic Communications Incorporated. Interior Design and Layout by Rob Scanlan This book was typeset in 11/15 Sabon.

Acknowledgments The author would like to give thanks and praises to the following people for providing helpful input, comments, and support in the research and writing of this book: René Catafago, Barbara Ellis, Michael Gentile, Kim Holden, Ari Kiriazidis, Randy Kelly, John Liddy, Rodney McCollam, Bette Lou Reade, and Rosanna Vitale from Formula Growth; Ian Soutar and Ian Aitken from Pembroke Management; Reuven Brenner from McGill University; and Diana and Parker Knox. Thank you to Los Angeles–based William O’Neil+ Company for supplying company stock charts. Very special thanks to Alan Freeman for helping to reorganize and simplify the manuscript of the first edition and for his skilful editing. Thanks as well, of course, to John Dobson, without whom none of this would have been possible, and to Mark Abley and Adrian Galwin at McGillQueen’s University Press for shepherding the first edition manuscript into print. Last, but not least, thanks to my beloved wife, Rekha, for encouraging me to never give up.

Contents Acknowledgments ................................................................................... v First Edition Foreword by David Johnston, Former Governor General of Canada ................................................. ix Preface by Randall W. Kelly ................................................................... xi Photos ................................................................................................. xviii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

An Uncommon Man ....................................................................... 3 A Father’s Son .............................................................................. 20 The “Real World” ........................................................................ 34 Triumphs and Turmoil ................................................................. 48 Rebirth and Renewal ................................................................... 69 New Blood ................................................................................... 82 The Growth Formula ................................................................... 94 Case Studies: It’s All About Growth (and sometimes value ...) ........................................................ 112 Formula Growth Hedges Its Bets ............................................... 165 Formula Growth Hedge Fund and Alpha Fund ......................... 174 A Move into Asia ....................................................................... 187 Creating Wealth through an Exceptional Team Effort ............... 196 A Foe of Excessive Government ................................................. 205 Supporting Entrepreneurship and the Free Enterprise System ............................................................ 214 Looking to the Future ................................................................ 248

Epilogue ............................................................................................... 253 Appendix 1: Formula Growth Fund Annual Performance ................ 256 Appendix 2: Long-term Formula Growth Fund Performance Chart ................................................... 258 Appendix 3: Vintage of Formula Growth Stocks chronologically over the decades (price at least doubled) ................... 259 Appendix 4: Formula Growth Current and Former Employees ............................................. 271 Appendix 5: Sample of John Dobson Foundation Support Recipients .................................................... 274 Appendix 6: Formula Growth 1974 Letter to Unitholders ................ 276 Index ................................................................................................... 279

“The greatness of a man is not in how much wealth he acquires, but in his integrity and his ability to affect those around him positively.” —Bob Marley

First Edition Foreword by David Johnston, Former Governor General of Canada John Dobson was many things: a brilliant investor, an outstanding leader, a generous philanthropist. But, above all, he was a trusted and loyal friend whom I knew and admired for many years. I am pleased that John’s story is finally being told, although saddened that, having passed away on 30 July 2013, he did not live to hold this book in his hands. During his remarkable life, his contributions to entrepreneurship, to business education, and to the mentoring and advancement of young people were considerable. Yet these accomplishments rarely received the recognition they deserved. John’s success as an investor was extraordinary. At the same time, he tirelessly promoted entrepreneurship, which he believed was the best way to create wealth for Canadians, and he supported many ground-breaking entrepreneurial studies programs at McGill and other universities across Canada. In addition, he provided financial assistance that made it possible for scores of young people to attend university. Yet John always kept a low profile – rarely speaking in public or giving interviews – preferring to focus more on satisfying his clients than his ego, and devoting his energy to helping others. His reluctance to be in the spotlight is reflected in the fact that he took little interest in telling the story of his life and his Formula Growth Fund. (He would have preferred to write what he called a “booklet” on the basics of investing and money management for the benefit of children as young as four.) As a result, this story has had to rely heavily on John’s many friends and colleagues to recount, in their own words, what he meant to them and how he made an important difference in their lives. A much deserved tribute, this book tells the fascinating tale of a great Canadian. For me, the underlying lesson is to always value your friends, never shy away from opportunity, and strive constantly to work for the greater good. This is John’s message to us all, one well worth sharing.

Preface Memo to staff from John Dobson: Objectives of Formula Growth Limited: 1. To make 20 per cent per year for our unit holders 2. To have fun doing it 3. To make certain that we have the people, discipline, and procedures to accomplish objectives 1 and 2

Greed and fear. Many people cite these as the two main driving forces behind the stock market. But a successful investor should know that qualities such as vision, knowledge, discipline, risk tolerance and patience are much more important. John W. Dobson mastered all of these qualities to become one of Canada’s greatest growth-stock investors. He launched his Formula Growth Fund on 27 June 1960, with a small group of investors who put up a total of $134,000 (CAN), including $20,000 from Dobson, to buy units in the fledgling fund. John’s initial investment would have been worth some $24 million as of 2020 – an increase of an incredible 1,200 times! This represents a compounded rate of return of 12.67 per cent a year over roughly sixty years of successful investing. In contrast, the same amount invested in the S&P 500 Total Return index would have been worth just $9.2 million (CAN). This is the kind of performance that has earned the long-term loyalty of Formula Growth clients, who include some of Canada’s most prominent businesspeople and entrepreneurs. It has also drawn the attention of several of the world’s savviest investors, such as the late Sir John Templeton, who at one time was one of the largest Formula Growth Fund unit holders.

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John passed away on 30 July 2013, just five days after his eightyfifth birthday and a few months before the first edition of this book was published. But we continue to practice his brilliant investment precepts, creating wealth for our clients, who include high net-worth individuals, family offices and, increasingly, institutions. We are also assiduously managing money held in our founder’s estate and the John Dobson Foundation to ensure it will be around for many years to promote entrepreneurship, investment and free-market thinking. Indeed, Formula Growth has lost none of John’s magic. Since the first edition of this book was published in 2014, Formula Growth has tripled its assets under management, to some $1.6 billion (CAN). We have also successfully broadened our product offering to give our clients more choices to meet their investment objectives and risk tolerances. In addition to our legacy, long-only Formula Growth Fund, we have a growing hedge fund platform that employs an additional investment tool – shorting – to drive down some of the risk in what we do and reduce volatility. This platform has been very well received, attracting strong asset flow from institutional investors and other risk-averse investors who want to sleep easier at night with lower-volatility funds that are less correlated to the markets. At the same time, we have applied our time-proven investment process to a new market in Asia with a talented team in Hong Kong that manages a range of products for us. We are hopeful that this business will grow significantly in the coming years by taking advantage of the many exciting investment opportunities that are emerging in China and other parts of Asia. Meanwhile, since the first edition of this book was published, the performance of our funds – including Formula Growth Fund, Formula Growth Hedge Fund and Formula Growth Alpha Fund – has been on target. This is thanks to the exceptional stock-picking and bottom-up growth stock investing skills of our portfolio managers, as well as continued strong stock markets in North America. Our Asia-focused Formula Growth Global Opportunities Fund has

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persevered despite turbulent market conditions in the region, and we remain very optimistic about its potential.

• Sixty Years of Success • With Formula Growth marking its sixtieth anniversary in 2020, we felt it was important to once again highlight our founder’s investment wisdom with a special commemorative edition of Up and to the Right. In addition to providing an update on our hedge fund platform, this edition features additional case studies of stocks in which Formula Growth has had particular success over the years. The case studies from the first edition and John Dobson’s investment rules have been very popular among students in learning institutions across Canada, and we are delighted to be able to share some more lessons learned with readers. One lesson to be quickly drawn from reading the story of John Dobson and Formula Growth is that the investment “game” is not always smooth or steady, but it is well worth the effort. Because the original Formula Growth Fund has traditionally invested almost exclusively in small- to mid-cap high-growth stocks in the United States, it has been prone to considerable volatility. As described in the following pages, it has been buffeted by economic and political events as well as the occasional investment simply gone wrong. In the mid-1970s, during an especially severe stock market downturn that had a serious impact on the fund, there was even a failed attempt to remove John from its management. Another lesson to be drawn from the story is the importance of being long term in your investment thinking and letting the magic of compounding work for you over the long haul. John was so successful because he hung tight and remained optimistic through all the ups and downs. He never lost faith in the stock market, in his investment formula, in compound investing, in the advantages of having a long-term investment horizon to reduce risk, and in his hand-picked team of portfolio managers, administrators and support staff.

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A man of considerable energy, skill and generosity, John developed an extraordinary network of investment brokers, advisors and experts stretching across North America and abroad, and cultivated relationships that endured for decades. His acumen for building an investment firm with exceptional professionalism, excellence, savvy – and forward thinking – embedded in its DNA also paved the way for Formula Growth to launch our hedge fund platform in the early 2000s – one that has become the envy of an industry too often riddled with failure. One of John’s favourite expressions was KISS – Keep It Simple, Stupid. He picked a career that was anything but simple, deciding to compete with the best and brightest on Wall Street. And while the academics, professors, analysts and consultants concluded that the market was too smart and too efficient to beat, he proved them all wrong. He not only beat the market, he pulverized it. He did this through KISS – he always stayed calm, and he never wavered. KISS is devilishly hard to do, especially when it comes to investing real money – yours or other people’s. But John was a master at it. John’s two overarching principles of investment were really simple: one, invest with good people running businesses that are growing fast; and two, always look forward and never look back. He never cared about the tiny details, the current quarter or the latest macro concern being touted by the talking heads on TV. He nagged everyone at Formula Growth to always look to the next year, and even the two years after that, when calculating target prices for stocks in the portfolio. John’s “potential sheets” (spreadsheets that expressed a target price for every stock in the portfolio) were held in great reverence at Formula Growth. They were something akin to the Holy Grail. He obsessed over these sheets and targets. He grilled the team if the targets made no sense. Through these sheets, he forced us to peer into the future, no matter how cloudy, and to take a shot at where the company or the stock would be by then. We were not allowed to be cautious. We had to take some risk; otherwise, there could be no reward. John always reminded us that

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there were no rich pessimists. He wanted us to hit the ball straight down the fairway, and he wanted us to hit it a long way. He would browbeat us if we sold too soon because he knew the math of compounding could not work its magic on our returns if we were out of stocks prematurely. But John would never admonish us if we made honest mistakes. As with the game of golf, he expected some bad shots; he understood that the investment business is just too tough not to have them. If we hit the ball into the woods or the sand, he simply expected us to get it back in play and make the most of it. And he expected us to finish the round, to see it through. Unlike his favourite golf club, Mount Bruno, which has the occasional mulligan, there are no mulligans in the stock market. And there was no such thing as quitting for John. In the end, he believed investing was a “numbers” game. You will never bat a thousand, but, as in golf, if you have sound fundamentals like a good grip, posture and swing plane, along with a good work ethic and nerve, you will post some solid scores. In his investing career, as on the golf course, John posted many, many good scores. The principle of supporting good people and looking forward, never back, also permeated John’s lifelong philanthropic work. He knew that if he encouraged passionate and energetic people, especially young people, we could build a better world by creating more leaders. This encouragement was obvious in the spectacular work he did through his John Dobson Foundation and through his personal generosity. We are proud to be carrying on this work on his behalf today. Thanks to the Foundation, John had a remarkable influence on generations of new entrepreneurs throughout North America and backed numerous organizations extolling the virtues of free-market capitalism. In 1989, the Foundation established the innovative Dobson Centre for Entrepreneurship at McGill University, spawning similar centres at numerous other universities across Canada. In addition, the Foundation supports entrepreneurial development at dozens of Canadian universities and colleges, as well as outreach

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programs, think-tanks, and other initiatives. These include or have included such varied groups as Shad Canada, Youth Employment Services Montreal and Junior Achievement of Canada. John was also the original sponsor of the Association of Collegiate Entrepreneurs (now Enactus Canada), a national student body that advocates entrepreneurial education. In recognition of his many contributions and achievements, John was awarded honorary doctorates from McGill, Concordia, Acadia and Dalhousie universities. In 1997, he was named to the Order of Canada and described as “a generous philanthropist [who] created a foundation to help develop entrepreneurial skills and self-sufficiency among Canadian youth.” Through it all, John constantly stressed to anyone who would listen the importance of common sense and having fun in life. His approach was “grip-it-and-rip-it,” and have fun while you are doing it. When it came to fun, he had an almost obsessive passion for the game of golf that began in his youth. He played on over 600 of the leading courses throughout the world, was a long-time board member of the Royal Canadian Golf Association, and helped run the Canadian Open. He even served for a time as a highly respected Golf Digest course rater for Canadian and US golf courses, and he was not shy about complaining of the unnecessary difficulty of some greens. Golf played an important role in helping John develop business relationships and loyal friendships that endured for over half a century. He described it as a networking game played all over the world. In addition to golf and work, John devoted a tremendous amount of personal time to mentoring and teaching. I experienced the guidance of “Mr D” first-hand. He focused on me and taught me everything he knew. He pushed and challenged me. As a great networker, he introduced me to everyone – and he seemed to know everyone. He was Facebook and LinkedIn and the World Wide Web all rolled into one. He worked a room better than anyone I ever knew. Amazingly, he did it the old-fashioned way, as he never had a cellphone or even a computer. I was lucky. When I met my boss nearly forty years ago, I won the lottery. What skills I have today, I owe them all to Mr D.

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Since the publication of the first edition, all of us at Formula Growth have been missing John Dobson, his wise guidance and zest for life. But we are thankful to be in a position to once again share his story among as wide an audience as possible, and to be faithfully carrying on his work for the benefit of our clients and Canada as a whole. We are committed to be building on a sixty-year track record of steering our investments, and our business, in one direction: Up and to the Right. Randall W. Kelly Chief Executive Officer, Formula Growth Limited

Even when he was a little boy, John Dobson’s forthright personality was obvious to see.

Young John with a grapefruit — a rare treat in 1934 — and his family’s big car.

John is on the right of this picture, together with his sister, Virginia, and his father, Sydney Dobson.

Since you cannot play golf in a Montreal winter, young John turned his attention to hockey.

Fortunately, the snow would eventually melt and allow John to pick up his golf clubs.

John with his friend Jacques Tétrault and two young women, one of them feeding a piglet in the landmark Montreal restaurant Au Lutin Qui Bouffe.

John Dobson, the quintessential young businessman.

John, his sister, and his mother. The young man’s fixed smile seems aimed at his mother’s hat.

On the practice tee at the Mount Bruno Country Club.

At the Royal Montreal Golf Club in 1980, helping run the Canadian Open.

As the friendly inscription shows, Dobson was on excellent terms with Canadian prime minister Brian Mulroney.

Confronting Sir Richard Branson, founder of the Virgin Group.

Receiving the Order of Canada from Governor-General Roméo Leblanc.

In 1996, McGill University awarded Dobson an honorary doctorate of law. Here he is with McGill’s chancellor, Gretta Chambers.

The Formula Growth family, circa 2000: Seated from left to right are John Dobson; Kimberley Holden, vice-president (retired); Randall W. Kelly, chief executive officer and co-chief investment officer; René Catafago, executive vice-president and chief financial officer (retired); and standing are Anthony T. Staples, vice-president and senior portfolio manager; and John Liddy, co-chief investment officer and executive vice-president.

To the end of his life, golf remained one of John Dobson’s passions.

Up and to the Right

Chapter 1

An Uncommon Man John W. Dobson was a study in contrasts. A wealthy man who always shunned luxuries and conspicuous signs of wealth. An extremely generous man who saw frugality as the ultimate virtue. A highly sociable and, at times, gregarious individual who nevertheless always lived alone and did not enjoy being the centre of attention. A life-long bachelor who often relied heavily on the support of women and took a keen interest in the careers and goals of young people. An affable person who could also be temperamental, impatient, and unwilling to suffer fools. An outstanding investor who made much of his money bringing new technologies to life but resisted most of them himself – he would always choose a smart conversation over a smart phone. An energetic and curious student whose 1949 McGill University yearbook quote paraphrased George Bernard Shaw: “Activity is the road to knowledge.” He followed this maxim over the next six decades. Talk to friends and colleagues about John Dobson, this man of contrasts, and they all agree that he was consistent about the three main passions in his life: work, the promotion of entrepreneurship, and the game of golf. He pursued all three with remarkable energy, dedication, and enthusiasm, adhering to the highest standards of honesty and integrity. In the process, he had a huge impact on those whose lives he touched, earning their unwavering loyalty and respect. “John really was in many ways a very decent, honest, and fine example of mankind,” says legendary Montreal money manager Stephen Jarislowsky, who knew Dobson since the early 1950s. “He was John, period. There were not too many people in his mould. I especially admired him as a decent human being, as someone who was trying to make a difference. He spent his whole life trying to

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change things in Canada for the better, whether it was entrepreneurship, or business, or politics. He had very strong values, which are hard to modify or shake.” While Dobson always demonstrated an unrelenting dedication to work in the service of his Formula Growth clients, he was also a strong believer in the importance of enjoying yourself, both on and off the job. “John always advised me to have a balanced approach,” said Ian Soutar, his long-time colleague and friend, who passed away in 2016 at the age of 79 after a multi-year battle against multiple myeloma. “He’d say: ‘You can’t spend all of your time in the office worrying about stocks. You’ve got to get out, travel a bit, and play some golf.’ John kept his life very simple. It was golf and it was the investment business. I think that’s one of the reasons why he was as successful as he was.” Formula Growth executive John Liddy notes that simplicity was a hallmark of Dobson’s life. Despite his considerable wealth, he stayed in the same modest apartment for thirty years. “He never lived large at all. His own self-aggrandizement was never a part of what he was about. I can’t think of many others like that. He was a real old-school, generous guy.” While he spent time socializing and playing golf, work was often foremost on Dobson’s mind, but there was not always a clear distinction between the two pursuits. “You were always challenged by John,” says Peter Mackechnie, a former Formula Growth executive. “For example, he’d suggest an afternoon of golfing. But when we’d get back to the office, we’d go over what we called target sheets to assess stocks. It was a very serious attitude there. There was no fooling around when we were working on stocks because John believed so much that the unit holders deserved the best we could give them. And he gave a lot.”

• Punctuality • Dobson’s energy was legendary – few could keep up with him. “He was always the last one in the room, looking for something to do,”

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says Randy Kelly, who succeeded him as Formula Growth’s president. “After a long night of business meetings or socializing, he would still get into the office right on time the next morning and be ready to go.” In fact, one of Dobson’s most intractable quirks was his obsession with being on time. “The number one lesson from him is the importance of punctuality,” says his niece, Diana Knox. “In his mind, if you weren’t punctual, you were showing the other person that their time is not as important as yours is. You had to always make sure you were on time for John, or heaven help you otherwise!” Bette Lou Reade, a long-time Formula Growth portfolio manager, recalls accompanying Dobson and Ian Soutar on a business trip to Dallas, Texas, where a number of appointments had already been lined up. “The plane was late, and because we were staying for a couple of days, we had each checked in several suitcases. When the plane landed, John would not let us get our bags off the carousel. He insisted that we had to get in the limousine and make it to the meetings. So, the whole day I could not concentrate on a single company because I thought I was going to lose my suitcase. It was just sitting in Dallas Airport on the ruddy carousel! We went back to the airport that night, and sure enough, there were the bags.” This unflinching dedication to punctuality even extended to leisure activities. “Sometimes we’d have a golf game. You’d get off a plane, and all John would do was go straight to where we were going to play golf,” says Reade. “You could never eat, never had a chance to change. You just had to get there.” At times, some felt that Dobson’s intolerance for tardiness bordered on rude, yet it was so extreme that it could sometimes be amusing. “I remember going one day to the Four Seasons Hotel in Montreal to pick up a friend of John’s from California who was here to attend a meeting,” says Barbara Ellis, Formula Growth’s longtime office manager, who retired from the firm in 2014. “John had told his friend to meet us at 5:03 p.m., but at 5:05 p.m. he wasn’t there, so John drove off. I said, ‘He’s only two minutes late! Can’t we wait a bit?’ ‘Nope,’ John replied. ‘I told him 5:03. I gave him two

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minutes. He’s late!’ I don’t know what happened to him, but I don’t think he made the meeting.” Even though Formula Growth made many successful investments in technology firms, Dobson displayed a complete lack of interest in computers, mobile phones, or other modern communication devices. “John didn’t keep up with information technology systems and never had a cellphone,” noted Ian Soutar. “He was always quite resentful of the fact that when he’d come into the office people had no time to sit and talk to him. They’d be looking at their screens, emailing people, the kind of stuff that goes on in the real world. The whole information flow has changed now. It’s so much quicker and so much more intense. Whether it’s better or not, I don’t know, but it’s the way people operate today. His view was that we’re really wasting our time too much, and there’s a whole load of information that we can’t process anyway.” Dobson, who never married, had a somewhat conflicted relationship with women. While relying on their support, especially from Formula Growth colleagues such as Barbara Ellis, Bette Lou Reade and Kim Holden (Bette Lou’s daughter and a one-time portfolio manager), when push came to shove, he preferred to deal with men, even on social occasions. “All John’s stuff did not involve wives, so if we went to a hockey game or something, it would generally not be with wives because he didn’t have one,” says Peter Mackechnie. “He was all into business, growth, opportunities, and free enterprise, that kind of thing. He really didn’t have time for women, but he enjoyed their company nevertheless.” Ian Soutar recalled that his former partner, the late Neil Ivory, once invited Dobson to have dinner with him and his wife. Dobson had a girlfriend with him, and he was going to a hockey game that evening. “They got through the main course, and the dessert was about to come. But John looked at his watch and said it was time to go to the hockey game. His date said it was impolite to leave, and she was going to stay for dessert. John said that was fine. He got up, left his date there and went to the hockey game by himself.” Soutar said

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that this story reveals a lot about Dobson’s character. “I think that if you are going to get married, if it’s going to last, you’re going to have to compromise. And he was not fond of compromising.” Dobson’s unusual temperament was a source of bemusement among those who knew him well. “You could never foresee how John would react,” says René Catafago, Formula Growth’s former CFO and executive vice-president, who was also Dobson’s personal financial and tax advisor. “He was very unpredictable. One time he gave me hell for ordering a new desk, saying it was a waste of money. Yet he could be so generous. He was also absent-minded. I remember one day he was in the boardroom and my office was not too far. I heard him scream for me, so I immediately jumped up and said, ‘Yes, John?’ He responded, ‘Not now, I’m busy!’” Sometimes Dobson’s meticulousness and attention to detail, so critical to his success as an investor, could be maddening, according to Catafago. “I once was at a meeting, giving John spreadsheets of companies I had analyzed. Everything was so neatly done, with columns, ratios, and cash flow. It was a nice sheet per company. Everything was pluses and minuses, which were in brackets. I saw John looking very perplexed about the whole thing. He turned around and showed the sheet of paper to Ian Soutar and said, ‘Ian, don’t you think the way he does his brackets is funny?’ I got so mad, I said, ‘John, after all the work I have done, all you have to pick on is my brackets?’”

• Generosity • Despite his quirks, Dobson is fondly recalled for his generosity and concern toward others. “He genuinely cared about people in this organization and keeping everyone together,” says Kim Holden. “He fostered this culture of togetherness, always asking how the day was going, how the evening and vacations were, and so on. He was very good about it.” Dobson’s generosity, often spontaneous, is legendary. “I had no money at all when I started, and the banks wouldn’t give me a mortgage,” says Bette Lou Reade, who

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was anxious to buy a home. “As soon as John heard about it, I got my mortgage.” “In the 1970s, John started providing financial assistance for youngsters, including the children of his friends who were attending university,” said the late Robert Paterson, a boyhood friend. “No one knows how many he helped. He seemed uncomfortable with people being aware of his generosity, as this was a private matter with him.” Jim Durrell, a businessman and former mayor of Ottawa, knew Dobson since the 1950s when his father worked with Dobson at Dominion Engineering Works in Montreal. Durrell likes to tell a remarkable story about Dobson’s impromptu approach to giving. It happened a few years ago after a game of golf at the Cape Breton resort of Baddeck, where John was having dinner with Kelvin Ogilvie, then president of Acadia University (and a retired member of the Canadian Senate), and Harvey Gilmour, an Acadia fundraiser at the time. “The maître d’ came over after we had eaten and said he hoped we enjoyed the meal,” Durrell recalls. “Kelvin mentioned that the waiter had done an outstanding job. The young fellow came over later to thank us for the compliment, and we asked him where he was going to school. He said he had wanted to go to Acadia, where his father had gone, but his family didn’t have the money. He was working to save up for next year. Ogilvie gave him his card and said, ‘I’m the president of Acadia. Your marks are all right?’ He said yes, his marks were great. Then the Dobber [as Dobson is known to some intimates] chirped in: ‘If your marks are good, then you have a four-year ride at Acadia courtesy of me.’ The fellow graduated a couple of years ago and did exceedingly well.” Durrell suggests there’s a moral to this story. “I’ve since said to my kids, ‘Treat everybody you deal with respectfully because you never know who they may be.’ My dad would always say, ‘The world should be a better place because you’ve been here.’ That’s been a guiding principle for us throughout life. And there’s no question the world has been a better place because the Dobber’s been here.”

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According to Durrell, Dobson never hesitated to give his straight and unedited opinion. “He didn’t tell you what you wanted to hear, rather what he thought.” He remembers toying with the idea of getting an MBA as a young man, and Dobson advised him not to, saying the degree was overrated. “He felt I should get out and work more. He said there were too many people with theories and not enough practical experience.” Durrell formed his own business and later spent a lot of time with Dobson working on a business plan for a new concept. “Our idea was to privatize recreational facilities across Canada. John gave me advice and lent me some money as an investment. He has a powerful personality, but for all of his bluster, he was as compassionate and caring an individual as you can find. If someone asked what I admired about John, I’d say his philanthropy, and his assistance to people was consistent and always without fanfare.” Durrell eventually sold the recreational company to a US buyer. He went on to become a prominent member of Ottawa’s business community, serving as president of the Ottawa Senators hockey team and chairman of the Ottawa International Airport Authority, as well as spending five years as the city’s mayor. In 2012 he was appointed a member of the Order of Canada for his decadeslong contributions to the city of Ottawa as a businessman, mayor, and committed volunteer. While Dobson usually limited his giving to entrepreneurial or academic pursuits, he was sometimes willing to bend the rules. Nancy Durrell McKenna, Jim’s sister, approached Dobson in 1996 about an idea for improving the health of mothers in Africa. She had a chance to work on a project in Ghana and asked Dobson if he would be willing to give her $50,000. “He said I wasn’t an entrepreneur and he wasn’t supporting maternal health, but he told me he supported me as an individual. A charity in Canada was able to accept his donation, and it was given to me then to do the work,” she recalls. Today, Nancy Durrell McKenna is Founder Director of SafeHands for Mothers Charitable Trust, a UK-based charity that supports safe maternal health practices in developing countries.

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“The most important lesson I learned from John was giving. He had a huge philanthropic spirit. He supported entrepreneurs and put many people through university. Giving back was very, very important to him.” Prominent research scientist Sam Catherine Johnston was another recipient of Dobson’s generosity. Despite her somewhat lessthan-stellar academic performance at McGill, he backed her in the pursuit of a doctorate at Harvard. Her goal was to design, implement, and evaluate a global development program for mental health policy planners and doctors who care for refugees and assist people in post-conflict areas. “Where most people who would provide a scholarship for a young person would look first and foremost for a perfect academic record (which I did not have upon graduating from McGill), Mr Dobson instead paid attention to my work in education in the two years after I graduated, as well as my strong desire to do something innovative. Global Mental Health Program trains fifty doctors around the world, a testament to Mr Dobson’s generosity and his willingness to take risks in investing in young minds.” Today, Johnston is director of postsecondary and workforce development at the Center for Applied Special Technology (CAST), a non-profit education research and development organization that works to expand learning opportunities for all individuals through universal design for learning. Florence Tracy, retired director of McGill Residences, credited John’s generosity for the provision of needed bursaries for many McGill students. “John donated [money] to McGill for me to use without restrictions and to disburse according to my own discretion,” she wrote on the occasion of Dobson’s eightieth birthday. “One student applied for a Rhodes Scholarship in the Caribbean region but was unable to afford to travel home for the interview. Thanks to John, she was able to attend and become the first woman from the Caribbean to be selected as a Rhodes Scholar.” Tracy noted that Dobson also funded the establishment of computer labs at six McGill residence halls in 1996, long before students routinely arrived with

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PCs. Alex K. Paterson, a prominent Montreal lawyer and former chair of McGill University’s board of governors (and the cousin of Dobson’s boyhood friend Robert Paterson), noted on the same occasion that hundreds of students across Canada received the benefit of Dobson’s generosity. “A lot [was] done anonymously. Many others benefited from his investment advice for over half a century and were guided not only by John’s investment wisdom but by his counsel on a litany of subjects.” Dobson’s support for young people was consistent throughout his long career. Philippe Hynes is a prime example. He first met Dobson while he was working as a bartender at Dobson’s beloved Mount Bruno Country Club near Montreal. Later, while at Concordia University, Hynes participated in a Formula Growthsponsored portfolio management competition, and Dobson became his mentor. “He gave me advice on where to go for a master’s degree,” Hynes recalls. “I had been accepted to Boston College, and he offered to pay. But after making some phone calls, he said that it doesn’t matter if the university you go to is not one of the top twenty. Because of his advice, I decided to go to L’École des hautes études commerciales (HEC) in Montreal, which turned out to be the best decision.” By staying in Montreal and getting to know investment firms there, Hynes positioned himself for a successful career. After working for Van Berkom and Associates Inc., he co-founded and is currently the president of Tonus Capital Inc., an investment and portfolio fund manager. But Dobson was still there for him. “John invested in our fund, which is a great reference to have in Montreal. He was so well respected, and his involvement gave us credibility.” Hynes retains enormous respect for Dobson and remains forever grateful for his backing. “He was always there to guide me. He was very generous with his time and money.” Hynes was not a member of the Mount Bruno Country Club, but in 2008 Dobson even sponsored his wedding reception there. “He invited me to play golf that morning with my father and father-in-law. It was quite a thrill.”

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• Philanthropy • Diana Knox considers her Uncle John to be a “genuine philanthropist” who did things quietly and often anonymously. After graduating from high school, she decided to study languages in Switzerland for a year. She suspected her uncle helped finance the trip, but no one ever told her so directly. On her return, she enrolled at university in New Brunswick and there met her future husband, Parker Knox. “We have instilled an interest in travel and languages in our own kids, and I think this interest goes back to John. All of this happened because of him,” she says. Parker Knox says Dobson has also been a marvellous role model for him, especially when it comes to leadership. “While leadership is fundamental in business, Dobson believed it is lacking in today’s world,” he says. “Many people will think of him as an entrepreneur, but his views on leadership were fundamental.” Dobson’s belief in being ethical in business still inspires Knox. “If I had trouble with how to handle a business situation, John would counsel me by asking me good questions, but never clearly telling me what to do. He led me through a process of discovery. He didn’t tell me what to think but told me about different perspectives to view the issue from.” This humility is a constant theme for those who knew Dobson. “John was very blunt and direct, but also highly trustworthy,” says Reuven Brenner, the retired REPAP chair of economics at McGill University’s Desautels Faculty of Management, and a long-time Dobson confidante. “He was very humble and modest. You discovered his giving almost by accident. He was one of the few who practised what he preached.” Brenner remembers first meeting Dobson when he was moving into his McGill office more than twenty years ago. “The boxes had just arrived at my office. I was unpacking when John knocked at the door. He came in and said, ‘I am John Dobson. Go on doing what you’re doing.’ I had no idea who he was. I asked the dean, who told

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me, ‘Don’t ask questions. Just keep him happy. He’s one of our biggest donors.’ I do not know if I managed that, but it was the beginning of a long, close friendship.” The late William I.M. Turner Jr, a board member of the John Dobson Foundation for many years, said that what Dobson did with his money was selfless, and helped to influence generations of new entrepreneurs throughout North America. “He was a very good judge of people,” said Turner, a prominent businessman who passed away in 2015. “On occasions, he was a little impatient of stupidity. He deserved his good friends. He worked hard for them.” “He was a loyal man, so he had very many loyal friends,” agrees former Canadian prime minister John Turner, who could rely on strong support from Dobson throughout his political career. “I was a friend of his for nearly seventy years. We shared a lot of confidences. We saw eye to eye on most issues.”

• investing in the course • Investing may have propelled John Dobson’s professional life, and entrepreneurship education may have dominated his philanthropy, but when it came to his personal life, no passion was more central than the sport of golf. From the moment a visitor walked into Dobson’s office at Formula Growth, the role of the game in his life was there for all to see: a set of golf clubs standing beside his desk, ready to be hauled into action at a moment’s notice. Since his teens, when John Dobson took up the sport at the Mount Bruno Country Club on the south shore of the St Lawrence River opposite Montreal, golf was seldom out of mind. “It’s a disease,” he readily admitted, describing golf as “a kooky game but a helluva good way to spend a life.” A central part of Dobson’s social life, golf was also the catalyst that allowed him to see the world, driving him to play at more than 600 separate golf courses around the planet, including premier courses in Australia, Japan, Latin America, and Scotland, the game’s homeland.

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For over half a century, golf proved its worth to Dobson as an unparalleled way to forge and maintain business relationships and friendships. “It’s a networking game played all over the world,” he said. “When you play golf with somebody for four hours, you get to know them a bit.” Wrapped up in this intense love of the sport was Dobson’s profound attachment to the Mount Bruno Country Club on the South Shore of Montreal. “I virtually grew up in Bruno,” he noted, calling the club by its diminutive. When he was much younger, it would take no more than fifteen minutes to drive from the family home in Montreal’s Square Mile to his beloved Bruno across the historic Victoria Bridge. “He was a very highly regarded member of the Mount Bruno Country Club,” said the late Drummond Birks, whose grandfather owned part of the property on which the course was built almost a century ago (it opened in 1918). “I think he was the second-oldest member, but I had ten years on him. I was a third-rate golfer, and he was better and much keener.” Indeed, as late as his mid-fifties, Dobson’s handicap was in the low single digits. According to Birks, the origins of the club date back to the late nineteenth century when Edson Pease, head of the Montreal office of the Merchants’ Bank of Halifax (forerunner of the Royal Bank of Canada), decided to build a summer home on Mount Bruno because of its beautiful landscape and close proximity to Montreal. He asked two brothers from the Drummond family, who were running steel distributor Drummond McCall, to join him in making a bid for the property. One of the brothers was Birks’s grandfather. In the early 1890s, the three friends built their homes on Mount Bruno, and Pease later became a prime mover behind the establishment of the Mount Bruno Country Club, even though he was not much of a golfer himself. In the contained world of Montreal’s Anglo elite, Mount Bruno was the Royal Bank’s answer to the venerable Royal Montreal Golf Club, a bastion of the arch-rival Bank of Montreal. In fact, John’s father, Sydney, who spent his career at the Royal Bank, was president of Mount Bruno Country Club in the 1940s.

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Brenda Norris, the sister of John Turner and a long-time friend of Dobson, recalls an amusing incident on the golf links dating back more than sixty years. “It was the summer of 1949 in St Andrews, New Brunswick, where we spent every summer, as did John and his sister, Virginia. I was attempting to learn golf but wasn’t much good at it and didn’t much like it. Tennis was my sport. However, one of my current boyfriends was an avid golfer, and so I persuaded John to join us on the golf course. Every time my friend was either looking for his ball or looking the other way, John hit my ball for me. My beau was mightily impressed, and years later when I bumped into him (the romance didn’t last!), he asked me if I was still a great golfer, and I replied, ‘Of course!’” In his hallmark red jacket, sweater, or polo shirt, John Dobson soon became a hugely popular player at Mount Bruno and elsewhere, known for his great sportsmanship and dedication to the game. As a governor of the Royal Canadian Golf Association and an honorary director of the Quebec PGA, he was a big supporter of golf across the country. He also introduced a trophy for the winner of the annual Quebec Pro/Junior Golf Tournament, which for many years was held at Mount Bruno. In 1975, Dobson helped run the Canadian Open with John Churchill-Smith, a friend whose son Michael became Dobson’s personal physician. It was being played at the Royal Montreal Golf Club, where Dobson was not even a member, although ChurchillSmith was. It was very unusual for the chair of the Open not to be a member of the host club, but nobody was upset in this instance, such was Dobson’s stature in the Quebec golf scene. Dobson met many important and influential people on the golf course over the years and understood the value of developing strong relationships. He recalled once running into golf legend Jack Nicklaus (“The Golden Bear”) during a tournament in Florida. “We weren’t on the same team, but mine was running second to last. I went up to Jack and said, ‘If you were on our team, we would be first!’ He joked that he would have played with us if he

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wasn’t already committed. How many people could have had such an encounter?” On another occasion, during a game at Lake Nona in Florida, Dobson ran into Denis Thatcher, husband of then British prime minister Margaret Thatcher. The Canadian prime minister at the time was Brian Mulroney. “We had met several times before,” Dobson recalled. “Anyway, he says to me, ‘That boy you have up there is not very smart. He’s managing everything wrong when it comes to South Africa.” Dobson also recalled playing golf with Robert Lowry, the Lord Chief Justice of Northern Ireland, at a course in Ulster. “We were on the ninth hole, and he had his bodyguards around. Suddenly, this golf ball comes bouncing around and hits Baron Lowry right in the face. I turn to a bodyguard and say, ‘You’re supposed to protect this man. What kind of a guard are you?’ He thought it was pretty funny.” Golf was the centre of Dobson’s social life, and it soon determined what he would do with his vacation time as well. For almost three decades, from 1968 to 1997, Dobson was a member of the Roger Bacon Golfing Society, a loose grouping of eighteen fanatics dedicated to playing “good” golf courses and meeting golfers “everywhere other than in Montreal.” The society took its name not from the famous philosopher, but instead from a legendary nineteenth-century Scottish golfer of the same name. During the Roger Bacon Golfing Society’s history, members participated in thirty annual tours, during which they played 210 rounds of the game at 131 golf courses in Canada, the United States, England, Scotland, Wales, Ireland, Northern Ireland, and the Channel Islands. Golfers included members of the Royal Montreal Golf Club as well as Mount Bruno. Many were also members of the world’s most prestigious clubs, thanks in large part to access facilitated by involvement in the Roger Bacon Golfing Society and the multiple connections of its members. Over the years, members played a total of forty-one matches against teams from twenty-five clubs and three societies, beginning at Royal Aberdeen in 1970, and the last one at Elie in 1996, both

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in Scotland. In the Bacon Chronicles, a privately distributed book recounting the history of the society, Dobson is satirically described as “a very noisy stock promoter renowned for sartorial elegance, in red.” John Gray, a friend since the 1930s, played golf with Dobson on countless occasions and praises his contributions to the Royal Canadian Golf Association. “We were keen to do better and occasionally had a good round. He was very interested in the game.” Like other golf buddies, Gray became a unit holder of Formula Growth at its inception. “I believed in the integrity of the man. That’s the only basis for investing in anything – to understand the people you’re dealing with and to only deal with those you know have integrity. I’m not interested in some guy recommending something to me. I want to know that he has skin in the game.” Another long-time Dobson friend and Formula Growth investor, Edmond Eberts, ran the Turnberry Golf Tour from 1985 to 2004, an annual international invitational event. “The great Dobber – there was only one of him,” he enthuses. Eberts, who has authored several books on golf and is chairman and founder of Rapport Capital Formation Strategists Inc., went to Bishop’s College School with Ian Soutar. Like Dobson, he also worked at C.J. Hodgson, opening their first Toronto office. He met Dobson around 1965, only a few years after Formula Growth was set up. In 1986, Dobson endorsed Eberts’s nomination as a new member of the Royal and Ancient Golf Club of St Andrews, Scotland. “There are only 120 Canadians among the 1,800 members,” Eberts notes. Montreal art gallery owner Robert Landau met Dobson in the early 1990s through golf at Mount Bruno and later joined him on golfing trips to Bermuda and Florida. Landau also became a Formula Growth investor. “A lot of people and members of the golfing fraternity invested in his fund. I invested later within my capacity and over the long term did very well. He had a very good track record, was always very honest and honourable,” says Landau. Still another of his golfing partners was Montreal dentist Frank Kay, who got to know Dobson through the sport and later invested

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with Formula Growth. (He also took on Dobson as a patient.) He recalls that early in their friendship, Dobson had invited him to play golf after someone in his Mount Bruno golf group had fallen ill. “He was a very persistent man. He called me at least five or six times! He convinced me to go to dinner and to go on a golf trip to Las Vegas. When I came back, I invested in Formula Growth. The first year there, I lost half my money. But he had a good track record, so I doubled up and did extremely well for the next thirty years. I was always impressed with his straightforward honesty. He and I basically had the same philosophy about golf as well – they tend to make golf courses too hard for no particular reason.” Dobson’s tendency to be opinionated did not leave him on the links. “John’s enthusiasm for this great game has never waned,” Gregor Jamieson, director of golf at Florida’s Lake Nona Golf & Country Club, wrote on the occasion of Dobson’s eightieth birthday. “He continues to make comments on the handicap system as well as the speed of greens. His opinion is that they are altogether too fast, which I concur with, as the skill level of most players is not good enough to be able to play at our speed.” That passion for the game sometimes bordered on the foolhardy, according to former Formula Growth executive Peter Mackechnie. “We once played Castle Pines golf course just south of Denver, where they played the PGA International Tournament. There was this wild thunderstorm, and everyone was off the course. But Dobson was so determined to see it through. The bloody thunder and lightning were rocketing off the rocks by the side of the course, and by the end of the eighteen holes we were totally drenched. I was really glad to be alive and relieved that I wasn’t struck by lightning. Dobson walked into the bar area, and like he always used to do, he would give his name first, ‘John Dobson, Montreal.’ And he said, ‘I’m the special representative from the Royal Canadian Golf Association who rates the courses, and I would just like to tell you that this golf course that I played today . . . ’ And I thought, ‘John, how can you be saying this? It was raining so hard! We were running for our lives!’ But he said,

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‘Of all the golf courses that I’ve ever played around the world, this ranks in the top ten.’ I felt so relieved because I didn’t know what he might say, and I thought the members might hang him!” Steve Farlow, founding executive director of the Schlegel Centre for Entrepreneurship at Wilfrid Laurier University in Waterloo, Ontario, fondly remembers playing golf with Dobson a couple of times a year at Mount Bruno. “He absolutely loved playing golf, but the rule was that when you’re out on the golf course, you don’t talk business. He liked to play fast, have a nice dinner, and then talk business. To John, golf was golf. I can’t tell you how much I enjoyed the five or six times I came to Montreal. We had a meeting at about 10:00 a.m. that would last maybe forty-five minutes. Then we’d be off in cars to Bruno for a quick lunch. Then out onto the golf course for the afternoon, followed by dinner. It didn’t matter how well you played, but you had to know the rules of the game and play it properly. He didn’t take his game too seriously, but as he aged, his scores would go up. He played very well. You wouldn’t spend a lot of time looking for a golf ball. If it wasn’t immediately apparent, he’d say, ‘Let’s move on, let’s keep going.’ He was focused on punctuality.” On the occasion of Dobson’s sixty-fifth birthday in 1993, the Formula Growth team organized a surprise for him at Mount Bruno. As former broker Robert Power recalls, “We had a great game and I was tasked with organizing it. There was a surprise party for him on the eighteenth hole. John and I came up and all his colleagues, friends, and members of the network were standing there holding up this big banner wishing him a happy birthday. The eighteenth hole was a difficult one, and John just lined it up and sank it for par, straight and true like his character. I think he was very proud, and very touched.” Affable. Temperamental. Loyal. Unpredictable. Generous. Shrewd. Fun-loving. John Dobson’s diverse qualities made him one of the most intriguing business personalities ever to emerge in Canada. And none of it would have been possible without the lessons and values instilled in him at a young age by the most important person in his life: his father.

Chapter 2

A Father’s Son “An honest day’s work for an honest day’s pay is still a good recipe for prosperity, perhaps the only formula that will ensure lower prices, a higher standard of living, and lasting good times for all.” — Sydney George Dobson

When John Dobson was a boy, his father would set aside $100 in shares every year in his name. “They belonged to me, but father wouldn’t let me touch them or do anything with them,” John recalled. “We would sit around and discuss the investments and why he made them. But that was it.” Finally, when John turned eighteen, his father gave him access to the funds, which had grown into a tidy sum thanks to the magic of compounding. John promptly decided to invest most of it in a silica mine headed by a friend. “When my father heard about my plans, he said, ‘No silica company has ever made money in Quebec,’” John would later remember. “He would make subtle comments like that but never direct me to do something. So I bought the shares and lost all my money.” That first investment over sixty years ago taught him a valuable lesson about risk and reward, the importance of doing your homework properly and the value of obtaining expert advice from others. In many ways, the foundation for John Dobson’s success lay with his father, Sydney George Dobson, whose initial guidance on the merits of saving and investing was one of many influences on his son. An unassuming man who worked for more than fifty years at the Royal Bank of Canada, Sydney Dobson rose from a lowly clerk to become its president and chairman. He epitomized many

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of the personality traits and beliefs that John held dear throughout his life: the importance of self-reliance, hard work, and entrepreneurship; a suspicion of big government and an abhorrence of over-taxation; a keen interest in young people; and a selfless generosity toward others. “I’m living life as my father’s son all the time,” John would say. “He had a great deal of common sense and knew everybody worth knowing in Canada, from Louis St Laurent to C.D. Howe. You can’t get a better deal than that and would be a fool not to benefit from it.” Sydney Dobson was born on 20 September 1883. He was the youngest of five children of Job William Dobson, a wealthy marine contractor and farmer in Sydney, Nova Scotia, and his wife, Harriet Martell. At the age of seventeen, Sydney decided he was done with school and told his parents that he wanted to start working. His father tried to persuade him to go to college, but having failed in this, succeeded in getting young Sydney a job at the local branch of the Merchants’ Bank of Halifax. That was in 1900, a year before it was renamed the Royal Bank of Canada. Organized in 1864 by seven merchants who needed a bank for their foreign business, Merchants was already the largest banking organization in Canada and the twelfth largest in the world, with assets of over $2 billion. The Dobson home was across the bay from the rapidly growing steel town, which meant that young Sydney had to row across the water to and from work, a story that remains legendary at the Royal Bank over a century later. He worked as much as twelve hours each day, most of the time delivering and collecting bank drafts. His salary was a princely $100 a year, or just under $2 a week. After four years at the Sydney office, Dobson was transferred to Truro (farther west in Nova Scotia) as ledger keeper, where he crossed paths for the first time with Morris W. Wilson, who was to become a trusted colleague and mentor. A future Royal Bank president, Wilson was an accountant at the branch and quickly marked Dobson for promotion, impressed by his “unusual qualities of application and accuracy,” his penchant for hard work and his conscientiousness.

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Sydney Dobson was part of an extraordinary tradition of Maritime entrepreneurial geniuses, individuals whose business abilities, tremendous drive and inexhaustible work ethic propelled them to the pinnacle of success in Canada and abroad. They included men such as Max Aitken, the New Brunswick schoolboy who became British newspaper baron Lord Beaverbrook; his one-time partner, Izaak Walton Killam, who emerged from Yarmouth, Nova Scotia, to become Canada’s leading industrialist; and Sir James Dunn, a New Brunswicker who made his fortune in mining, steel, and shipping. Over the next fifteen years, Sydney Dobson would rise rapidly through the ranks at the Royal Bank, criss-crossing Canada to assume management positions at branches across the country. In 1916, he was appointed manager of the Vancouver branch; then, two years later, he was transferred to the superintendent’s department in Winnipeg. In 1919, Dobson was named general inspector at the Royal’s headquarters, which had moved to Montreal from Halifax several years earlier. He was appointed assistant general manager in 1922 and general manager in 1934.

• The Montreal Move • The late William I.M. Turner Jr, a former chairman of ConsolidatedBathurst Inc. and a friend of John Dobson for sixty years, recalled that Sydney Dobson’s transfer to Montreal happened almost by chance and was the result of his impressive judgment of people, a trait shared by his son. “The story goes that head office had offered Sydney a job as manager of the main office in Hamilton, but had asked him to stop by in Montreal for a day for a chat. Sydney walked in, and the general manager told him that he had to replace the general inspector of the main branch in Montreal. Sydney was asked for his opinion of the selected candidates. He replied that he wouldn’t choose any of them because none seemed to be qualified. Sydney returned to Hamilton, and when he arrived there, he found a telegram offering him the position in Montreal.”

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In Montreal, Sydney Dobson and his wife, Beatrice (née Chambers), settled into a comfortable apartment in Montreal’s affluent Golden Square Mile district on the slopes of Mount Royal, just west of McGill University. It was the home turf of Canada’s business elite, where railway and industrial tycoons had built sprawling mansions in the nineteenth century. Some of these mansions were already starting to make way for elegant apartment blocks and office buildings after the First World War. The couple’s daughter, Virginia, was born in 1921. John came along seven years later, on 25 July 1928. Sydney Dobson continued to earn promotions, and by 1942 he was vice-president and general manager of the Royal Bank. Three years later, he was named executive vice-president, working as righthand man to his old friend Morris Wilson, who had assumed the presidency in 1934. (Wilson was John’s godfather.) The two colleagues appeared together on the last five-dollar banknote issued by the Royal Bank in 1943, marking the end of the era when Canada’s chartered banks printed their own currency. The Bank of Canada, founded in 1934, gradually took over the responsibility for issuing currency. In 1946, Wilson died suddenly, and the Royal Bank’s board selected Sydney Dobson as his successor. “$100-a-Year Bank Clerk Now in President’s Chair,” proclaimed a 6 June article in the Toronto Daily Star. It was written by the financial editor, Beland Honderich, who would later rise to become chairman and publisher of Torstar, the parent company of the Toronto Star. At sixty-three years old, Dobson was characterized as a modest man who was loath to speak about himself or his banking experience. Honderich described Dobson, the fifth president of the Royal Bank, as “a short, stocky man 5’7”, 170 pounds, with steel-grey hair and hazel eyes” and “as friendly and informal as a prairie merchant.” “He is recognized as a keen, forthright banker whose hard work has been the principal reason for his success.” “He walks four miles each day to and from his St James Street office and his Sherbrooke Street apartment. It is a rare occasion when he rides, even during the cold winter. He smokes a pipe, but seldom at work, and flowers are taboo

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in his office except for May flowers once a year from the Maritimes,” Honderich wrote. Reporting on the new president’s appointment, the Montreal Gazette described Dobson as “a virile man, active and endowed with an abundance of energy. He likes motoring long distances and has an itch for golf. His first love is the sea and the ships that ply upon it, and his greatest hobby, banking.” Away from the office, Sydney spent most of his time with his family. John’s lifelong passion for golf was already in evidence, as one newspaper reported: “Although [Sydney Dobson] plays golf in the ’80s, he has to admit that his son, John, 18, usually beats him. A Sunday morning during the summer usually finds father and son walking along the Montreal harbour just to look at the ships.” On weekdays, Sydney would occasionally take his young son on visits to fire stations and local branches of the Royal Bank, where he would be greeted with the deference accorded to the bank’s top executives. Sydney would also begin to explain to John how the bank worked. “During the war, father would tell me that the Canadian government would store its war plans in the bank’s vaults for safekeeping overnight,” John recalled. “That’s how respected he was by the powers that be.” Sailing and sailboats were the pride and joy of Sydney Dobson’s life. The walls of his office were lined with pictures of sailing vessels, including his own schooner, the Eskasoni, docked in his hometown of Sydney. (In 1954, the Dobson Yacht Club was established on land known as Shingle Point, which belonged to Sydney and his sister. Today, Dobson Yacht Club describes itself as Cape Breton’s premier yacht club.) “He lived on his boat for the two summer months each year that he could get away from the office and out to sea, often with daughter Virginia … as his helper,” one paper reported. One summer, when his only companion fell overboard in a heavy sea, Sydney skilfully manoeuvred the schooner and rescued him. In 1946, another newspaper profile of Sydney, this time in the St Maurice Valley Chronicle, reported that the new Royal Bank of

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Canada president “is not the traditional banker type,” and listed a number of traits that could later be said to characterize his son. “He is easy to meet, keenly aware of his responsibility as head of an institution serving the general public. His approach to problems is direct and incisive, his decisions quickly made,” the Chronicle continued. John recalled that his father had a particular penchant for cars and sharing long drives with his chauffeur. “It was not unusual for him to get in the car with his driver and spend two days driving to Nova Scotia for a one-day meeting, and then spend two days coming back. That certainly wasn’t my idea of fun, but he loved it!”

• Community and Charity Work • Setting an example for his children, Sydney Dobson was active in the community, chairing fundraising campaigns such as that of Montreal’s Welfare Foundation and Federated Charities, a precursor to the United Way. Federated Charities funded the work of thirty-three humanitarian organizations, including those that served destitute families, helped homeless and neglected children, and provided health services, as well as promoting “character building” among the young. Sydney Dobson also emerged as a Canadian pioneer in the corporate sponsorship of sports. In a story that has become part of Olympic lore, Sidney Dawes, the head of the Canadian Olympic Committee, phoned Dobson in 1947 and pleaded desperately for the Royal Bank’s help in getting the Canadian Olympic team to the 1948 Winter Games in St Moritz, Switzerland. The Olympic Games were just a short time away, and the team did not have enough money to make the long and costly journey. Dobson did not hesitate; he supplied the needed financial support and saved the day. This started a long tradition at the Royal Bank of supporting Canadian athletes in general and the Canadian Olympic team in particular. Sydney was frequently outspoken about current events. He was strongly anti-Communist, fervently pro-business, and opposed to big

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government – all opinions that his son, John, would echo. Appearing at his first Royal Bank annual meeting as president in January 1947, he provided his formula for future prosperity: increased industrial output, improved cooperation between management and labour, and substantial tax reductions. At the same time, he warned that lavish government expenditures, low productivity, and higher wages would never be the ticket to good times. He also railed against sloth. “I regret very much the irresponsible outlook many persons have regarding work and wages,” he lamented. “I am one who also believes that the time will come again when possession of a job will be considered an asset, when having a little money as a standby will loom larger in people’s minds than leisure hours.” True satisfaction, Sydney maintained, can “only be found when the worker values mainly the work he does, and not how much he is able to compel the employer to pay. I believe in a high standard of living for everyone, and in leisure, but I am sorry to say that too many people today make high wages and plentiful leisure the greatest aims of their lives.” In a theme that would often be repeated in his speeches and writings, and later echoed throughout John’s life as well, Sydney Dobson reaffirmed his strong faith in the free enterprise system. At these meetings, held in the aftermath of the Great Depression and the Second World War, he argued that “the experiences of the past few years have brought home to all of us the fact that business and industry exist to satisfy the needs of people. I believe that prosperous business conditions will be the bedrock upon which people will satisfy most of their other wants.” He denounced high taxes, a subject that would also become a passion of his son, who was especially opposed to capital gains taxes. In 1946, Sydney noted that taxes accounted for 24 per cent of national income, more than double the level in 1938, following big tax increases needed to pay for the war effort. “The withdrawal of this money constitutes a drag upon business,” Sydney argued. “A substantial reduction in taxes would give an incentive to individuals and to industry, encourage expansion and new ventures, encourage

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greater production and lower prices, and therefore prove an aid toward a higher standard of living.” Sydney also frequently spoke out against restrictive trade practices and planned economies, which he said deprived the world of freedom of development and expansion of business. Denouncing “totalitarian” countries, he noted that the only two countries Europe could turn to for help after the war were the democracies of the United States and Canada. “It should be our objective to show that free enterprise is the only economic system in the history of the world flexible enough to change in keeping with the needs of its people.” Sydney Dobson consistently had an optimistic outlook about Canada’s economic prospects, a trait inherited by his son. “On the whole, our Canadian people are sensible and sound,” he told Royal Bank shareholders at the 1947 annual meeting. “They are entertained by pictures and stories of Utopia, but they know that success is not made of dreams. The story of Canada’s advancement is one of people and resources and the ingenuity of the people in using the resources.”

• The Dobson Diary • From 1938 to 1957, Sydney Dobson wrote a remarkable diary of over 300 pages, chronicling the events leading up to the Second World War, the war years, and the following decade. In the diary, sometimes written with John at his side, he demonstrated an ability to see through the fog to record events and interpret outcomes before they happened. Writing in the fall of 1938, Sydney saw that appeasement toward the Nazis was a horrible mistake, noting that while Britain had been preaching and acting for disarmament, Germany had continued to rearm itself. Commenting on the Munich agreement negotiated by British Prime minister Neville Chamberlain in October of that year, Sydney predicted that war was imminent. “Apparently, the cause of the back down by Great Britain and France was that they were not ready. But will they be ready when the next crisis comes? Personally,

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I do not think that they will be, as it will come too soon. I fear that Chamberlain’s ‘Peace in our time’ will not be realized.” The same perceptiveness was evident on the morning of 7 December 1941, when Sydney predicted that war between the United States and Japan would break out at any moment. Writing hours before news of the attack on Pearl Harbor, he stated, “The possibility of war between the United States and Japan is very near and may start at any time, perhaps in a day or two. I have been unable to believe all along that the Japs would be such damn fools, but there appears to be no limit to the arrogance of these people. I firmly believe the United States will have to fight them some day.” Sydney usually recorded the day’s events in his diary in the evening after being chauffeured or walking home from the Royal Bank’s head office on St James Street in the centre of Montreal’s thriving financial district. The Golden Square Mile, where the Dobson family lived for all of John’s childhood, was only a few miles away. “We moved about every five years, including to a house on what was then known as Mountain Street and an apartment on Sherbrooke Street, but we always stayed in the same area,” John later said. He remained loyal to the neighbourhood, living and working for decades in the same few blocks west of McGill University – blocks that are also within a short walking distance of Formula Growth’s offices on Sherbrooke Street.

• A Life of Privilege • By all accounts, John’s was a life of privilege, but also one instilled with sound values of honesty, hard work, and self-reliance that would serve as guideposts throughout his life. “John’s father may have been paid $30,000 to $40,000 a year, so they were certainly affluent,” said Robert Paterson, John’s schoolboy friend, who lived across the from the Dobson family during the Second World War. “But the family was frugal and careful about saving money, as people from the Maritimes could be expected to be. They were far from flamboyant, which was considered in bad taste after the 1930s.”

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John was expected to earn his own pocket money and had a regular newspaper route. “One summer, I worked at the Dupuis Frères department store in downtown Montreal in an attempt to learn French, but I wasn’t very successful,” he chuckled. The family would often go away for a month at a time to Chester, Nova Scotia, where he would swim, play golf, practise his tennis, and mingle with family friends from Canada and the United States, many of them prominent citizens. In winter, they would go to the family cottage in the Laurentian village of Sainte-Adèle for cross-country skiing and other winter sports (a tradition that would endure for over seventy years). Among John’s earliest and closest friends were twin brothers André and Jacques Tétrault, who lived nearby in the Golden Square Mile. “I was considered to be part of the Tétrault family,” Dobson said. “I was always over at their house, being consulted on family affairs. We almost lived together. We played sports and sat around on street corners talking into the late evening. Those were good days.” “He was a very easygoing guy,” said Jacques Tétrault, who would go on to found the law firm McCarthy Tétrault and become a longtime director of Formula Growth. (He passed away in 2017 at the age of 89.) “We played cricket and soccer together, and later on, I helped him organize activities at McGill, such as the Winter Carnival. We grew up together and were always great pals.” The trio all went to Selwyn House, a private boys’ school. Dobson admitted to being an average student at the time, although in university he would often score straight As. “I was middle range, but I was interested in everything that went on,” he said. “I never finished first, but I had a lot of energy and enthusiasm. I was always running around doing something, but not necessarily being productive.” John’s mother would make sure he made it over to Selwyn House, which, at the time, was right across the backyard from their house (it later moved to Westmount). “Mother was a very good looking, stay-at-home mom, whom everyone adored,” he recalled. “I was closer to father but always felt very fortunate to have such a wonderful mother.”

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Being a busy executive, Sydney had a laissez-faire approach to parenthood. “There was no time for him to discipline me,” John admitted. Sydney was a supporter of the federal Liberal Party, a tradition later followed by John, though he generally steered away from active politics. “His political leanings would have been Liberal, since that was all that there was around at the time, and he was friends with many prominent Liberals such as Louis St Laurent and C.D. Howe,” said John. “But he didn’t do anything of substance in politics.” The Dobsons were good church-going Protestants, although John admitted that he opted out as soon as he could. After church on Sundays, the family would go to the Mount Bruno Country Club for an afternoon game, allowing John to nourish a passion for golf that would remain with him throughout his life. “I started golf very early, at age eight or nine, and played my first game with a friend while my parents were off in Europe,” John recalled. “I had a terrible start: it took me seventeen strokes to finish the first hole. I got better after that!” Robert Paterson, who would cross paths with John throughout his life and have a long career at the Royal Bank, remembered that his friend was always keen on sports. “Everyone played hockey and baseball in his backyard,” he said. Occasionally, the Selwyn House hockey team would cram into the Dobsons’ large car with their duffel bags, skates, and sticks, to be driven by the family chauffeur to a local rink for practice. Even though John and his sister, Virginia, were not that close in age – she was seven years older – they always had great admiration and respect for one another, and John would look out for her throughout her life. “Mother was very proud of John,” says Diana Knox, Virginia’s only child. “They shared a passion for golf and family relationships.” John’s relationship with his parents followed the Victorian ideal that children were to be seen and not heard, and he always referred to them formally as “Mother” and “Father,” Diana adds. Virginia attended Miss Edgar and Miss Cramp’s, a private girls’ school, graduating in 1939, and went on to attend McGill during

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the war. In 1943, she went to New York, where she worked as a secretary for several years. Having returned to Montreal, in 1948 she married Stuart Cockfield, son of Harry Cockfield, the co-founder of prominent Montreal advertising agency Cockfield Brown. “Dad died very young, and my mother was left to raise me alone, with John stepping in as the father figure,” says Diana Knox. She recalls her uncle fondly, but remembers him as someone who could be “very strict and stern about certain things. I’d mostly see him up at the cottage in Sainte-Adèle on weekends, or at Mount Bruno.” The contrast between John and Virginia was striking. “Although my mother was very approachable and emotional, John’s life was always very regimented. As an adult, I think he just continued this and never displayed his emotional side.” After her father’s early death, Diana Knox lived a comfortable life with her mother in Montreal’s Town of Mount Royal, in a house that she says was probably bought for them by her grandfather, Sydney Dobson. He also provided financial support for Diana and her mother, although nothing was ever said about it. “As a single mum, I think Virginia did a great job of bringing me up. I never lacked anything. She instilled the values of hard work – there was no ‘silver spoon in my mouth.’ This all stemmed from my grandfather.” In 1955, when John was just twenty-seven, his mother, Beatrice, died unexpectedly of complications from phlebitis. “It was a shock because she was five years younger than my father, and we thought he’d die before her,” John said. In 1957, his father wrote an entry in his diary for the first time in two years: “My beloved wife for forty-two years suddenly passed away, and I have been far from normal for a long time,” he said, explaining the long period of silence. Noting that he had also been in the hospital five times for kidney stones, he added “I think it is understandable that, under all the circumstances, the diary should be forgotten.” John and Sydney continued to live together until the early 1960s. That was when Sydney fell ill with dementia and had to be placed in the Douglas Hospital, where he passed away on 8 August 1969.

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“My grandfather had Alzheimer’s for several years near the end, and my very patient mother would deal with him as he telephoned over and over asking the same questions,” Diana Knox recalls. “When we’d visit his home before he entered the hospital, I would go ask my grandfather for five dollars. I’d wait ten minutes, then go back and ask for five dollars again because I knew by then he’d have forgotten.” A day after Sydney’s death, the Montreal Gazette ran an obituary under the headline: “Outstanding Canadian banker dies age eighty-five.” The subhead declared: “Career with RBC covered more than fifty years and extended from the lowest desk to the highest executive position.” Earle McLaughlin, the Royal Bank’s president and chairman, said: “No individual has contributed more to make the bank what it is today, and he holds a place in its history which will be everlasting.”

• Off to McGill • After their years at Selwyn House, the Tétrault brothers went to Lower Canada College, while John Dobson was sent to Trinity College School in Port Hope, Ontario, a not uncommon route for well-to-do Anglo-Montrealers who wanted their children to round out their Quebec high-school education, which ended at grade 11. “My mother had also been ‘shipped off’ to Toronto for grade 12,” notes Diana Knox. “At the time, a lot of people who could do so sent their kids away to boarding school. In a sense, this helps before you go off to university.” In those days, boarding schools were seen as good places for affluent parents to send their children, not only to gain a solid education, but also to learn the habits of independence.” In 1945, after a year at Trinity, John enrolled at McGill University to study commerce and immediately joined Delta Epsilon fraternity on the recommendation of Stuart Cockfield, the future husband of his sister, Virginia. “This was a very lucky break for me and somewhat of a turning point in my life,” John said. “Epsilon was where all the student leaders were, where many of the big activities at McGill were

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organized. If I had joined any other fraternity, I would likely have spent a good deal of my time drinking with the other members! I wouldn’t have become a leader and got into Harvard.” Before long, John was organizing a variety of activities, including McGill Winter Carnival. “I was by far the youngest person in the school since most of the students were just coming back from the war,” John said. “I was exposed to many school organizations, and being young, I had no choice but to keep up.” John’s quote in the McGill yearbook, “Activity is the road to knowledge,” reflected an impressive list of activities that encompassed managing football, hockey, golf, and athletics teams and being involved in everything from Scarlet Key to the Freshman Reception Committee and student government. “John was hugely into sports, activities, and organizing,” says Diana Knox. “He later tried to instill in many kids that the social part of university is super important as well. Doing things other than school was key for him. He felt this created a better-rounded person.” Dobson had always been skeptical of students who were at the top of the class. In his view, real-life experience and good wits, as opposed to academic prowess, were the true measure of a person’s abilities, especially in terms of entrepreneurship. This prompted Robert Scully, host of PBS’s long-running The Dobson Series, in which he interviewed leading entrepreneurs, to pen a little poem on the occasion of Dobson’s eightieth birthday in 2008. It included the following verse: John doesn’t go for students who are top of the class All this summa cum laude stuff he finds a bit crass Tell him in boarding school you were kicked out on your ass And you’ll be his friend for life, he’ll give you a free pass.

Chapter 3

The “Real World” “We took this approach: If you came from Mars, how would you invest in the rest of the world aside from Canada?” — John Dobson

Dobson graduated from McGill in 1949 with a bachelor of commerce degree and immediately applied to Harvard Business School’s prestigious MBA program. Its case method of teaching approach was quite different from almost anything available in Canada. Dobson was just twenty years old, but he was overflowing with confidence. “I was a proven leader, so it never occurred to me I wouldn’t get in,” he said. He was wrong. Harvard’s dean told him that he was too young and should stay away from university for a year or two and accumulate some work experience. “I thought I’d spend time with my dad at the bank and see the real world. But he told me that wasn’t the real world. So I ended up working in a small paint company for a year, selling and mixing paint: the real world!” The experience would serve him well, giving him first-hand exposure to sales and marketing. “Most people don’t know the real world until much later in life. I always looked at how I was different from others, and it was because I was ordered to go into the real world by Harvard.” Returning to Harvard a year later, Dobson still found himself the youngest in his class – many of the students had delayed their studies because they had served in the Armed Forces during the Second World War. The ever-energetic Dobson threw himself into the grind of classes and rigorous assignments. “They had case studies,” he

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recalled, “and you had to hand in your work Saturday night at 9:00 p.m. It was all work and no play!” Yet every spring and fall, Dobson would take time out to stay with new friends and fellow golf aficionados such as Nancy Walker Bush, the sister of the future US President George H.W. Bush, at their home in Concord, Massachusetts. “She was a great, bright girl,” he said. “I met lots of people like her while at Harvard and created a large information network, which helped Formula Growth tremendously in later years. In fact, we had a network second to none, and much of that was developed while I was at Harvard. There is nothing like bouncing investment ideas off like-minded investors who have local knowledge.” Dobson graduated from Harvard in 1952 and immediately returned to Montreal. At that time, Harvard MBA graduates had extraordinary opportunities because North America had embarked on its huge post-war expansion, and many companies were in desperate need of young management talent. A degree from Harvard Business School had tremendous cachet and was seen as a ticket to the big time. Prominent Montreal money manager Stephen Jarislowsky, who graduated from Harvard three years before Dobson, notes that seven of his classmates went on to lead Fortune 500 companies.

• Dominion Engineering Works • Dobson’s early ambitions were more modest. His first job was as assistant to Hubert Welsford, president of Dominion Engineering Works, a venerable Montreal manufacturer of electric turbines and paper-making machinery. “The president wanted a business-school guy in the mix, and I was that guy,” Dobson explained. He stayed at the company for seven years, working at the beck and call of Welsford in a busy office environment. For an ambitious young MBA graduate, it felt like an eternity. While at Dominion, Dobson demonstrated his skill at judging people’s strengths by singling out a junior staffer, Alan Durrell, for

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promotion. “My dad used to be the first one in the office and the last one out, and John picked up on this,” says Durrell’s daughter, Nancy Durrell McKenna. “John mentioned to the president that my dad had a great work ethic and should be in line for promotion.” Thanks to Dobson, Durrell rose through the ranks at Dominion, and Dobson would become a lifelong friend of the entire Durrell clan. “I remember as a little girl, I’d be excited that Mr Dobson would be coming for dinner,” says Nancy, who became Dobson’s unofficial goddaughter. “We always referred to him as ‘the Dobber’[.]” A native of Ottawa, Alan Durrell had been only fourteen years old when his father died. He looked after his mother and four sisters, so there was not a lot of money to go around. “He never went to university and was a self-made man,” says Nancy Durrell McKenna. “John has a lot of respect for people with a ‘get-up-and-go’ attitude, and it was wonderful to see the mutual respect he and my father had for each other. They were on opposite sides of the spectrum in terms of wealth and privilege, but they still had the same values.” Nancy’s brother, Jim Durrell, the former mayor of Ottawa, remembers meeting Dobson as a teenager. “He was kind of the family mentor. My father had an enormous respect for him, and we were the same, growing up. He was well educated and had an opinion on everything. And you knew exactly where he stood.” It was while working at Dominion Engineering that Dobson and a number of Harvard alumni and other executives began teaching the Harvard business case method at evening classes organized by Montreal’s Junior Board of Trade. That course, with its emphasis on teaching business skills and modern management practices, was to become the foundation for the McGill Executive Development Institute, where Dobson taught for twenty years. “I always believed that universities needed to get more involved in fostering entrepreneurship through specialized programs,” Dobson explained. “I especially admired the Harvard model, which had professors of entrepreneurship, and I felt it should be more prevalent in Canada.”

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One of the directors of the Junior Board of Trade program was William (Bill) I.M. Turner, who had first met Dobson at Harvard Business School and found him to be very gung-ho. “He was a good athlete, liked people, had an infectious attitude, and was very outgoing,” said Turner, a prominent businessman who passed away in 2015. Turner ended up in Montreal through a circuitous route. Born in Pennsylvania of Canadian parents, Turner graduated from Harvard and immediately went to work for Jeep in Toledo, Ohio. “It was the third largest exporter of automobiles after the war because the road system was a mess, and Jeeps were handy in bad road conditions. After two years in Toledo, they wanted to send me to Africa to work at a supply depot there, but I was married and had a child on the way, so I quit and went to work for Ingersoll-Rand with another Harvard classmate.” Turner later joined Power Corporation of Canada in Montreal and became CFO of its subsidiary, Bathurst Paper. He stayed there for twenty years, overseeing the merger with Consolidated Paper in 1966, which created Consolidated-Bathurst Inc., where Turner became CEO and a leader of Canada’s pulp and paper industry. When he first moved to Montreal, Turner recalled bumping into Dobson, who was already “mixed up” in the Executive Development Institute and active with the Junior Board of Trade. “He and his buddies had gone down to Harvard and asked for some business cases,” he said. Dobson asked him whether he was willing to do some teaching. Turner agreed and ended up lecturing at the institute for more than ten years. He noted that in the 1950s there were not many Canadians in business school, and few Canadian universities offered an MBA (the University of Western Ontario had started its program in 1948). This made the program developed by Dobson and his friends particularly timely. “No Canadian university of the day appreciated the pluses of business education,” he said. “McGill regarded a commerce degree as a good preparation for becoming a civil servant in Ottawa. We were involved in teaching cases for more than a decade, and McGill then took this work over and finally expanded its commerce department into a wider mission.”

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Willard Ellis, former executive director of the Executive Development Institute, remembers Dobson as a valued yet underpaid lecturer. “We always got a chuckle out of the fact that I paid him the magnanimous sum of $20 an hour for his efforts,” he wrote on the occasion of Dobson’s eightieth birthday in 2008. “John’s support of many activities and individuals is well known, but if the true story of the full extent was ever actually known, they would be equalled by few, if any, in Canada. His kindness and thoughtfulness knew no bounds.” In his 1997 induction as a member of the Order of Canada, Dobson’s work as an educator was cited: “He also conceived and co-founded the Executive Development Institute at McGill University. As a result of his initiative, the Institute merged with the Montreal Board of Trade to form the Management Institute, which has had a positive impact on the Business Administration program, bringing students and businesspeople together in a dynamic learning environment.” Robert Paterson, who joined the Royal Bank after graduating in commerce from McGill, remembered getting together informally with Dobson and other young members of Montreal’s business community every two weeks to discuss Harvard case studies. Since many were still living at home, they would often meet at their parents’ houses. “We enjoyed getting into their liquor cabinets at the end of the evening.” After a year and a half of discussing case studies and business practices, the group organized a “fathers’ luncheon” to thank them for their hospitality. “I organized one at a private club on Sherbrooke Street East, away from the group’s traditional AngloMontreal haunts,” recalled Paterson, who passed away in 2018. “This was novel for people who would never have set foot in the place. It was the headquarters of the Liberal Party. Sydney Dobson got up and thanked us for our hospitality and said he hoped we had a great future with all our advantages. Lorne Webster got up and said, ‘I was always told I was born with a silver spoon in my mouth – but it’s still tougher than you think.’”

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Dobson and several other members of the study group would soon go on to form a unique investment club that would put their new-found business acumen to the test.

• A Formula for Growth • Dobson’s early silica mining investment debacle, in which he lost all the money set aside for him by his father, did nothing to dampen his interest in the stock market. Nor did it shake his optimism about the benefits that could be reaped with the right approach to investing. In the fall of 1959, he left Dominion Engineering to work as an economist for the Montreal brokerage firm of C.J. Hodgson. Soon after joining Hodgson, Dobson began to consider setting up an informal investment club, and he discussed the possibility with two close friends, John Rook and Walter Cottingham. Rook was general manager of Power Corporation of Canada, where Dobson’s good friend Bill Turner worked. Cottingham, a member of the wealthy Sherwin Williams family, was a schoolboy friend and fellow McGill alumnus. He was working as assistant-treasurer for Premium Iron Ore in Montreal. As Cottingham recalls: “It was John’s concept. He had gone to Harvard Business School and met a variety of people in the investment business. He had come to the conclusion that Canada represented only 2 per cent of the world economy, and that we should broaden out and invest outside in smaller companies since they were, theoretically, faster growing. He talked it up to me, and he also talked to John Rook and various other people.” The trio had all been looking for new investment opportunities on their own, but they did not find much in Canada that was exciting, Dobson later said. “So we took this approach: ‘If you came from Mars, how would you invest in the rest of the world aside from Canada?’ The answer: develop a strong network of people who are experts in various countries, and look for high-growth companies around the world.”

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Dobson, who was just entering his thirties, went about assembling a hand-picked group of investors who could help identify international trends and select investments from a large number of opportunities. By the summer of 1960, the three friends had signed up eight other young men, and together they all agreed to put up a total of $134,000 (over $1 million in today’s money) in seed money for an investment club – which was to become Formula Growth Fund. The investors were a diverse lot, drawn together through common friendships, family ties, or school alliances. By pooling their investment knowledge and backgrounds, they hoped to leverage their individual financial resources while sharing ideas about investment approaches and philosophies. Dobson and Walter Cottingham each put in $20,000 and John Rook $15,000, with the other eight investing the balance. This group included a who’s who of current and would-be members of Montreal’s elite. They included people who would become federal and provincial cabinet ministers, financial titans, and even a prime minister. Among the pioneering investors was John Turner, then an up-and-coming lawyer at Stikeman Elliott in Montreal. Elected as a Montreal MP in 1962, he would later serve as the seventeenth prime minister of Canada. Turner first met Dobson in St Andrews, New Brunswick, at about age sixteen, while he was vacationing at the home of his mother and stepfather. (The Dobsons used to stay in cottages behind the iconic Algonquin Hotel in St Andrews by-the- Sea.) “I spent part of every summer there for years, except for when I was in Oxford, and we used to play golf together,” says Turner. “John and I hit it off right away and were friends since 1945.” The two went on to see each other regularly in Montreal during the 1950s, when Turner started practising law. “He asked me to incorporate Formula Growth in 1960, and I became its first secretary.” Also on board was Lorne Webster, a member of the powerful Webster business family, who would go on to build an empire in insurance, trust, real estate, and investment management. Heward Grafftey, a friend of Dobson’s, also jumped in. Grafftey was a

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businessman who had just been elected Progressive Conservative MP for Brome-Missisquoi riding in Quebec. Frank L. Schnabel, a securities analyst who was working with the Webster family’s Imperial Trust Company, signed on too. Rounding off the group were Dobson friends and investment managers Andy Hugessen, Peter Cross, and Jacques Glorieux. Each would put up $10,000, with the exception of Robert Midgley, a relative of Dobson’s. “I had just graduated from McGill Medical School and didn’t have that much money,” says Midgley, a doctor and plastic surgeon. “You needed $10,000 to get into the fund, and I had nowhere near that, but John let me in for $4,000.” Although Dobson was only in his early thirties and didn’t have much of an investment track record, Midgley trusted him implicitly. “John was young and aggressive and he said ‘Why not?’ and I said, ‘Sure!’ I never really knew the other investors. I met some, but they were all of different walks of life. I did not attend any of the meetings or anything. I wasn’t part of the team because I only contributed $4,000. I was just a poor kid then! I put all my faith in John. I believed in him, and so did my dad.” For Dobson, the investment pool was far from a gamble. “The Quebec silica mine fiasco was a good lesson,” he said. “I wasn’t aware that I was taking any particular risk. If you have the best network and the best people to invest in running growing companies, it doesn’t seem like a gamble. I was confident that the money that I put in was going to accumulate, but I wasn’t trying to build a business.” Formula Growth Fund was officially established on 27 June 1960, with initial units being issued for the equivalent of 7.57 cents each. (This takes into account a 10-for-1 split in 1965, a 10 per cent special distribution in 1971, a 10-for-1 split in 1981, a 100-for-1 split in 2013, and annual tax distributions.) The fund began on a very informal basis. As Walter Cottingham says, “We all did a bit of a research and talked it up and thought about it. We met perhaps once a month in somebody’s house and had a drink and put a portfolio together.”

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• International Investments • With advice from Peter Cross and contacts in Europe, the members initially bought a basket of stocks in France, Italy, Argentina, Spain, France, and the United States. “We all did stock picking,” says Cottingham. “We used our contacts and our investment knowledge to put the portfolios together collectively. We all took a kick at the can with various companies. We agreed. We disagreed. We investigated. We all were there trying to find good companies.” The late Ian Soutar, a founding partner of investment management firm Pembroke Management and Dobson’s advisor and friend for over forty-five years, said the idea from the very start was to invest internationally. “This was novel at the time. Dobson thought everyone was looking at Canada and the United States, not at these greater opportunities abroad.” Soutar first met Dobson in the mid-1960s, when he was working in the investment department at Sun Life. They became fast friends. “We agreed on a whole lot of issues,” he said. “We both had many of the same views, loved golf, loved the investment business, and loved investing in small companies. That was sort of my background, and that was John’s background. It was a natural thing for us.” Japan was a market of special interest for the young investors, and at one point, the fund had a fifth of its portfolio there. “We did very, very well in the Japan market and reasonably well in the other ones. That was a big bonus,” says Walter Cottingham. “Japan was doing extremely well in the early 1960s, and John thought the Japanese were the new business leaders,” says money manager Stephen Jarislowsky, who has had a lifelong fascination with Japanese culture (he worked for the US Army in Japan after the Second World War) and was a friend of Dobson’s for over sixty years. “Everybody thought it was a Japanese miracle. They were trying to figure out how they did it, how they organized and all of that. John was very smitten with that kind of success.” The group was looking for growth stories in what would become known as the “Growth Formula.” According to this formula, every

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stock held should be capable of growing at 20 per cent a year. The time span is relatively short. The fund looks for stocks that will be performing well in one year to three years’ time. If the 20 per cent target is not met, the stock is sold. If the stock performs well, it is held unless the price/earnings multiple three years out exceeds 25, when the holding is reduced to 1 per cent of the total fund, and eventually sold entirely when the upside is limited. In addition, the holding cannot form more than 7 per cent of the total portfolio. Diversification has always been key. “My guiding principle was always to shoot for 20 per cent performance for our unit holders, which includes ourselves,” said Dobson. “Everything else was secondary. Making money on stocks was the game, not management fees. We also wanted to always have fun doing it because you can’t last in this business if you can’t have fun. Excluding some exceptions, we invested by targeting 20 per cent earnings per share (EPS) growth, 20 per cent sales growth, and 20 per cent return on equity.”

• Early Interest in the Fund • The fund was an immediate success, rising 19.1 per cent between 1 July and 31 December 1960 and climbing 56.4 per cent by 31 December 1961. Word of this lucrative little fund quickly got around the small Montreal investment community. Friends and business associates, many of them Dobson’s fellow golfers at Mount Bruno Country Club on Montreal’s South Shore, clamoured to get on board. They included the following: • The Birks family, owners of the legendary jewellery chain known for its blue boxes. “I became involved because of my respect for John Dobson,” said G. Drummond (Drummie) Birks, son of company founder Henry Birks. “I thought he was an able investor. I knew him socially as well and always had enjoyed his company. Our fathers went way

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back, too. I remember playing golf with both our fathers in the 1930s, when I was a junior member of Bruno.” Birks died in 2017 at the age of 98. • Hugh Hallward, head of Argo Construction, who later took John Rook’s place as a director of Formula Growth Limited. He was a founding investor in the Montreal Expos baseball club in 1968, alongside Charles Bronfman and others. “I went to school with John and Walter at Selwyn House, and we used to play sports together,” said Hallward. “I knew all the players, and although I had my own investments, I thought Formula Growth had an interesting approach. We had meetings and occasionally arguments one way or the other about certain investments, but by and large, there was a convivial consensus.” Hallward died in August 2013, a few weeks after his old friend John Dobson. • Neil Ivory, a portfolio manager at Arbuckle, Govett & Co. Ltd. (dissolved in 1976), who in 1968 would co-found Pembroke Management, manager of the highly regarded GBC family of mutual funds, along with Clifford L. Larock, Scott Taylor, and Ian Soutar. Pembroke and its partners would be long-time investors and trusted advisors to Formula Growth for many decades. • Donald Johnston, a lawyer at Heenan Blaikie, who would become a member of the cabinet of prime minister Pierre Trudeau and later secretary-general of the Organisation for Economic Co-operation and Development (OECD). He also acted as Formula Growth’s second company secretary. “I was conscripted by John Turner when I graduated from law school in 1958,” Johnston recalls. “I was an articling student and worked closely with Turner and

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his clients and friends. One of them was this group of guys who were the nucleus of Formula Growth: John Dobson, Walter Cottingham, etc. I took over the files in 1962 and became the lawyer for Formula Growth, and we restructured as a management company at that time. It was run by John and Walter at that point. I went to the meetings and got to know the guys pretty well. We remained friends. I was the lawyer and secretary and kept the books.” Also among the early investors were investment advisor Bobby Hall, Dick Forest (later an executive at Air Canada), boyhood friend Jacques Tétrault, and Nassie Godel, who had met Dobson while working at C.J. Hodgson and was a fellow golf fanatic. “People became interested,” says Walter Cottingham. “I don’t think we hustled it, but we did invite people to come in because they had some money and contacts. They were keen about the idea and the concept. They knew John and all of us. So it grew from a private group that met once a month into a growing business. It was good to have them on board.” The fund grew so quickly that by 1962, Dobson, John Rook and Walter Cottingham decided to leave their day jobs to devote their full-time efforts to the venture. Cottingham stayed on as a consultant to Premium Iron Ore, and they all moved into his small office. Together, the trio then owned about 20 per cent of the units of the fund and were therefore focused on ensuring its success. “The office was slightly crowded, but the fund was growing,” says Walter Cottingham. “I know John had the idea that it shouldn’t become too big, and I don’t know if in his mind too big was $15 million or $30 million. We got up to our target over a period of time. It was stimulating and an interesting concept that forced people away from investing in big companies and into small companies that grew quicker. It was original.” While relying mainly on contacts in target countries, the trio also began travelling to visit companies that had investment potential.

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Dobson and Ian Soutar went to Japan initially, followed by Walter Cottingham and Peter Cross. “Even back then, John liked to travel with his golf clubs. He would take them with him when visiting companies and brokers,” says Cottingham. “Over the years, we cultivated a fair number of brokers and advisors in the United States and in Europe to come up with ideas.” Dobson travelled around the world in 1963, more for pleasure than for business. During a trip to Japan with Soutar about six years later, he had an experience that underscored, he later said, the role luck always played in his life. “I arrived in Honolulu a day before Soutar, and the hotel misspelled my name in the registry. When Ian arrived the next day to check in, they said they had no record of me being there. He didn’t know where to go or what to do, so he took a walk on the beach. I was also walking on the beach and out of sheer luck, I ran into him. If that hadn’t happened, the entire trip would have been a disaster.” Dobson was a big advocate of the idea that luck is an essential part of both life and investing. Sometimes you simply need to show up.

• Ups and Downs • Looking for quick-growing companies with aggressive business plans has usually pointed Formula Growth Fund to invest in small- and medium-cap growth stocks. As a result, its performance is subject to a high degree of volatility. Like most investment portfolios, it has also been buffeted by periodic stock market dips over the fifty plus years of its existence. The first occurred soon after its foundation, when the Cuban missile crisis sent the Dow Jones Industrial Average (DJIA) into a downspin. The Dow dropped 26.5 per cent from its height of 728.8 on 1 December 1961, a year after the election of president John F. Kennedy, to a low of 535.76 on 26 June 1962. Tensions became heightened in October 1962, and the Dow dropped 2 per cent the day after Kennedy’s famous speech warning the Russians to withdraw missiles

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from Cuba. The Standard & Poor’s 500 fell nearly 28 per cent during the same mini-bear market. The main culprits for the stock market dips were fears surrounding the Cold War, the failed Bay of Pigs invasion, the Cuban missile crisis, and the threat of nuclear attack. The blame cannot be laid on the economy, which was poised to begin a decade-long expansion. Even though Formula Growth Fund was not fully invested in the US market, as it would be in later years, its units fell nearly 29 per cent during the mini-bear market of 1962. But they recovered in 1963, climbing nearly 17 per cent, and were up 7 per cent and 51 per cent in 1964 and 1965, respectively, thus establishing their historical trajectory: up and to the right.

Chapter 4

Triumphs and Turmoil “[Dobson] never worried about the downside; he always looked to the upside. But there were a lot of people saying “Gosh, what the heck are you doing with my money?” — Ian Soutar

Despite the hiccup of 1962 when Formula Growth Fund units fell by nearly a third, the early days of the fund proved to be fabulously rewarding for unit holders. A buoyant stock market and astute investment decisions by Dobson and his colleagues resulted in excellent returns. By the end of 1965, just five years after the founding of the fund, its unit value had jumped by 151 per cent, which was triple the 51.35 per cent gain for the DJIA. Formula Growth Fund was still small and closely held, with 123 registered owners holding a total of 11,135 units valued at $1,772,940. The directors of the fund’s management firm and their families themselves owned 27.3 per cent of the units. But after that initial exuberance, the following decade proved trying for investors’ patience. Gains turned into losses, leading to a nasty battle that almost resulted in the ouster of John Dobson and the souring of some of the close friendships that had been at the heart of Formula Growth Fund. After an early interest in a broad range of overseas investments, notably in the emerging Japanese economy, Dobson would ultimately decide to stick closer to home, namely the growing US market. By the end of 1965, a dominant part of Formula Growth Fund’s portfolio already consisted of US stocks, although the fund would continue to

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return to Japanese and other markets in varying degrees in the subsequent decade. There were only four Canadian companies on the list and just one outside North America – Sagimo, a French property firm. The fund’s US holdings ranged from Tektronix Inc. (an emerging technology firm that had its IPO in 1963) and Swank Inc. (a maker of costume jewellery) to companies such as United Airlines and Pennsylvania Railroad, which were still modest enough in size to meet Dobson’s investment criteria. Formula Growth Fund was also beginning to evolve into a more formal business, despite Dobson’s desire to keep it as an overgrown investment club. In 1965, the company was still being run by a group of friends and associates, most of whom had been around since the initial days. The officers and directors at the time were John Dobson, president; Walter Cottingham, vice-president and treasurer; Frank Schnabel, vice-president of research; Lorne Webster, vice-president; Drummond Birks, director; Hugh Hallward, director; Neil Ivory, director; and Donald Johnston, secretary. As Ian Soutar noted, “I think a lot of people in the business tried to make their money by making the assets under management grow through marketing techniques. But John was never interested in that at all. He was interested in making money for the unit holders and investors in the fund, but he wasn’t going to make money off the fund by the fees that were coming in. The fund did grow a lot, and after a period of time there were fees coming in, which you need to pay the people working. But it was really his objective at all times to just make money for the investors or create wealth through capital gains. He never wanted to make money off the investors.” In the early years, the total management fee of the fund started at 2 per cent on the first $2 million of assets and slid down to 1 per cent for assets under management over $10 million. Strangely, this sliding scale dropped to 0.75 per cent at $100 million of assets, at a time when getting to $100 million in assets was still considered unachievable. Yet, with the power of compounding, the assets soon grew to well over $100 million, and the 0.75 per cent fee kicked in. (The fee

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was applied equally to all unit holders, regardless of the size of their investments.) Because the expenses of running the firm had escalated over the years, Formula Growth Fund simplified the fee structure in the 1990s to a 1 per cent flat fee, and then to 1.5 per cent in 2013, still low by industry standards. In contrast, a shareholder in a mutual fund can pay as much as 5 to 7 per cent in front-end loads that go to brokers and intermediaries, as well as 2 to 3 per cent per year in management fees, known as the MER (management expense ratio). Dobson and his colleagues also wanted to avoid building a big fund because they felt it would be difficult to successfully invest large sums of money. As proof, they cited the mediocre performance of most professionally managed funds compared to that of various stocks. A large fund, they observed, tends to go up and down like the stock market as a whole because it lacks the flexibility to move large amounts of shares as investment conditions change. The decade that followed the initial golden years would be momentous for Formula Growth as North American stock markets were rocked by such events as the Vietnam War, the Watergate scandal, and the 1973 oil embargo. There would be a significant expansion of the fund’s investment network, key staff additions and, in the most serious threat to the fund’s survival, an attempt to oust Dobson from the fund’s management. In 1972, Walter Cottingham decided he wanted to broaden his horizons. He decamped for London, then an emerging financial centre, to work for an offshore fund called Eagle Investments, which had a loose affiliation with Formula Growth. “I was still working with Formula and coming back to pass on or receive ideas from them,” Cottingham explained. He returned to Canada two years later, but he left Formula Growth Fund for good to work with another Montreal investment management firm. “By then, Formula Growth had sold most of its overseas portfolio to focus solely on US companies. They discovered that their research time and limited resources would be best served by investing only in small-growth companies in the US,” Cottingham notes.

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Ian Soutar remembered going to Japan with Dobson in 1969 to investigate stock prospects there, but by the mid-1970s, all Japanese stocks in the firm’s portfolio had been sold. “My partner Neil Ivory, an early investor in Formula Growth Fund, advised John to stick closer to home, to focus on the US market, and this influenced John’s decision. He saw that there were lots of opportunities in the United States.” Randall Kelly, who would join Formula Growth in 1984, at the age of 27, and become its president in 1992, notes that Dobson often complained that he left Japan too early. But in hindsight, it proved to be the right thing to do. “There is no doubt that the Japanese stock market was on fire during the 1980s, but it became a bubble of epic proportions in the 1990s and beyond,” Kelly says. “The market has since been moored in muck for decades and has produced a negative return for twenty-five years. Many Japanese companies made for questionable investments,” he adds. “They didn’t have a high return on equity. They didn’t pay attention to growing earnings. They had these lifetime pacts with their employees. The Japanese economy didn’t have the healthy obsolescence you see in the United States, where old, tired companies perish and new vibrant ones are born. Free market forces just weren’t evident to me. Companies there didn’t make sense. And to top it off, accounting practices were often flakey.” Dobson said he decided to abandon Japan for a number of reasons. “First of all, it was too far flung, and the objective of Formula Growth has always been to have people on the ground in the area to find good ideas. That was virtually impossible to do in Japan with such a small staff. Second, we wanted to bring something different to Canadians than what they could get in Montreal or elsewhere in Canada. We wanted to narrow it down to the United States alone and use our expertise and network there to the greatest effect.”

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Investable Companies By the mid- to late 1970s, Formula Growth would focus almost exclusively on the United States markets, and it continues to do so today while maintaining a portion of the portfolio in other geographies. “We like the American market because it offers an almost infinite amount of ways to play all sorts of different businesses,” explained John Dobson. “These same US companies give you worldwide exposure, and many of them operate with big international businesses. So you can get international bang for the buck by buying 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, Dobson acknowledged. “You have to beat the bushes to find them.” They can be either newly emerging growth stocks that come out of initial public offerings, or companies that are reemerging with a new product, new 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 we need to be in front of the story early so we are there before the Street is aware of the idea.” Formula Growth often bet against some of the skepticism that normally surrounds growth stocks, Dobson noted. “You have to be careful, as many growth business plans don’t come true. In order to help our batting average, we do a lot of kicking of the tires.” While there are thousands of public companies in the United States, Formula Growth CEO Randy Kelly notes that perhaps half are not really investable because they are dollar

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stocks, companies losing lots of money, or companies with market caps that are too small. “On the other hand, there are probably 3,000 or 4,000 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 that might form a portfolio for us.” There is never a shortage of good ideas to invest in, Kelly adds. Because Formula Growth has been in business for sixty years, it has a very deep database on many of the investable companies in the United States that it can cull from. Additionally, it deals with 100 different brokers on the sell side – from the largest all the way down to regional brokers who might be located in Minneapolis or Little Rock, far away from New York. “It is important to talk to everyone, as you never know where the next great stock will come from.” Because the fund has been in business for so long, it has a very large buy-side network of friends and peers that it talks to. “These are people with whom we compete, I suppose, but for the most part, it’s really just friendly competition,” says Randy Kelly. “It is 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 get quickly to the bottom line of a story.” Currently, Formula Growth has an in-house team that does nothing but research, model and screen for stocks, and talk to management teams in order to discern whether or not the stock is a good investment. Team members also spend a lot of time on the road visiting company headquarters.

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In the early 1970s, Paul Levesque, an investment banker based in New York City who had worked with Dobson and Formula Growth for several years, suggested that Dobson call a bright young analyst at Commercial Trust named Peter Mackechnie to help lead the fund’s aggressive expansion into the US stock market. “John phoned me and said, ‘I’ve heard good things about you from Paul Levesque and Charlie Baillie (then head of the TD Bank),’” recalls Mackechnie. In 1972, Mackechnie was offered a position as executive vice-president. He took the job right away, thankful to get away from the bureaucracy of Commercial Trust. “Formula Growth was a wide-open type thing, where you just talked to John Dobson about his thoughts, about looking at certain companies. And he was always very good and excited about it. He trusted people’s judgments, let them take risks.”

• Target Sheets • Peter Mackechnie was particularly impressed by Dobson’s use of what he called “target sheets.” He would look at the names and the numbers on the sheets, and if they were very promising relative to everything else, he would give the okay and tell Mackechnie to see what he could chase down. Formula Growth has employed potential or target sheets for half a century. They are customized spread sheets used to assess stocks. In addition to being used to do an initial evaluation prior to purchase, target sheets are also used to track a stock’s ongoing performance. “We manage the portfolio with very strict price targets and very tight qualitative scripts or stories associated with each stock,” explains Randy Kelly. “If a management team tells us they are going to do ABC and they do XYZ, we’re going to sell the stock. We model everything we own. If we expect the company to earn $0.10 in a quarter and it earns only $0.06, then we are going to be very strict about why the company missed the EPS target and likely sell the stock.”

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To control risk, Formula Growth also respects stop loss guidelines to protect the downside. This ensures that a security is sold when its price decline surpasses a particular point. “If a stock price moves down and we don’t quite understand it, we are going to sell some or all of the stock and ask questions later,” says Kelly. “On the other hand, if a company is successful and hits our upside price targets based on our modelling, we are also very strict about selling. To manage money successfully, you have to have a tough-sell discipline. You have to stick to your disciplines, and it’s one of the key features of Formula Growth.”

• Dobson Dinners • Peter Mackechnie had experience covering hotel and restaurant stocks in the United States, so he promptly started looking for opportunities for Formula Growth in California and the Western United States. “These regions hadn’t been particularly high on Dobson’s list, but after we got out there several times, he saw that the companies were dynamic and fast-growing,” says Mackechnie. He and Dobson attended investment conferences in California and elsewhere regularly and cultivated a network of fund managers and brokers who would prove invaluable sources of advice. They also launched an annual investment banquet in San Francisco that would famously become known as “the Dobson Dinner.” At each of these events, participants would pick a stock they thought would be the best performer in the coming year, and a friendly competition would ensue. “Many of these people would be out west for an investment conference, such as one organized by Hambrecht & Quist [a San Francisco–based investment bank], and we would steal them away for our dinner,” said Dobson. “It was all part of our strategy of building the best information network around.” Peter Mackechnie was in charge of keeping statistics about winners and losers for nearly twenty-five years. “I calculated who was winning beforehand and then showed up at the dinner with who

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owed what to whom and that kind of thing,” Mackechnie says. In fact, he continued to act as master of ceremonies at the dinners for many years, even after he left Formula Growth. The Dobson Dinners were lavish affairs, usually held at the San Francisco Yacht Club and attended by thirty-five or forty people. “People just didn’t want to stop coming, and participants were called Dobson Dinner Players,” says Mackechnie. “We had some very good guys: Tom Bailey way back in the early years, who made his billions in Denver; Phil Hempleman was also there. He went on to make a huge fortune in stocks. [In 1987, Hempleman founded Connecticutbased Ardsley Partners, a long/short equity hedge fund with approximately $1 billion under management today.] He came for many years, and it annoyed him that he could make many millions doing what he did in stock funds but he could not pick a winning stock in the Dobson Dinners.” To the bemusement, or annoyance, of many Dobson Dinner Players, pride of place often went to representatives of tiny Formula Growth Fund, who won a disproportionate number of times since they were such great stock pickers. Randy Kelly alone won five times. Ted Ashford, a US portfolio manager known as the “Delaware Dynamo,” who was featured in John Train’s 1994 book The Money Masters, attended the dinners for many years. “It started as a few people going to dinner and picking a long [buy] and a short [sell]. You’d come back a year later and figure out who won,” says Ashford, a long-time friend of Dobson’s. “Peter [Mackechnie] would talk about the worst first, and the guy with the worst long had to pay the guy with the best long. The same system was used for the shorts. And Peter would just roast the losers! These were bright people, but they got an earful,” Ashford chuckles. Peter Mackechnie also attended a similar event organized by Dobson in New York that was dubbed the “20 Percenters.” This brought together like-minded growth-stock investors, including the legendary Sir John Templeton. “The people at that event were just beyond smart,” Mackechnie says. “They were just great analysts or

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money managers, and it was all because of Dobson just being creative enough to seek these guys out and pick their brains. That was his real forte.” Ted Ashford remembers his first 20 Percenters dinner clearly. “Templeton was sitting on my left. John called the meeting to order and asked Templeton to start off and share his thoughts. He covered everything I had planned to cover, and I was next in line. Everyone laughed, because I had nothing left to say!” Ian Soutar said it was remarkable how a relatively small money manager in Montreal was able to find its way into the biggest and most successful money management firms and conferences and attract heavy hitters to its events. “It was John’s initiative to get activities like the Dobson Dinner and the 20 Percenters going. It was a brilliant idea because I think those relationships really helped in terms of the fund’s performance. It was a lot of fun, and John would always pick up the tab for this stuff. Participants enjoyed meeting other people doing the same kind of things, and John was able to attract some of the best talent in America to his events. So it was something everybody felt was really important to attend because they were brushing shoulders with people who were good for business. And although there were other great conferences, and these people had choices, they would always come to the Dobson Dinners. It was the thing to do.” Another critical player in Formula Growth’s success joined the organization in those heady days of the early 1970s, although initially only part-time. Bette Lou Reade would play a key role in the fund’s growth for nearly forty years. Reade had met Dobson at McGill, where she spent two years in accounting before switching to the arts. “Friends of mine were friends of his, but I didn’t really get to know him well,” she recalls. Reade was in the midst of a divorce and in difficult financial straits when she was hired by Formula Growth to come in two days a week to do the books in the tough early 1970s. “The only other person there was Peter Mackechnie. We were at 666 Sherbrooke Street West, and it was a measly little office. We

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didn’t have a whole bunch of money under management, and it got smaller.” Reade’s accounting work started in 1973, and for the next two years she never prepared an “up” monthly portfolio valuation – for twenty-four months in a row!

Formula Unit Trust In February 1976, Peter Mackechnie was instrumental in setting up Formula Unit Trust, the Formula Growth institutional fund that mirrored Formula Growth Fund and would thrive for over three decades. It peaked at about $500 million (US) in size and returned 11.7 per cent (compound annual growth rate – CAGR) versus 8.2 per cent (without dividends) and 11.6 per cent (with dividends) for the Standard & Poor’s 500 over thirty-two years. The idea stemmed from Dobson and Mackechnie’s frequent travels to the United States, where they met contacts who had a lot of institutional clients. They decided it was worth taking a shot at the institutions because Dobson had such a fabulous long track record with Formula Growth. Even though the fund had suffered a couple of dismal years in 1973 and 1974, it had jumped over 70 per cent in 1975, making this a good time to offer institutions exposure to small- and mid-cap US companies and to the US dollar. “John felt that everyone should have some portion of their money in companies that grew 20 per cent or better because he genuinely believed that if the company grew at 20 per cent a year, then the stocks would grow 20 per cent and so would your portfolio,” explains Mackechnie. “Compounding-wise, that was just a huge number, so a lot of people bought into that.”

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One of the first investors was the Birks family, who put a portion of the family’s Foundation money in Formula Unit Trust. Then the Royal Bank and Air Canada came on board, seeking exposure to the US growth sector for their pension funds. Mackechnie recalls that he and Dobson were having lunch one day at the St James Club in Montreal with Tim DeWolf, pension fund general manager at Air Canada at the time. “I can never forget that one because at the end of the lunch, DeWolf said they were going to invest $2 million in Formula Unit Trust. Dobson coughed and choked, and his onion soup went all over the table. What a tremendous shock we both had! Fortunately, I had nothing in my mouth, but I almost choked because we just kept thinking of what the management fee on the $2 million would give. It was big money in those days, and with the Formula Growth Fund losing business, we needed it to help pay for our overhead.” At one time, Formula Unit Trust boasted an impressive list of institutional investors, including Northern Electric (later Nortel), Bimcor, University of Toronto, McGill University, Ontario Hydro, CP, Montreal Trust, and ConsolidatedBathurst. However, by 2008, Randy Kelly decided to wrap up the trust after all but two of the investors – McGill and Air Canada – had left. “Our 1 per cent fee was no longer attractive for them, and there were other alternatives such as exchangetraded funds (ETFs).” Adds former Formula Growth executive René Catafago, “Our small- to mid-cap approach no longer suited them very well. Plus, they did not enjoy the joint meetings and sharing of information among each other.” Air Canada and McGill agreed to move their portfolios to Formula Growth’s hedge fund platform, launched in 2002, and McGill remains an investor to this day.

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• Attempted Palace Coup • Formula Growth Fund’s poor performance in the early 1970s provoked questions about Dobson’s unwillingness to sell losing stocks. Ultimately, this led to an attempt by some unit holders and directors to force him out. “The market went down enormously from 1968 to 1974, especially in the kind of stocks Formula Growth was investing in,” recalled Ian Soutar. “The years 1973 and 1974 – following the Yom Kippur War and the formation of a strong OPEC cartel – were especially awful periods of time. And I would imagine that not only did the fund go down a lot, but the economics of the fund must have been really struggling.” Former Formula CFO René Catafago notes that in 1974, when the whole world was “anti-stock” – everyone was shying away from the stock market – Formula Growth generated only about $75,000 in revenues from fees. “The year 1974 was a disaster of enormous proportions. The net asset value of Formula Growth went down every month for two years. So we were really on the verge of death.” This caused a huge strain, not only financially, but within Formula Growth’s tightly knit group of directors and investors. “There were clearly divisions in terms of the ‘right kind’ of investment policy for the firm at that time,” said Ian Soutar. “Dobson had a philosophy of finding good growth companies and hanging on to them. He never worried about the downside, sometimes ignoring risk controls; he always looked to the upside. But there were a lot of people saying, ‘Gosh, what the heck are you doing with my money?’ The unit value had gone down hugely, and many people were telling John he was crazy. You’ve got to realize that stocks that go up could go down. Everyone was saying Dobson’s clearly lost it.” Walter Cottingham acknowledged that he was extremely frustrated with Dobson’s reluctance to sell losers. “John was most optimistic at market bottoms, and he would say the stocks were just too cheap, and a lot of other people would say the stocks were worthless,

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that they should be tossed and cash should be raised. But John just felt they were too cheap. He was a great optimist.” The reality was that Dobson was usually right; stocks may drop sharply, but over time, they would always roar back! McGill Professor Reuven Brenner, a long-time associate of Dobson’s and occasional advisor to the Formula Growth team, argues that Dobson’s optimism was a big factor behind his success. “In the financial sector, optimism is a must since it exists to finance the future, among others, by correcting mispricing,” Brenner says. “If you expect the end of the world, there is no scope for finance. Of course, timing matters. But if you finance entrepreneurial, small but growing firms, you must be an optimist. You must believe that the United States would eventually correct the mistakes that have been compounding. And sooner rather than later.” Brenner says Dobson always had confidence that markets could weather even the worst storms, a sunny viewpoint that Brenner did not always share. “He had a more idealistic view of markets and what could be done than I have. John thought that things could be solved very quickly. I believe bankruptcy is the mother of invention – and until you get there, all those in power, and fearing losing it, will do everything they can to correct the grave mistakes they made. We differed on the speed at which things can be done. I spent the first fourteen years of my life in Romania under Communism and knew that there were no Communists there. Just politicians, apparatchiks, and opportunists doing all they could to get in power and keep themselves there. Most politicians, bureaucracies, and all those depending on government for handouts in the West are no different. In politics, as in business, fear of default is the mother of invention. Only in business and in the West, we have far more ways to correct the mistakes faster.” Pessimism about the market was so rife in the mid-1970s that one of Formula Growth’s clients came into the office one day and explained he planned to liquidate his holdings in the fund and all his other stocks and buy gold with the proceeds. Peter Mackechnie recalls, “He said he was putting the gold in a safety

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deposit box, and every time he bought goods or services, he planned to pay for them by shaving off pieces of gold, sort of a bartering type of thing.” Scott Taylor, Ian Soutar’s partner at Pembroke Management, a long-time director of Formula Growth and a friend of Dobson’s, remembers how Walter Cottingham and Dobson started to drift apart. Tensions were also high with Lorne Webster. “People on the board had to intercede to make sure Dobson would take control and move things forward. I was present at the time, but not involved – just aware of the stresses that were present.” To add to the tension in the office, Peter Mackechnie was a heavy smoker, and smoking was a habit Dobson detested. “He was always on Peter’s back about smoking,” says Bette Lou Reade. “So eventually, Peter used to leave the office every half hour or so to have a cigarette. That also became a matter of great discussion.” There was good reason for the investor unhappiness. In just one year, between September 1973 and September 1974, the per-unit value of Formula Growth plunged by nearly 50 per cent, to $240.61, compared with a drop of 33 per cent in the TSX and 36 per cent in the Dow Jones Industrial Average. Total assets totalled just $4.9 million. But for those who had been with Formula Growth Fund from the start in 1960, fund units were still up 167 per cent compared with a gain of 52 per cent for the TSX and a decline of 5 per cent for the DJIA. Between 1972 and 1974, the US economy went from an annual growth rate of 7.2 per cent to a decline of 2.1 per cent. Oil jumped 70 per cent, from $3 a barrel to $5.11 a barrel, beginning with the October 1973 OPEC oil embargo. Inflation also emerged as a major concern, and interest rates were about to soar. In October of 1974, an unusually defensive Dobson wrote a sombre letter to unit holders, acknowledging that he might have underestimated the severity of the market downturn. (See full letter in Appendix 6.) “For the past two years, we have given you various reasons why the ownership of selected equities should provide significant future gains,” he wrote. “While we still firmly believe in this

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thesis, the continued economic problems experienced throughout the world have rendered our advice incorrect.”

• Dobson’s Optimism • Dobson noted that stocks have historically bounced back sharply following a correction, and he suggested, rightly as it turned out, that this would again be the case. To back his argument, he pointed to the sharp drops experienced by big name stocks in the “Great Debacle” of 1929–32 and compared them to the “Super Bear Market” that had begun in 1965. For example, Chrysler fell 96 per cent in the post-1929 period and 83 per cent in the latest bear market. Con Ed dropped 91 per cent after 1929 and 88 per cent in the 1965–74 period. Honeywell fell 90 per cent and 80 per cent, and Westinghouse 95 per cent and 84 per cent, respectively. “In the 1929–32 crash, the market was reacting to almost a total wipeout of cumulative corporate earning power,” Dobson wrote. “The cards were all on the table, and a depression was taking place as the market was going down. But what of today? We have seen that a great many stocks have already declined as much as they did in the 1930s. Thus, the markdown for a great many stocks has already discounted an economic debacle of the magnitude of the 1930s. Still, unlike 1929–32, the evidence that such a debacle is actually taking place is hardly overwhelming!” To underscore his optimism about the market, Dobson presented a dramatic table of 30 DJIA stocks from their 1932 lows to their 1933 highs. Allied Chemical rose 283 per cent, American Tobacco B 1,250 per cent, Chrysler 1,060 per cent, General Motors 400 per cent, IBM 202 per cent, Procter & Gamble 157 per cent, Union Carbide and Carbon 240 per cent, and Westinghouse Electric 314 per cent. “It must be remembered that these moves came when the United States was still deep in a depression,” Dobson noted. The news background was dismal. These huge advances took place in the blue chip stocks of the period. The moves in many smaller issues were far greater.

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Typically, half of the total gain in these stocks was achieved in the first few months off the bottom. “If current fears do not become realities,” Dobson concluded, “stock market gains from current levels should be large. If these fears are realized, stock prices already appear very close to discounting a similar economic debacle.” Dobson’s reassuring prediction of a market recovery seemed highly prescient when in 1975, the Dow Jones Industrial Average jumped by over 38 per cent, followed by a nearly 18-per-cent climb in 1976. However, the index dropped by over 17 per cent in 1977. Yet Formula Growth units showed no such pause and were up another 15 per cent in 1977 after increases of 72 per cent and 26 per cent in 1975 and 1976, respectively. But the steep crash in 1973 and 1974 had done its damage, and confidence in Dobson was still low among Formula Growth investors. A $10,000 investment in the units at inception in 1960 were worth $62,425 at the end of 1972 but only $54,709 at the end of 1976. Grumbling grew so intense among certain insiders that a meeting was called at the University Club with the goal of ousting Dobson from Formula Growth. “I heard how unhappy some people were about John’s unwillingness to sell, and to see stocks go down and down,” said Ian Soutar. “We all loved and respected John, but because he always saw the optimistic side of things, he stayed invested.” Many initial unit holders in Formula Growth Fund were also shareholders in the management company, Formula Growth Limited. Over the years, some of these early investors sold their units and their shares. John Rook left because he thought Dobson and Walter Cottingham were running it too much like a business. Frank Schnabel left because he was more interested in private venture capital. By 1977, the remaining shareholders in the management firm were Lorne Webster, Hugh Hallward, Roger DeSerres, Nassie Godel, Neil Ivory, Drummond Birks, John Dobson, and Peter Mackechnie. The ownership crisis was sparked when Hugh Hallward announced he was resigning from the board effective 15 June 1977, and asked for his shares to be repurchased. This triggered a

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battle with other shareholders over what a fair price should be, with Dobson arguing that they had little value since it was his own skills, and those of other Formula Growth employees, that were of value. In fact, Dobson thought it was absurd for more than 80 per cent of the shares in the management firm to be in the hands of people who were not involved in day-to-day investment decisions. Bob Staples, an auditor for Formula Growth, was engaged as a mediator and evaluated the shares in Formula Growth Limited at a book price of $100 each, which in retrospect was well below their true value. Hallward was so angry at the outcome that when he quit in May 1977, he insisted on giving the proceeds of $8,800 from the sale to charity. Among others who also sold their shares were Lorne Webster and Nassie Godel. In valuing shares in the management company, Dobson compared valuations of other asset management companies, noting that many were selling below book value. While shares in Formula Growth may have been worth $200 each in 1972, they were now worth only half, he maintained. “My offer of $90 to each still stands. One hundred dollars is if everyone sells so as to relieve me of this problem,” Dobson wrote in a letter at the time. In a letter dated 23 June 1977, Dobson vented his frustration and laid all his cards on the table. He argued that only he and Peter Mackechnie should be responsible for the Trust and complained that a “disproportionate amount of time, energy, and goodwill” had been spent discussing the price of Formula Growth Limited’s shares and ownership. He also noted that there had been a large number of redemptions in the previous six months. He proposed to buy out all shareholders and said that the company should be reorganized so that only directors would attend to the investment side of Formula Growth Fund. Dobson faced stiff competition for control of Formula Growth from Lorne Webster, who wanted to add it to Bolton Tremblay, an investment management firm that was part of his Prenor Group. He was willing to pay up to $400 a share, four times what Dobson was offering. Dobson fought back, accusing Webster of empire-building.

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“I, Soutar, Taylor and Mackechnie feel that we are entrepreneurs,” Dobson told Drummond Birks in a letter written in October 1977. “We invest in and visit owner-run companies and feel that to do our trade requires a climate of owner-management independence and enthusiasm. Clearly, none of us wish to work for Bolton Tremblay or a Lorne Webster–owned company.” Dobson also warned that if Bolton Tremblay bought the firm, institutional investors in the trust fund would be more likely to redeem their units. “I would feel like leaving town if I got [the Trust investors’] support, ran the fund for a couple of years, and then sold it off for a capital profit.” Dobson complained that 82 per cent of the Formula Growth management company was owned by individuals not directly responsible for making investment decisions. “I am accountable to 300 to 400 of our friends and four pension plans for investment results in a very difficult investment climate. I am frustrated by our inability to get action when the majority agree on what is needed.” In the end, with financial support mainly from Drummie Birks, Dobson wrote cheques to all the Formula Growth Limited shareholders and took complete control of the management company, which he held on to until the early 1990s. “John paid whatever the units were worth at the time and bought them off the board,” said Ian Soutar. “John retained control, which then allowed the firm to exist, quite frankly, because he was able to remain fully invested despite what Peter and others wished.” Soutar noted that, in retrospect, Dobson was on the right side of history. “Looking back over the years, you could see John was always basically right,” he said. “It would have been wrong to get rid of all those stocks at that time because they were incredibly cheap. The fund went up enormously between 1975 and 1983, about 30 per cent a year. So a lot of people who had hung in ended up making a lot of money. At the time, it was very easy to say that John should have sold out. In retrospect, I think he was right. The good thing about it is that he stayed consistent. He didn’t panic.” Hugh Hallward was reluctant to discuss the episode. He made efforts to downplay

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the boardroom tussle, arguing that the main issue was leadership. “Walter Cottingham was about to go abroad, and there were questions about whether John would be the best leader,” he recalled. “There were many differences of opinion, but it never became personal. I remember Nassie Godel playing a very constructive role.” Godel, who first met Dobson while at business school in 1959 and shared his passion for golf, says that one of the conflicts related to the size of Formula Growth. “Some members wanted to bring in more clients and charge more. They wanted a much bigger pot to earn fees on. John was worried that if the fund got too big, it would be less successful, so he bought the others out.” Peter Mackechnie left Formula Growth in 1977 after Dobson purchased control of the management firm from the dissenting partners. He went on to pursue a short-lived career in the fast-food business by becoming a Long John Silver’s franchisee in Western Canada. He later became a successful businessman and stockbroker in Los Angeles and in Vail, Colorado. Mackechnie today expresses regrets about the failed effort to overthrow Dobson and the role he played. “I’m not happy with what I did,” he admits. Dobson never took it personally, however. He felt Mackechnie was simply doing what he thought was right. In fact, Dobson later provided scholarships for Mackechnie’s three children to attend university. “When you were a friend of John’s, you were always a friend of John’s, no matter what you did,” noted Ian Soutar. “He would give you heck at the time for doing something he didn’t like. But then it was over with! One of the great characteristics of the man is that he was loyal to all his friends.”

• Black Hats and White Hats • Some wounds from the attempted coup never really healed, even though there were efforts to make light of them. At a dinner for Dobson’s sixtieth birthday, held at the Mount Bruno Country Club in 1988, Peter Mackechnie spoke of the old Formula Growth board

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meetings, comparing them to an old-style Western movie. “John is waiting in the corral when out of the sunset come the guys in the white hats, the good guys – Roger DeSerres, Donald Johnston, Drummie Birks, Neil Ivory, and Nassie Godel,” Mackechnie said. “They are clean shaven, listen to Pat Boone records, and give money to Save the Whales. They say hi to Dobson just before some shooting begins up on the hill. The bad guys are approaching. They have on black hats, black shirts covered with dust, scruffy black beards, and their eyes look very mean. They’re the bad guys – Hugh Hallward and Lorne Webster. When the shooting dies down and the bad guys have driven off, someone notices over in the trees two men with grey hats on. These are the half-good, half-bad guys. They don’t even shave – Walter Cottingham and Peter Mackechnie.” The crowd loved it!

Chapter 5

Rebirth and Renewal “John let us do what we wanted, but we had to adhere to the target sheets and focus on earnings-driven stocks.” — Bette Lou Reade

The late 1970s to the mid-1980s were boom years for the Formula Growth Fund. After hitting a low of around $24 in 1974, by 1980, unit values surged fivefold to about $125. By 1987, they had zoomed up to $750, an increase of more than thirty times their value. From its bear market bottom of 577 on 6 December 1974, the Dow Jones Industrial Average also rebounded strongly but increased “just” fivefold through the 1980s, riding what was known as the “Reagan Bull” to a high of 2,722 on 25 August 1987. “The boom market lasted until 1987 for us, so you could have done very well,” says René Catafago, who started working for Formula Growth as a part-time controller in 1978 and would join full-time a decade later. “One of our clients came in with $100,000 in 1974, and he bought 4,000 units at the bottom. At the top, those units were worth about $8 million. This was a time of opportunity, because if you had bought in those years, you were almost assured you’d make a lot of money.” This was in line with what Dobson had articulated in his 31 December 1974 letter to unit holders. Before the recovery took off in earnest, and prior to the attempted palace coup, Formula Growth’s tiny staff (Dobson, Peter Mackechnie, and Bette Lou Reade) saw the addition of office administrator Barbara Ellis, who remained with the company until 2014. Ellis had been working down the hall from Dobson for a head-hunting firm

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and used to go for lunch with Reade. “Formula Growth hit really bad times in around 1974, and they didn’t have a receptionist, so I did a lot of the typing,” Ellis recalls. “I got to know them really well, and then Bette Lou offered me the job.” Ellis started in 1977 and was alone on the first day because the three other members of the company happened to be travelling. “It was so small in those days that we’d close the office when they had trips to go visit companies throughout the States,” Ellis chuckles. “If it was in Florida or Hilton Head, I was invited, and we all went and had a good time. I remember going to Nashville and visiting companies like Hospital Corp. of America, which went on to become a gigantic hospital management company and a big winner for Formula Growth.” Right from the beginning, Peter Mackechnie and Barbara Ellis would meet at her apartment, and he’d train her about the business, including showing her what Formula Growth called the monthly “break up” or “net asset value” sheets. These allowed them to calculate the monthly valuation of the fund portfolio. “I wasn’t a math wizard, so it was really quite nice that he spent so much time with me,” Ellis says. “But I learned it.” Dobson felt that if Ellis was going to work at Formula Growth Fund, she should know what investing was all about, so he helped her buy her first stock. “I can’t remember what the company was, but he said I could pay him back when I sold it, if it does well. But if it doesn’t do well . . . let’s just say he was very kind and generous. Luckily, it did do well, and I paid him back and took a trip to Hawaii with the proceeds.” Dobson believed that you had to be an owner to be involved and interested. “So he loaned me money to buy units in Formula Growth Fund, and again I paid him back for that,” says Ellis. “He was just great that way. He included me in everything, the meetings and the lunches they had every Tuesday to discuss investments. His main goal, always, was that he wanted it to be fun to work at Formula Growth. And it was. We had a blast!”

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Barbara Ellis recalls that occasionally after work she would go to Bette Lou Reade’s house, where they would drink martinis and have a laugh. “Bette Lou had a brand-new Mustang, and it was gorgeous. I was so jealous. I told her it was beautiful. She said she got it from Formula Growth because you get a car after five years. I thought, wow! And ten years later, I was still waiting for my car. Thirty-five years later, I was still waiting for my car. Bette Lou forgot to tell me it was a joke – her mother bought her that car. We still laugh that I never got my ‘Formula car.’” After Peter Mackechnie left Formula Growth, Dobson asked Bette Lou Reade if she would be willing to give up her accounting and bookkeeping duties to concentrate on investments. She reluctantly agreed. “I loved that stuff by then,” Reade says. “John wanted me to do stocks though, because Peter was leaving. I guess that was the beginning of my career.” Reade started actively picking stocks. Her father had run his own investment company, so she had been exposed to the business. “It certainly wasn’t foreign to me. I had spent enough time around Formula Growth to know what was required and how I had to go about it.” Earlier, Reade had worked in retailing, so it’s no surprise that one of her first purchases was fashion firm Liz Claiborne. “John let us do what we wanted, but we had to adhere to the target sheets and focus on earnings-driven stocks,” Reade says. “You’d have to go out one and three years. We had these spreadsheet meetings once a week every Tuesday and would order in Laurier BBQ Chicken, and we’d go over the stocks. So, it was really John’s criteria that we followed.” Vivacious and attractive, Bette Lou Reade had a knack for talking up executives and extracting every last ounce of information from them. “We’d go to conferences, and Bette Lou would stay at the bar with these guys and get all kinds of very useful information for us,” said Ian Soutar. “Sometimes she’d come back and tell John that particular investments could be in deep trouble for such and such reasons, because ‘so and so would say . . . ’ John would sometimes ignore completely what she had said. In some cases she was right and John

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was wrong, certainly in the short term. Bette Lou was our important hidden treasure in terms of getting us information about stuff that John would have never been able to get hold of. “Dobson would often sic Bette Lou on some company,” remembers long-time fund manager Ted Ashford. “In her own way, she would learn a lot. She asked the best questions. She smelled a rat with Comp-U-Card, and the CEO is now in prison. She didn’t like his eyes, his answers, or the smell.” Reade recalls buying a company for the fund in the mid-1980s. Headed by Barry Minkow, it was called ZZZZ BEST, and it was supposedly in the business of carpet cleaning and insurance restoration. “The IPO was presented to me by a firm out west, and I met Minkow over lunch. His manners were absolutely incredibly awful,” Reade says. “He was twenty years old, and he commenced to tell us that he had gone to military school. So I thought, hmm, no one that’s been to military school comes out with manners like that. So I was suspicious. Anyway, I bought the stock and it went straight up. I think it doubled. That was enough for me. I sold the whole thing. A year later, Minkow was in jail. The thing was a total fraud. And John said to me, “Just think, it could have been ZZZZ WORST!”

• The Network • Critical to the investment strategy of Dobson and his team was travelling across the continent to visit the people running the businesses in which Formula Growth invested. The intent was to gain first-hand knowledge Dobson thought was essential. He also built a network of regional brokerages, fund managers, and contacts in the United States that was second to none. This generated ideas as well as tips on growth companies that were poised for success. “We held day-long conferences in places like Newport, Rhode Island; and Hilton Head, South Carolina, to develop this network of people we had around the country,” says Bette Lou Reade. “They’d be attended by stockbrokers and money managers who contributed

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meaningfully to the success of the fund. A key to our success was getting to know really smart people throughout the United States, from big cities and small cities, who were doing the same kind of things. They’d share their ideas with us and became good friends. These turned out to be pre-eminent managers, so it was a collection of very smart individuals who became extraordinarily successful.”

alex hammond-chambers One of the earliest members of this network was Alex HammondChambers, a prominent UK money manager and investor who would later become chairman of the Scottish firm Ivory & Sime. He had just joined the firm when he first met Dobson in the summer of 1966, having previously worked with Formula Growth director Neil Ivory at a company that was a predecessor of Pembroke Management. (Ivory, the grandson of the founder of Ivory & Sime, went on to co-found Pembroke Management with Scott Taylor, Ian Soutar, and Clifford Larock. He was also the brother-in-law of Scott Fraser, who co-founded Jarislowsky Fraser with Canadian money guru Stephen Jarislowsky.) “Dobson and Ian Soutar hunted in pairs or teams when looking for and visiting small-growth companies,” says HammondChambers. “Since I was also managing American money, I joined them.” The trio had the same investment approach. They were looking for good, well-managed, smaller-growth companies in which the management had a significant financial stake. They spent a lot of time on price potential or target sheets, looking at what the companies would make over three to five years, instead of in a matter of months. “We’d do our research and determine what growth rates and terminal price-earnings ratios to expect,” explains HammondChambers. “Then we’d decide if there was a good return to be made on it.” In contrast, today’s market is dominated by value investors who look at what is the price potential given the earnings forecast for the quarter and the current price-earnings ratio. “No one today looks very far forward when investing,” he adds. “In fact, many stock market participants seem to just day trade.”

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What impressed Hammond-Chambers was Dobson’s incredible discipline. If the price potentials looked cheap on a long-term basis, he would top up the holding. But if it looked expensive, he’d cut it. “If it was a good company, he was happy to own a little bit of it on the grounds that he’d want to go back into it one day when the price was more attractive. If you sell a holding, you’re inclined to give up watching it, which he didn’t want to do,” Hammond- Chambers notes. “Dobson typically had quite long lists of sixty to eighty stocks. He’d have two parts in a portfolio: one for major investments and another for his ‘nursery’ portfolio, in which he’d put in a small amount into the stock and watch it grow.” Hammond-Chambers and Dobson would attend conferences together, share ideas, price potentials, and then play a little golf. “We weren’t competing. Dobson had a great network, and we did, too. We exploited the opportunities of going around to regional brokerages and finding local companies. Regional brokers knew who the good people and the good companies were.” Ivory & Sime and Formula Growth rang up some big winners between the mid-1970s and the mid-1980s in what HammondChambers described as the “golden era.” Most of these gains were in technology and specialty retailing, such as fast food. Stellar performers included Shared Medical Systems Inc., a health-related computer services firm; orange-juice giant Tropicana; big-box retailer Toys R Us; and the high-end tool supplier Snap-on Tools. Dobson was patient and focused on the right things, Hammond-Chambers notes. “That’s one of the reasons he was so successful. Today, things are more complicated. People look at things that are not as relevant. That may be good for egos, but not for the money they manage.”

Steve Riven Steve Riven was one of the early sell-side regional brokers who worked with Formula Growth. Today a senior managing partner at Avondale Partners in Nashville, he got into the securities business in 1966 and credits Dobson with his success. “John was the most

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helpful guy I’ve ever seen. If it hadn’t been for him, I wouldn’t have been successful. I’ve been in business for over fifty years thanks to him and Ian Soutar.” Riven’s parents hailed from Montreal, and he had a first cousin who went to McGill with Soutar. “I was living in Nashville,” Riven recalls, “and had registered to enter the securities business in 1965 with J.C. Bradford [a famous brokerage house]. My cousin encouraged me to go to Montreal and meet this one guy, Ian Soutar.” Riven and Soutar got together and discussed companies and stocks they were following. It was then that Soutar introduced Riven to Dobson. Dobson took over the networking from there. “He was like a tiger,” says Riven. “He knew everybody and introduced me to them. He could get you in the front door, and then the first guy you met would introduce you to another, and it would snowball from there. He was the best networker, and everyone loved him.” Riven sold research and equities to Formula Growth for twenty years while at J.C. Bradford & Co., including such winners as Hospital Corp. of America and Blue Bell Jeans. Riven continued to do business with Formula Growth when he moved to Equitable Securities and later set up Avondale, an investment banking and wealth management firm. “When I founded Avondale in 2001, John called and said he wanted to be the first trade through our firm. And he was.” Dobson’s approach, Steve Riven notes, was simple but consistent: buy good people and good companies for the long term. “He believed in people. He took some risks as well, based on people running companies. But he got to know them, and if he was confident in them, he’d support them. To me, John Dobson is a legend. He helped many kids go to college and never looked for any recognition.”

Scott Taylor Scott Taylor is a long-standing partner of Ian Soutar’s at Pembroke Management, which manages the highly successful GBC family of mutual funds. Founded in 1968, Pembroke’s investment philosophy was similar to that of Formula Growth’s. While more focused on

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Canada, it also invested in US stocks. Taylor and Soutar used to meet with Dobson and his team at least once a week to discuss stocks and world events. “John was the kind of guy you could take to readily, because he was so friendly,” says Taylor, now Pembroke’s Chairman Emeritus. “He had strong convictions of what was good or not good. I’ve always admired his integrity and networking skills. He was a great believer in getting out and talking to people.” For many years, Pembroke acted as a consultant to Formula Growth, providing a second opinion on companies. “It’s nice to run things by someone,” explains Taylor. “We were familiar with the names involved with Formula Growth. We were like a partner, and got the benefit of hearing what John Dobson and Peter Mackechnie thought. Dobson was very generous, and he thought there were advantages in looking at the market together.” The two companies even invested together in a lot of names and had similar investment criteria. The only rivalry between Pembroke and Formula Growth was around Christmas time when they had bet on stocks for the next year in a friendly, informal competition, a tradition similar to the Dobson Dinners.

Ted Ashford Professional investor Ted Ashford had also known Dobson for decades and bonded over a mutual interest in investing. “We started turning up at the same places, and we got to know each other,” Ashford says. “I was always interested because John and Ian [Soutar] would appraise companies for their upside potential in a very disciplined fashion. They weeded out companies that didn’t have potential, causing you to focus on the ones that did.” Ashford and Dobson would attend the same regional investment meetings in Atlanta and elsewhere, and once the meetings were done, they’d all play golf for a couple of days in what Dobson called a “balanced program.” Ashford managed a growth-stock fund and then set up his own firm, which managed small-cap growth stocks. “We weren’t really competitors with Formula Growth since they were in

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Canada and we were in the United States,” he says. “Like them, we wanted to get excellent investment results and didn’t want to be big.” Ashford began calculating a company’s potential the same way as Dobson and Soutar did. “This way, we could speak the same language. When you have three different guys looking at a management, you come up with different questions.” The trio would often call on private companies and look for opportunities together, mainly on the US West Coast. Ted Ashford and Dobson stayed friends for many years and went on golf cruises together to the Mediterranean, New Zealand, the Baltic, and along the Rhine River. “We’d be on a boat, then golf for the day, and get back on the boat. We’d talk investments on these trips, but it wasn’t a purposeful investment trip.” They both also had a mutual interest in entrepreneurship. “US investments were John’s specialty, but he wanted Canada to have the same kind of entrepreneurship, and he’d work hard on this.”

John Lowenberg John Lowenberg, who runs an investment partnership called Anvil Management Co., met Dobson and Soutar while working as an institutional salesman at Robinson Humphrey in Atlanta. He was introduced by colleague Bobby London, whom Dobson liked to refer to as “Big Bad Bobby” – he was 5’4”. London was a charming man and a nifty dresser who often wore white shoes and a cashmere topcoat and who knew Dobson and Soutar from frequent trips to Canada. “John was an instant charmer,” says Lowenberg. “It turned out that we knew many of the same friends from Scotland, such as Alex Hammond-Chambers, and shared a mutual love for growth companies.” Dobson and Soutar would always sit in the front row at Robinson Humphrey’s investment seminars and ask good, perceptive questions, says Lowenberg. “We would go visit companies together because I had an analytical and business background.” They also held meetings with companies and clients in such places as Sea Island, Georgia,

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playing golf or tennis during the day while the CEOs would talk about their companies in the evenings. Lowenberg says some lucrative investments in the southeast United States resulted from this close business relationship, including Cousins Properties, a huge Atlanta-based real estate developer that reaped more than 20 per cent annual returns over thirty years. Formula Growth got in early with retailer Dollar General, when it had fewer than 100 stores compared to about 5,000 today, and Theragenics, which produced a novel treatment for prostate cancer; its stock jumped from $2 to $60 between 1988 and 1992. Other winners included Scientific Atlanta, Office Depot, Humana, Charter Medical, and Genuine Parts. Coca-Cola Company, while based in Atlanta, was given a pass. “It wasn’t growing quick enough. It was growing only 12 per cent,” quips Lowenberg. “John Dobson had a tremendous nose for business,” he adds. “He was open to any venture and loved getting to know the company chairman, relaxing and chatting. He knew I had my own formulas, and we’d key them together and come up with the best companies that fit Pembroke and Formula Growth. We were looking at 17 to 20 per cent returns for fast-growing companies.” Lowenberg contends that Dobson’s nose for business was at least as good as that of legendary investor Peter Lynch. “He was always jovial but an extremely hard worker, putting in fourteenhour days.”

Bobby London Bobby London was only about twenty-five years old when he met Dobson while working with Robinson Humphrey. “I worked with John Lowenberg but started calling on Dobson shortly after being hired. I was an institutional broker, but since all major accounts in the US were covered and no one was covering Canada, I decided to go there. So I showed up in Montreal in the early 1970s on a day when there were still eight inches of snow on the ground. I rushed to my first meeting with John, Peter [Mackechnie], and Bette Lou

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[Reade], and they all laughed when I walked in. I was wearing a light blue suit and white shoes, without a coat.” Bobby London and Dobson became close friends, and they’d visit companies together in the Atlanta area. London also attended the Dobson Dinners in San Francisco for about eight years after moving to Montgomery Securities in San Francisco. “John was so generous, probably the most enjoyable of all my clients,” says London. “He took me under his wing and introduced me to everyone. He wasn’t a tough guy, just a pleasure and a gentleman. He had a great sense of humour and was gracious even about bad news.”

Robert Power Robert Power, who worked as an international equity salesman at Hambrecht & Quist – a well-known New York–based technology, venture capital, and underwriting company in the early 1980s – was also impressed by the warm reception he received from the Formula Growth team. “One of the things to understand about Formula Growth is that unlike virtually anybody else, they believed in being nice to people rather than having this adversarial relationship,” Power notes. “I was made to feel welcome from the get-go.” Power found Dobson to be no less than remarkable, able to cut to the heart of things. “I always admired how quick and decisive he was. He would know instantly if something would appeal to him, and he was very loyal to those he dealt with. Formula Growth has probably got the greatest long-term record of any investment entity that I’m aware of because their network was composed of people who were like them.” Hambrecht & Quist had many tech underwritings in which Formula Growth was interested, and Power used to visit Montreal fifteen to twenty times a year, sometimes more. Power says he introduced Formula Growth in the late 1990s to what would become one of its biggest winners: Celgene Corp., a biotech company. Another company that did very well was First Financial Management Corp. “Formula Growth wanted growth. They didn’t care from where, but

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it had to be growth. So they were very focused on technology and health care.” Power, now a managing director at Pickwick Capital Partners, says one of the Formula Growth team’s strongest features was the fact that they had good instincts. “They knew a good story when they heard one, and this distinguished them from other people. Their experience and network would have played a bigger part in their decision-making process than it would in other organizations. If they blamed us for any failures, I never knew about it. Formula Growth has lived through ups and downs of growth stocks, and you need strong stomachs for that. I never remember them blaming us for any disasters.”

Dick Lilly Dick Lilly, a former analyst for Raymond James and JW Charles, also had extensive dealings with Dobson from the mid-1970s to the early 1990s and was impressed by his uncanny ability to read research and pick out ideas to invest in. “I was focused on smaller emerging companies then, and brought some ideas to John. I thought he was one of the smartest money managers I ever came across.” Along with John Templeton, Dobson caught electronics retailer Circuit City at an early stage of development in the 1970s and early 1980s, when it was called Wards, and had a spectacular run with it. He sold before the company fizzled and ultimately went bankrupt. For a while, Circuit City was Formula Growth’s largest single holding and was ranked the best stock on the NYSE in the 1990s. “He was one of the first to recognize the opportunities presented by bigbox stores,” said Lilly, who passed away in 2016 at the age of sixty-nine. “Other big-box retailers that became home runs for the fund were Price Club and Home Depot.” Dobson was a master at managing risk and reward. His track record showed consistent returns, noted Lilly. He believed in the quality of management and took a hands-on interest in what he was investing in. “He used to visit many companies a day, 200 plus a year,” said Lilly, who headed up the research department at

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Raymond James between 1974 and 1987. “He was constantly travelling, visiting companies throughout North America, maintaining good relationships.” Dobson had an extraordinary ability for identifying small, emerging growth companies before they became big names – and finding the right talent to help him get the job done. Decade after decade, this proved to be his investment hallmark.

Chapter 6

New Blood “I always felt John Dobson and I were like ‘two ships destined to meet.’” — Randy Kelly

Bob Staples first met John Dobson in 1974 through Formula Growth’s auditor, Russ Bremner. “John was a character. Very bright, very much in the know, very connected with current events,” recalls Staples, who worked for Gardner McDonald (later acquired by Touche Ross, and now Deloitte Touche). Staples would soon become audit partner for Formula Growth, keeping that role for close to thirty years until his retirement in 2003. “The fund was very small in the 1970s, especially after the market crash, and they all worked in a tiny office. But I witnessed tremendous growth over the years.” While Dobson always introduced Staples as his auditor, Staples also acted as a business adviser and family counsellor. “It’s a twentyfour-hour job in a small practice like that,” Staples notes. “I was the outside source for a lot of people to bounce ideas off. I also helped them deal with many personal issues: breakups, divorces, you name it. It was not just a business relationship, but a friendship.” Staples became known as “the Captain” because he took Dobson and members of his network out on his sailboat. Then one day he told Dobson about a young auditor working for him at Touche Ross named Randy Kelly. It would prove to be a fateful introduction. “Randy and I worked on some big accounts together, and we had a lot of respect for each other,” Staples recalls. “So I got Randy to do the audit at Formula Growth, and I suggested to Dobson that if he needed a young guy, to talk to Randy.”

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Kelly couldn’t have come from a more different background than Dobson. Growing up in the working-class Montreal neighbourhood of LaSalle, he attended Verdun High School like his father. “My background is very blue collar,” Kelly says proudly. “My father drove a train. He dropped out of school in grade 9 to help his family in the late 1930s, during the Great Depression. My mother was born in Sherbrooke. She too had to drop out in grade 8 or 9. I grew up with parents who had great principles, great morals, and great ethics – but little education. So the dominant thing was to get an education. ‘You have to get an education, Randy.’ That’s all I ever remember my parents saying.” Kelly describes his father as “one of the brightest people I know.” He also had a passion for cards and, without knowing it, a deep understanding of probabilities, skills that would serve his son well for a career in the stock market. “Through my dad and my upbringing, I remember always being interested in mathematics and probabilities. And I remember my father teaching me how to play Monopoly, and poker, and every other card game when I was a little kid.” Kelly used to go to Montreal’s Blue Bonnets racetrack with his father, where he initially made a little money and then lost it. “I quickly recognized that the math behind racetrack returns had a hole in it, because the track has to take 20 per cent to make money. So in the long haul, the bettor won’t make money. A racetrack or a casino is not a closed loop. There is always a ‘rake’ for the house, so players can’t do well. When I explained that to my father, he said, ‘I just like to watch the horses go.’ In other words, it was fun for him. But that wasn’t enough for me.” After graduating from Verdun High School in 1973, Kelly took the proceeds from his summer job as a busboy at the LaSalle Legion Hall and started to invest in the stock market. He considered it the ultimate card game. Unlike the racetrack with its rake, a card game is a closed loop. No money leaks out. It remains in the loop and accrues to the winner. Kelly explains, “If you actually do your work, the stock market is like being at a card table. In fact, it is a card table

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where the ‘house’ pours in more money via the growth of the underlying companies and growth in GDP – so even better! If you stay and make the right moves, watch the cards being dealt, and have steady nerves, you will win over the long term. But don’t fall asleep.” Kelly recalls those days as a good time to buy because stock prices were really low, so he started buying stocks and making money. Coincidentally, this was at the same time Dobson was imploring his customers to stay the course in 1974. “As a young guy, probably around eighteen, I think I spent my money quite quickly and had fun.” That summer, Kelly went to work at Northern Electric (the predecessor to Nortel), expediting goods between the office and the plant in Montreal’s Pointe-Saint-Charles district. “I liked what I was doing at Northern and decided to switch to commerce from science. I went back to Dawson College [a junior college, or CEGEP, in Montreal] and finished the required two-year program. I got accepted at Concordia University, but not the more highbrow McGill that was so near and dear to John Dobson, because my grades were just okay.” While studying commerce at Concordia, Kelly lived at home with his mother, who had separated from his father. “I had to keep making money to chip in to help support my mother. I remember when my parents started to break up they’d argue about money, and I concluded that it could solve a lot of problems. I think a little differently today, that money can’t solve problems, but it sure doesn’t hurt. But back then, I always wanted to make money since I thought I could help out the family if I had it. So between liking money, liking math, and liking games of chance, I fell in love with stocks. I also really loved to work. I’ve liked every job I’ve ever had. I find it keeps me out of trouble. The stock market is perfect for me – it’s very challenging and keeps me busy.” After graduating from Concordia, Kelly decided to go into accounting because it seemed practical. “When I went to the job recruiting room in Concordia, there was a big board filled with job offerings from all the Big Eight (now the Big Four) CA firms, so I applied for two or three of those and got interviews with all of

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them. I had what they wanted: a B.Com with honours in accounting.” He had secondary interviews over lunch with a few partners, and Touche Ross (now Deloitte Touche) seemed to be the best. So he signed on in August 1978. Kelly studied for his chartered accounting degree at McGill by taking night courses for two years and obtained his designation at the age of twenty-four. “I had a blast at Touche Ross because there was a constant stream of young people coming in. I would get good clients, which was helpful for my growth, because I would do audits for public companies such as United Westburne, Bank of Montreal, etc. I met high-level executives and learned how to talk to them, which helped me later in the investment business.” Randy Kelly had a knack for speaking and relating to people and moved up the ranks quite quickly. He was working hard as an accountant and was busy teaching and lecturing in the CA programs at McGill and Concordia. “At around age twenty-five, I wanted to become a partner, and I thought it was a great career path,” he says. “You can become anything once you’re a CA, even more so today, with the world being over-regulated.” Bob Staples was one of Kelly’s bosses at Touche, and he asked him to audit a client, Formula Growth. Kelly was reluctant. “I didn’t want to because I’d never heard of it, and it seemed kind of small,” he recalls. “He said it ran two high-profile mutual funds whose clients included high net-worth people and big institutions like the Royal Bank.” Kelly says today that he always felt he and John Dobson were like “two ships destined to meet.” But that wasn’t how it looked at first. He came in as the auditor and met Dobson, Bette Lou Reade, and Barbara Ellis. René Catafago was also working as an external accountant at that time, performing all the internal accounting for Formula Growth’s funds. “He becomes my go-to guy during an audit. I come in and I’m fascinated by the place and I see a list of stocks that I’ve never heard of, all of them American, small- and mid-capped stocks, and they’re growing like crazy.”

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Kelly’s first impression of John was not all that favourable, however. “I thought he was crazy,” he admits. “That remained my impression for a few years, even when I worked with him. Over time, I understood him better. He was the most intellectually honest person I’ve ever seen. And he was so focused, passionate, and energetic, with an unbounded curiosity.” Kelly did two or three annual audits, which required him to be in the Formula Growth office for a week or so each year. He got to know the company’s tiny staff. “John barked at me for looking at the petty cash, worrying about that. It was immaterial. I got to know his idiosyncrasies and thought he was fascinating, and he clearly was a success. I could see from the portfolio that a lot of the stocks he had invested in had skyrocketed. In 1981–82, when technology was exploding, the fund was on fire. Things were spectacular. I was mesmerized.” While auditing Formula Growth, Kelly says he recognized the enormous leverage potential in the investment business. “I compared it with the accounting profession and charging myself out at an hourly rate and hoping to become a partner. I started to see the challenge of finding these great stocks and wanted to be part of it.” In the fall of 1983, when Kelly came in to do a half-day systems audit with René Catafago, Dobson announced that he wanted to hire somebody young. Kelly suggested a colleague of his at Touche Ross, but Dobson shot back, “I want you.” Kelly, still aiming to be a partner at Touche Ross, told Dobson that at twenty-seven he wasn’t young anymore. “I was working in a highbrow accounting firm and told him I’d get him a younger guy.” Dobson was relentless and took Kelly to a few investment meetings in Montreal so he could see how he operated. “I thought it was cool. I had a long lunch with Bob Staples, and he told me I’d be out of my mind to not take this opportunity with John. So I did. I got on board in early 1984 as treasurer.” Kelly’s modest origins were not a hindrance. On the contrary. Drummond Birks, Dobson’s old friend, was enthusiastic about the

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idea of hiring Kelly. “If you want somebody to succeed you, they should be from Verdun,” Birks advised. “That was near and dear to John,” says Kelly, “to have a guy from the other side of the tracks. Maybe he saw it in his father, Sydney, because he came from a more pedestrian background.” But soon after starting, Kelly decided Formula Growth wasn’t for him. “After three months, I wasn’t getting close enough to the stocks, and the accounting was getting dull because there wasn’t enough to do. So I told John I was getting bored and wanted out. John and I had this catastrophic argument. It got really nasty, and I thought that he’ll either fire me or I’ll quit. So I’m basically done.” Dobson called the next day, and the two reconciled. “I told him things had to change, that I had to give the accounting back to René Catafago, the external accountant, and visit companies. I wanted more input on the portfolio,” Kelly says. “I told him I’ll supervise the accounting and treasury, but I’ll delegate it outside. At that point, I got more involved with John on the portfolio and got in on the calls and on the road. I learned about the business and applied the knowledge I had as a CA, analyzing financial results. Later on, I became a chartered financial analyst (CFA), so I could progress even further.” When Kelly signed on in 1984, Formula Growth Fund had about $36 million US in assets under management, and the institutional fund, Formula Unit Trust, had about $55 million (US). There were 133,000 units, and the price was $270 (US)/$347 (CAN) per unit. “Unfortunately, when I came on board, it was a tough period for Formula Growth because 1983 was the crescendo of a tech boom,” recalls Kelly. “The tech stocks were hot in the early 1980s, and the unit price topped out at $500 in mid-1983. By the time I bought my first units, they were $300 each. John loaned me the money to buy my first thirty or so units. My first units alone today would be worth over $270,000. He loaned me $10,000, which has long been paid off.”

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• Black Monday • Then came the stock market crash of 19 October 1987. In what has become known as Black Monday, the Dow Jones Industrial Average fell by 508 points, or 22.6 per cent, from 2,246.73 to 1,738.74, its biggest one-day percentage decline ever. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The crash has since been largely blamed on automated computer trading that forced sell orders when the market turned down, exacerbated by negative market psychology. Following the stock market crash, a group of thirty-three leading economists from around the world met in December in Washington, DC, and collectively predicted that “the next few years could be the most troubled since the 1930s.” Nevertheless, the DJIA was positive for the 1987 calendar year. It opened on 2 January 1987 at 1,897 points and closed on 31 December 1987 at 1,939 points. However, the average did not regain its 25 August 1987 closing high of 2,722 points until almost two years later. Formula Growth units lost nearly 34 per cent of their value in October 1987 and ended the year down 7 per cent. Just before the crash, the Formula Growth team was having its weekly meeting, enjoying Laurier BBQ chicken in the office, when Dobson received a phone call. Unknown to the rest, it was from legendary investor Sir John Templeton. “John gets mad that our chicken lunch gets interrupted, and I hear him yelling ‘No!’ gruffly into the phone multiple times, and he hangs up,” remembers Kelly. “I ask who it was, and he says, ‘Sir John.’ It turned out he wanted to come into the fund as a customer, and I told Barbara [Ellis] to phone him back and tell him we’d find a way to get him invested from his offshore base. I leave the chicken lunch to talk to Templeton’s people and they ended up investing significantly in the Formula Growth Fund in August 1987.” René Catafago remembers the episode, although slightly differently. “In 1987, just before the crash, John Templeton called and spoke with Dobson and said, ‘I’d like to invest in your fund.’ Now

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Templeton is the god of investments, and they were friends before that. But Dobson tells him, ‘No, I don’t take new money, I don’t want your money.’ And he just hung up on him! So he tells Bette Lou [Reade] and Randy [Kelly], and they thought he was out of his mind! They say, ‘Do you realize how important it would be to have Templeton investing his own money in your fund? Call him back!’ So he calls him back and says, ‘Yeah, yeah, I spoke with Randy and Bette Lou, and we should take your money.’ So, sure enough, Templeton puts money in, invests in August of 1987. By October there is a crash, and a couple months later, Templeton had lost 40 per cent of his money.” (He astutely doubled down his position after the crash, trying to recoup his losses by buying twice as much.) “So timing, if you get the entry point right, can be everything! With the years, he made it all back, and at some point, around 2000, Templeton was the largest single unit holder of Formula Growth. He had around $40 million with us, either himself or through his foundations. And he stayed very, very loyal to the fund until a few years before he passed away, when he had to redo his estate.” Templeton invested in Formula Growth because he believed that it had the right investment approach, and he trusted Dobson implicitly. “I remember when we reached a certain amount, he congratulated us on the milestone,” recalls Catafago. “I think when we reached the equivalent of $900 a unit, he said it’s a milestone of 100 times our money. After that, the unit went from $900 to $5,400 in Canadian dollars by 2013, which is another six times! So, at some point, we were a printing machine, and we only charged 1 per cent on the funds under investment, which was much less than anyone else in the business. Everybody realized it and wanted to give us money.”

• New Troops • After more than a decade of doing the books externally or part-time, René Catafago was brought into Formula Growth as a full-time employee in 1987. Catafago had known about Formula Growth since

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the late 1960s because his brother, Philip, had been the company’s auditor in those days. “I remember him telling me that there was a beautiful fund and people were making a lot of money with it. He said it was Formula Growth, but he couldn’t invest in it because he was the auditor of the company.” In 1972, while studying for his CA, Catafago went to work for auditor Russ Bremner, who happened to have trained Philip as a CA as well. In 1976, Catafago installed new accounting systems for differentiating between US and Canadian dollars at Formula Growth. The fund was still tiny, staffed by only Dobson, Bette Lou Reade, and Peter Mackechnie. “The first time I meet Dobson, he comes in and they tell him there’s this bright auditor asking too many questions. He gives me shit. He says he doesn’t have time for number crunchers. He can’t waste time giving me useless information.” Catafago says he went back to Bremner’s partner, Bob Staples, and told him, “‘I’m not working at this place ever again. Don’t ever send me there.’ Just to make a long story short, I’m still here. That’s about thirty-five years later.” (He retired in 2016.) Dobson was always against administration and red tape, says Catafago. “He was Mr Entrepreneur. He loved to buy stocks, sell stocks, and he wanted to create profits for unit holders. He never had time for anything to do with administrative work. He was not into it. It wasn’t his forte.” While Catafago may have failed to convince Dobson what good things the back office could do, the two became good friends. “When I met him, after the initial fight, he asked my name, and I said René Catafago. ‘Too complicated,’ he said. ‘I’ll call you the Cat.’ After that, my office started calling me the Cat. Later on, all my friends started calling me the Cat. And I’m now the Cat to everybody.”

• Group Therapy • Dobson liked to get people together in a group because he believed in the power of teamwork. He once invited investors in the Formula Unit

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Trust fund for a sailboat expedition on the St Lawrence as a “bonding” experience. The participants ended up getting a lot more than they had bargained for. As Peter Mackechnie recalls, “Bob Staples (the Captain), brought his sailboat to a dock on the St Lawrence River, and about a dozen members of the Formula Unit Trust fund were invited on board. During the expedition, there was this terrible crash, and we couldn’t figure out what the hell had happened. It turns out the boat had run aground and its masthead shattered. Bob comes from the end of the boat with a cut that had opened up on his head. I had a smaller cut, but still needed stitches. People were lying around, dazed. Bob Thompson from the Royal Bank was the most seriously injured and was taken to the Montreal General Hospital. He got twenty-one stitches in his forehead. He came back and insisted on getting back on the boat. The moral of this was that Dobson felt that having all the customers together with Bette Lou Reade and me and some other Formula Growth friends was just good for business. That was one day, though, when it was not too good.” Two months after Catafago formally joined Formula Growth, the stock market crashed. He lost much of his savings and feared Formula Growth might go bankrupt because it was going downhill so quickly. “For three years, from 1987 to 1990, the markets tried to rally. The unit value went from $750 to about $380. And some customers were really mad at us, asking what we were doing, yelling at us for losing their money. And we said we haven’t changed. We invest for the long term.” Catafago rose to become CFO and then executive vice-president and an owner of the firm, but he never played an active role in picking stocks. “Dobson had this idea that you either pick stocks or you’re in charge of administration. He said to me once, ‘Your forte is administration and not stocks, so concentrate, because trying to do both is not a good idea.’” Just a few months after the October 1987 crash, another key player joined Formula Growth. Kim Holden, Bette Lou Reade’s daughter, came in to replace Barbara Ellis while she was on maternity leave.

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One of Holden’s major selling points was that she could actually handle a computer in an office where there were none. Everything at Formula Growth was being done manually. “We read the Wall Street Journal every weekend, and we kept the prices,” recalls Reade. “We’d take the quotes right out of the newspaper. We were very basic.” (Formula Growth Fund valuations were calculated twice a month for purchases and redemptions.) In that environment, Holden looked like Microsoft founder Bill Gates (his company had just gone public in 1986). “All I had to do was buy a computer and install some basic software packages, and they thought I was genius,” she recalls with a smile. “So they asked me to stay after my six-month stint.” Holden had just graduated with a degree in economics from Carleton University in Ottawa. “I had skipped a couple years of education and graduated at twenty, so I was a little young to know what I wanted to do. This opportunity presented itself, and I had grown up with investments all around me. So I decided to take the job and learn a little bit about the business.” Soon after Holden had been hired full-time, Randy Kelly suggested that she do the CFA exams and learn the business. Even though she hadn’t had any previous accounting or business experience, she sailed through three years of the financial analyst’s course, obtaining her CFA in 1990. Dobson immediately encouraged her to put some money to work. “One of John’s great strengths was his willingness to teach other people. And one unusual thing about him was that he taught by allowing people to take risks,” she says. “So many other people would be worried about the downside in allowing someone very new to take such a risk. They’d tell me to do my research, think of three ideas, and then they’d go over it. John would just tell me to buy some stocks.” Holden could not have started at a better time. “After a very rough start to the decade, the early 1990s were absolutely stupendous years,” she recalls enthusiastically. “I think from 1991, the fund went up sharply every year for five years. They were just fantastic, and the US dollar was at its peak against the Canadian dollar. The

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performance was achieved without hedging or derivatives, just a plain vanilla, long-term horizon. The entire decade turned out to be a strong one for us.” Formula Growth’s stellar performance during the 1990s (the unit price jumped over nine times, from $380 to $3,600 US) was due partly to these favourable market conditions. But a much bigger factor was Dobson’s discipline, along with his fearless investment approach. It was not something for the faint of heart.

Chapter 7

The Growth Formula “Those things that are often perceived as risky have the most opportunity.” — Ian Soutar

Throughout its history, Formula Growth has not hesitated to invest in unconventional companies, the type that might not pass muster in a traditional blue-chip portfolio of established names. While it has almost always played with publicly listed stocks, many are at such an early stage of development that investing in them could best be described as engaging in a kind of public-venture capital. Too small or too unproven, these companies are clearly not ready for so-called prime time investing by mainstream investors. This approach has been an essential part of Formula Growth’s game plan from its earliest days, with generally terrific results. Occasionally, however, some big catches have got away. Back in 1970, for example, when an upstart retailer from Arkansas decided to go public with his growing chain of discount department stores that concentrated on small, neglected markets, John Dobson decided to check it out. “When the great companies were becoming public, we had a look at them and tried to get in really early,” he later explained. “We had an opportunity to invest in Walmart right at the beginning. I even had dinner with Sam Walton. But we never bought Walmart. We thought it was too expensive.” It was a rare misstep in a remarkable career. “Fortunately, we did buy Home Depot very early on, before the big-box formula really took off,” Dobson continued. “Ian Soutar and I went to visit the first store they opened up in Atlanta. So we were

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doing things that were really unconventional, and to make really big money that’s what you need to do.” The idea was to get in on innovative ventures, to look for a business plan that was brand new and perhaps not well understood, and where the people involved might be inexperienced or at times not even regarded as the best. Ideally, their ventures turn out to be huge successes. The founders’ lack of experience, or the challenge they faced in explaining their product, could even be assets in Dobson’s eyes. “When the companies all are well recognized and everyone understands the story, they become well priced in the market, so you don’t make the kind of returns that Formula Growth is looking for,” Dobson explained. Because of this approach, there have been failures as well. “But the successes are so early in their life cycles that they tend to overshadow the failures,” Dobson said. “The failure rate may be much higher, but the success rate is so big and so powerful that it overshadows it.” This investment approach has meant that Formula Growth has focused mainly on technology, pharmaceuticals, speciality retailing, restaurants, financials, and some small industrial companies. It has generally shied away from commodities, with the exception of oil, because these companies tend to be cyclical and hard to judge. If Formula Growth owned a cyclical, it tried to come in very early, when the growth was the fastest off the bottom. But Formula Growth also recognizes how difficult it is to judge where the bottom is and generally keeps away from this space. As for utilities, they were and still are too dull to consider. And while Formula Growth is always looking for the next “big idea,” it also looks for “real” companies. It avoids investing in concept stocks and keeps away from those reliant on a fad with outsized future expectations. “A fad by nature is just that – a fad,” said Dobson. “It comes quickly and leaves just as fast. Where is Pokémon now?” During the dot-com bubble of the late 1990s, the market was filled with “weekend” investors chasing such fads. “People were no longer investing. They were speculating.”

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Such speculation was one of the reasons for the 1929 stock market crash, Dobson noted. Rumours, innuendo, and an army of day traders caused markets to swing wildly from day to day. The aftermath of this was a terrible bear market hangover that left the investment community struggling for years to pick up the pieces and rebuild. Financials have also been a big part of the Formula Growth portfolio, but usually not traditional banks. Rather, the fund was always interested in a financial company with a new idea. One example was Jackson National Insurance, a firm that provided specialized insurance products and annuities. The spectacular gains earned by Formula Growth when the company was bought out by British insurer Prudential PLC provided the initial funding for the John Dobson Foundation.

• “What Are You Doing?” • “Formula Growth was typically unconventional,” said Ian Soutar. “Most people would not understand some of its choices at all. They’d look at it and ask, ‘What are you doing?’” Dobson said the goal was to find solid individual companies and have the patience to wait for them to succeed rather than relying on traditional tools of market timing or economic factors. Formula Growth has always taken a bottom-up approach, looking at individual companies rather than starting with an industry or macro approach. “I long ago concluded that the best results are obtained over a longer time period by investing in successful companies that are making above-average returns on shareholders’ equity, that have rapidly increasing earnings, and that are selling at historically low prices. I knew going in that we would experience setbacks, which we probably wouldn’t be able to identify in advance. But the rewards have always justified the risks.” René Catafago says that Dobson had a simple formula for picking stocks. “His philosophy was that you should concentrate on

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earnings-per-share growth and sales growth. He said if you can cover those two, you can do very well. So if a company grows at 15 per cent a year and you buy it at a fair price, your investment will grow at least 15 per cent a year. But Dobson’s philosophy was to find companies that grew at 20 per cent plus. The ‘20 per cent plus’ means that you double your money every three and a half years. That was his aim.” It was not always an approach for the faint of heart, but Formula Growth made it work. “If you can find one super stock out of every four stocks you buy, boy you’re going to make it rich,” says Catafago. “One stock is going to be terrible. Two will do nothing. But that one super stock will make up for everything else.” Catafago regrets that he never had Dobson’s patience in his own personal investing. “In Dobson’s era, you had to buy a $1 stock and try to keep it as long as you could. Buy and hold from 1975 to 2000 was the only thing you could do, unless you were lucky and got out in 1987, not to come back until 1991. That was a terrible period of time. But buy and hold was a way to make money. I would have been way better off had I listened to Dobson’s approach, because I had some stocks personally that I sold so early, thinking I was smart, and then they went up tenfold after I sold them.” Everyone agrees that Dobson had an extraordinary level of risk tolerance. “He always said that the big mistakes we made were mistakes of omission, not commission,” said Ian Soutar. “The thing that really would upset us was missing a Walmart at the early stage, not investing in something that went down 50 or 60 per cent. We wanted to make sure that everything was going to turn out to be an exceptional longterm growth opportunity. We’d look at them all. Sometimes we didn’t like it – too expensive or we didn’t like the people – and it would go on to be a success. Then we’d be really upset! John encouraged us to go out and take risks and do unconventional things. Those things that are often perceived as risky have the most opportunity.” A willingness to take on risk did not mean that Formula Growth was reckless. In fact, it was highly disciplined with its target sheets, which it used to assess potential stock purchases as well as to track a

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stock’s ongoing performance. After attending a conference or visiting a company, the team would always go through the sheets carefully. “I remember one night we came back from San Francisco, Bette Lou [Reade], John, and I,” recalled Soutar. “John insisted, because we hadn’t done the worksheets yet, that we had to do them. So we went to my house, and my wife was upstairs with our young children. We’d had a lot of drinks on the airplane, and we were making a lot of noise getting the worksheets done. And my wife was pretty upset about it. But that was John. You had to get the worksheets done.” Formula Growth usually tracked scores of stocks for potential purchase, and when there were not many stocks that were deemed to have a lot of potential, it was usually a sign that the market was too high, Soutar noted. “At those times, someone like Bette Lou [Reade] would suggest raising a little cash. But John never wanted cash in the portfolio, so he’d say to find stuff with potential. That sometimes perhaps led us to be a little more liberal when it came to assessing earnings.” In short, Formula Growth was sometimes less rigid in its investing approach than other companies were. Dobson was an optimist who believed that when he bought a company he was buying its management as well. “His attitude,” says former portfolio manager Kim Holden, “is that you’re not renting the shares in the company. You are owning them and helping management in their endeavour to grow larger. He was very loyal. He tended to hold on to his investments and disregard the short-term negatives because he had such a long term-time horizon.” Dobson believed that management teams were the driving force behind a successful company, and that the best way to judge them was to meet face to face. “We want to see the whites of their eyes and gauge their desire to be successful and rich with their stock. Because if they get rich as shareholders, so will we,” Dobson said. Senior officers of small companies usually have a significant portion of their net worth in their company and are often falling over themselves to get their story out. There is far more information available in this segment of the market when compared to large-cap companies, which

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are usually efficiently valued. Furthermore, the CEO of a large corporation like GE may never be available. “Generally speaking, Wall Street covers only larger companies, and by investigating the company ourselves, we can find out information that few other people know, giving us an advantage,” noted Dobson. “Because of our experience, judgment, and instincts, we can make quick decisions and buy these stocks at cheap valuations before the growth prospects are clear or widely known.” Formula Growth’s large and varied network also allows it to tripleand quadruple-check information on a particular company. “There are many smart people on the sell side [brokerage/analysis/investment bankers] and the buy side [money managers],” said Dobson. By using all the available resources, Formula Growth developed an overall database of information that few other firms could rival. Dobson was always a very patient investor, which sometimes cost Formula Growth dearly. “Sure, he rode some stocks to zero,” said Ian Soutar. “But if you look at the money that John made, he did incredibly well by hanging on to things. John’s instincts were usually very good about people and opportunities. He was very inarticulate in terms of explaining exactly what he was doing. But when you look at the track record of the guy, he was usually right and quite often early.” Dobson proudly stated that Formula Growth was always trying to hit home runs, shooting for the fences. “We’ve had a lot of winners over time, like WebMD (the Internet-based health information service). We bought that in a private deal with a company called Actamed, and they got merged with WebMD, also in a private deal. We had paid $1.73 for that, and it came public at $8, and within eight months, it went to $120 or so, although we sold most of it in the vicinity of $35 or $40. That’s twenty-five times your money! One of Formula Growth’s most successful investments was in Hospital Corp. of America (HCA) of Nashville, one of the world’s largest private operators of health care facilities. According to HCA Chairman Thomas J. Frist, Ian Soutar’s Pembroke Management was

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the first institution to buy HCA stock when it went public in 1969. At that time, Soutar also introduced Dr Frist to Dobson and Formula Growth. Frist credits Formula Growth for opening doors to other money managers in Canada. Dobson and Soutar were also close to Jack Massey, who founded HCA with Frist’s father. Another good example of a successful Formula Growth investment was Service Merchandise, a Tennessee-based catalogue retail company founded by Raymond Zimmerman. Zimmerman first got to know Dobson, Soutar, and Alex Hammond-Chambers at a meeting in Nashville arranged through Jack Massey of Hospital Corp. As the company’s sales soared, Formula Growth went on to be a big investor in Service Merchandise in the 1970s and 1980s. “We would talk frequently,” says Zimmerman. “John would call me, or I would call him for his opinion, which I very much valued. He was a wonderful shareholder and a wonderful friend.” (Service Merchandise went bankrupt in the late 1990s, but well after Formula Growth had sold its holding at a huge profit. Zimmerman later bought the former company’s name and logo at an auction and revived it as an online-only Web store.) Raymond Zimmerman passed along to his Canadian friends some practical advice for assessing a company. One day, he got a call from Dobson saying that he, along with Soutar and HammondChambers, planned to visit a Kentucky-based restaurant chain called Long John Silver’s that specialized in seafood. “I told them that if the restroom is clean, then it’s a pretty good store,” Zimmerman recalls. “So the first thing they do when we get to Long John Silver’s is go to the restroom to check out if it’s a good place. I told them to look at the ladies’ room because the men’s room is easier to keep clean. It was around lunch time, and the restroom was a disaster. They all looked at each other and said, ‘We’re not buying stock here or eating here!’ A couple of months later, all the executives of the restaurant’s parent company died in a plane crash, and the company went straight down. After that, I became their unofficial fastfood analyst.”

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• Shooting for the Fences • After almost sixty years, it is astonishing how many good stocks have passed through the Formula Growth Fund portfolio, contributing to its long-term performance record of 12.6 per year. Appendix 3 (page 259) shows just some of the stocks that at least doubled in price. Organized by decade, it demonstrates that, no matter what the macro situation or sector of the economy, there was always a stock worth buying. Most of the names would mean little to the casual investor. John Dobson revelled in finding stocks before the mainstream investment community. Some went on to increase by 100 times the cost of the original purchase price while others reversed in value or even went bankrupt. Sometimes Formula Growth was caught in the carnage as the stock changed course and declined. But to Dobson it was all a “numbers game.” He felt growth stock investing was all about diversification and running a portfolio with a lot of names. The inherent risk in investing in growth stocks is the underlying business plans of the companies themselves. They are generally new or emerging businesses doing something radically new or bravely taking on incumbents with what they hope is a better mouse trap. This reality made diversification the key risk control in managing the Formula Growth Fund. Dobson believed strongly in starting with a small position after first scripting a company’s “story.” He felt there was no better way to get to know a well-scripted stock story than by owning it. As the script unfolded, and the fundamentals came through, he would delight in averaging up and building a larger position. He hated averaging down. If a stock price was going against his “script,” his instincts or his sell disciplines demanded that he go slow with the position or sell it entirely. This process demanded a lot of the Formula Growth team. As well as production, “gardening” the portfolio (pulling the weeds and watering the flowers) required a great deal of attention and finesse. Constant dialoguing with management teams and Formula Growth’s information network on Wall Street helped carry the load.

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Dobson felt that if you were on to something you should buy some of the stock. He recognized that you could never tell exactly where the next big winner would come from. Idea production was always front and centre. Formula Growth CEO Randy Kelly emphasizes this point by saying, “Think of ideas or stories being processed like meat through a grinder.” Quickness in idea discovery was also at the core. Dobson said, “don’t dawdle, otherwise the Street will cotton on to the idea and the price will move higher away from you. You may not get another shot at it.” He was often right, as the appendix shows, with so many new ideas doubling right out of the box.

A Dobson Investment Primer: Ten Guidelines Formula Growth’s ability to pick winners is the culmination of its disciplined investment approach, one that has remained virtually unchanged since the fund’s inception in 1960. It has rigorously championed several basic investment guidelines that have served its unit holders well. Guideline #1: Let Compounding Work for You. A line sometimes attributed to Albert Einstein goes as follows: “The greatest invention in human history is compound interest.” Compounding is the ability to generate returns that are then reinvested and then generate their own returns. The power of compounding is truly magical over time. For example, the founding partners of Formula Growth Fund would have seen their initial investment increase by 1,100 times over the past sixty years, or a compound growth rate of some 12.6 per cent per year (through late 2019). Guideline #2: Buy Growth Stocks. Dobson has long believed that the most important single rule

The Growth Formula

is to buy a company with increasing earnings per share. This usually requires fast sales growth and a high return on equity to finance the growth. These factors are more often found in small emerging growth companies because their potential is greater than that of larger ones. Cyclicals are generally avoided because they are too hard to judge. Formula Growth also avoids stocks with high price-earnings (P/E) ratios. Twentyfive times earnings is generally the maximum tolerated. Guideline #3: Usually Ignore Dividends. Formula Growth believes a growth company should have better use for its money than paying dividends. If it does not have a better use for its money, that means the internal growth rate of the company is probably slowing down. So it is best to move on to another growth stock. Guideline #4: Don’t Be Deceived by Appearances. Look at the individual company rather than starting with an industry approach. Recognize that mundane companies can do as well or better than glamorous ones. Frequently, technological innovation and superior management lead to big gains in unglamorous companies. Often, they can be bought at cheaper prices because of lack of investor interest, and they can become big winners. Guideline #5: Trust People. People are key. Portfolio managers and a company’s management should preferably have a financial interest in the stock recommended. Ownership of Formula Growth has been in the hands of insiders since the 1970s, so its closely held shares trade at a cheap book value. This allows for flexibility with bonus pay-outs and the ability to attract talent. Never forget

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that success is about attracting, developing, and working with the best people. Guideline #6: Be Patient. Patience is very important. It is a serious error for an investor, upon retirement at age sixty-five, to decide to sell equities and move to yield (bonds, etc.). Retirees should continue to invest in equities and sell off a few shares as cash is needed. Guideline #7: Stick to Your Niche. Be consistent and disciplined, and do not switch strategies mid-stream. Minimize attention to short-term considerations, and remain fully invested. Otherwise, investors can lose too much on market turns and miss out on big potential gains because of short-term worries. Missing the best ten days in a bull market move means missing out on 80 per cent of the upside move. Never try to time the market. Guideline #8: Be Prepared to Make Mistakes. Diversification Is Key. Investors can never be 100 per cent sure about any investment. That is why there are always buyers and sellers. In a fast-moving world with modern technology, it is essential to diversify risk and incubate portfolio holdings. Always be prepared to make mistakes, and do not dwell on them. Guideline #9: Develop a Strong Network. The development and proper use of an information network, good market intelligence, and useful contacts, especially among fellow fund managers if one is in that business, are all equally important. For comfort, get to know somebody local who has good knowledge of the people running a given company.

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Guideline #10: Limit Sales and Marketing (If You Are Running a Fund). Do not spend too much time on sales and marketing. These activities steal time from the work of the best stock pickers because clients always want to meet them. If you limit hours spent on marketing, more time is freed up for investment analysis.

• Finding the True Value • Formula Growth has always believed that small-cap investing is the best avenue for getting the highest returns in the long run. In doing so, it often looks for what it calls an “earnings growth and multiple expansion double play.” This is the significant acceleration a stock price gets when it has growing earnings and a growing multiple. For example, a $15 stock trading at a multiple valuation of fifteen with earnings growth of 20 per cent will grow to $18, assuming the same valuation. However, if the multiple increases to twenty, what results is a $24 stock, and the return will increase from 20 per cent to 60 per cent. That kind of growth in stock price is easier when a company is small and relatively unknown when you buy in. When evaluating a stock, Formula Growth gives some thought to the impact of macroeconomic factors and to the P/E ratio. But it devotes much more time and effort to determining the growth rate of an individual company. “At the end of the day, we believe that growth pushes the P/E multiple,” explained Dobson. “We essentially look at the business, estimate a growth rate for three to five years, and apply a reasonable multiple to it. We can then determine the price a stock could trade at over the next few years and conclude whether it is a sound investment or not.” Despite these calculations, it was Dobson’s view that investing is often more of an art than a science. “There is no mathematical

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equation that can be applied to the stock market and yield precise results. Experience and judgment are an investor’s best friend.” Misjudgment by investors of the “real value” of businesses is one of the major sources of disappointment in stocks, leading investors to overpay. In the growth-stock universe, the obsession with short-term earnings growth and relative valuation leads to superficial analysis. “We strongly believe that the short term does not matter. One needs to be mindful that it is a series of short terms that add up to the long term,” said Dobson. “Volatility in the market is generally a result of too many people focusing on what will happen in three months, rather than on where a company will be in three years.” In the long run, day-to-day changes in the stock price tend to be dwarfed by the overall trends. A large stock price change may be significant today but only a blip in five years if the stock continues to grow. “This volatility is actually an advantage to us because when other people are selling in a mad panic, stocks are on sale,” Dobson said. “A stock that may have been too expensive before can suddenly be cheaply priced and perfect to be bought, assuming the core story is intact.” Formula Growth analysts look at several characteristics of a company in order to gauge its growth prospects and determine an appropriate valuation. After first assessing the growth rate of earnings and sales, they study the company’s market cap relative to the scope of the business opportunity, the competitive environment, the nature of the business and whether it is cyclical or has recurring revenue, whether the firm is capital intensive or not, the growth dynamics of customers, operating leverage, dependence upon capital markets for growth plans, and return on invested capital.

• Catching a Falling Knife • Dobson cautioned that there were always pitfalls in investing that should be avoided. “We try to avoid catching up to a hot sector and investing in the ‘old winners’ when there is probably nowhere left

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to go but down.” Trying to justify valuations by comparing a stock to other stocks that have very high multiples can also be a mistake, he said. The fact that similar companies have higher or lower multiples should be only one element you need to consider when valuing a stock. Moreover, being inflexible or having a “hard head” is a brutal character flaw in an investor. “Not realizing when you are wrong torpedoes an investment portfolio.” This behaviour usually leads to averaging down or buying more stock at lower levels, which is hazardous if not done with care. “It can be likened to catching a falling knife,” said Dobson. “It’s hard to time it just right.” He cautioned against playing “hot tips” because, generally, these stocks have already had great runs. Sadly, many investors do not have the patience to see an idea through to fruition. They make a dollar or two and are excited to take profits and show how bright they are. “If you are in front of a good story, you must give it time to unfold,” said Dobson. “That’s how you make doubles or triples!” Dobson also believed deeply that one of the most important ingredients for successful investing is optimism. “Pessimists will never make good investors because they cannot look at the shortterm uncertainties in a company and see the pot of gold beyond it. The only companies pessimists feel comfortable investing in are those that are without flaws. The problem is there is nowhere to go but down as these stocks are priced for perfection.” Investors must also be conscious of the fact that for every death, there is a birth. For example, IBM’s loss of its dominant market share was Microsoft’s gain. Hard work and passion are also vital because finding “the next big thing” takes time. “If you can’t get up in the morning and look forward to your day, then you will not be the one kicking over that one special stone and finding the next Walmart,” said Dobson. “There will always be a company that is growing. You just have to find it and see it for what it could be. Remember, Sam Walton started with just one store.”

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Dobson’s Top Eight Investment Criteria The Formula Growth team has always tried to buy shares in a company at an early point in its life cycle, when revenues and profits are ascending swiftly. Here are some of the criteria they look for: 1. Revenue Growth: Sales gains should be steady. This tells you that the company has successfully tapped a need or a niche in the marketplace. Does the company also operate in a growing market for its goods or services? 2. Earnings-per-Share Growth: Rapid revenue and earnings growth does not always equal big profits. What counts is how much a company can bring to the bottom line on a per-share basis. Solid profits allow companies to finance their own expansion. 3. Price-Earnings (P/E) Ratio: This measure represents the stock price divided by the current year’s forecast earnings per share. Ideally, it should be about half the earnings growth rate. The P/E ratio is essentially the reflecting pool for all of the information in the public marketplace (including interest rates and inflation), incorporating investors’ expectations for growth and the risk associated with it. A key to growth-stock investing is understanding or developing a feel for what the three-to-five-year P/E should be. 4. Price-Sales Ratio: This is the stock price divided by pershare sales. For companies with high sales volumes and low profit margins the ratio should be around one. For

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companies with proprietary products and high margins it should be around three. 5. Accounting: Practices should be conservative. Revenues should be booked when they are received, and expenses recognized when incurred. 6. Momentum: Formula Growth does not worry about catching a stock at a low. Instead, it looks for stocks that are outperforming at least 80 per cent of the market. Relative strength in a stock means investors are coming around to your idea. It is also important to know whether the stock is in a leading group or sector of the market. 7. Balance Sheet: This should be healthy. Debt can limit a company’s ability to conduct research and development, launch new products, fight competitors, or get through tough economic times. 8. Margins: Are margins high or low? This indicates the degree of leadership or proprietorship the company has in its industry. Pay attention to the trend. Are margins rising or falling? Formula Growth often prefers lower margins because companies that start with high margins likely have nowhere to go but down.

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Why Formula Growth Favours Investments in Small Companies 1. Smaller companies have more room to grow than large companies. Eventually a large company’s size will weigh it down. Small-growth companies can also usually grow faster than large-growth companies. 2. Smaller companies can adapt more quickly to new, fastmoving trends and take advantage of them. Large companies are often mired in legacy businesses. 3. Smaller companies are acquired more often than large companies. 4. Buying back shares can be more impactful in a small company than in a large one. 5. There is less Wall Street research on small companies; this inefficient coverage can lead to re-rating in the P/E as discovery happens. 6. Small companies are more understandable than multi-line, large companies. 7. Small companies can be riskier, but the risk can be offset by investing in a proven management team that is transparent, favours diversification, and avoids fads. Startups and early turnarounds with a solid inside ownership also offer opportunities.

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More Formula Growth Investment Tips: 1. Maintain independent thought; don’t be drawn into the “herd.” 2. Maintain a healthy degree of skepticism. 3. Don’t overpay; valuation alone is never a sufficient reason to buy or sell (short). Cheap stocks are often value traps, while expensive stocks can have growth dynamics that make the current valuation a bargain. 4. Tracking quarterly results is a necessary evil but do not lose sight of the big picture; distinguish between the “noise” and a real change in the outlook. 5. Patience is good, stubbornness is not. Sometimes you just get it wrong; admit it and move along when your investment script has changed. 6. A big ego is the enemy of becoming a good investor while humility is your friend. 7. Bad news, like cockroaches, often comes unendingly; oneoff events seldom do. 8. Making a thoughtful analysis is better than drawing instant conclusions. 9. Experience matters, and winners in the investment business always seek out other voices and opinions to test their own. This builds knowledge and leads to better decision making.

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Chapter 8

Case Studies: It’s All About Growth (and sometimes value . . . ) “One good management team and investment can lead you right to the next one. Don’t miss it.” — John Dobson

In John Dobson’s view, superior growth rates in companies can typically be broken down into five different buckets of opportunity:

1. 2. 3. 4. 5.

Innovation/Discovery Unit Growth in a Growth Industry Market-Share Growth in a Mature Industry Consolidation/Acquisition Strategies Value and Re-emerging Growth (Re-rating)

Over the years, stocks in the Formula Growth portfolio often fell into one or more of the above five buckets. The “best of the best” are companies that are in the second category: exhibiting unit growth in a growth industry. Fast, well-executed growth usually results in margin expansion as increasing scale pushes the business model into a sweet spot, where incremental revenue dollars contribute higher profit margins. This phenomenon is called “operating leverage.” “Because many costs in a business are fixed, increasing sales over a given level where fixed costs are fully absorbed allows for more gross margin to fall to the bottom line,” explains Formula Growth

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CEO Randy Kelly. “The beauty of this phenomenon from a stock perspective is that it generally leads to P/E (price/earnings) expansion and a large upward re-rating in the stock price.” Formula Growth likens this to winning the exacta at the racetrack, explains Kelly. “Quickly growing earnings per share (EPS), with a rising P/E multiple, results in very large stock-price moves.” Other features of the best stocks include limited growth in the number of shares outstanding, which means there is very little dilution to earnings per share. “More often than not, Formula Growth would find the stocks that fell into these five buckets before the public had caught on to the story,” notes Kelly. At times, there was a lack of public interest because the company was controversial or hard to understand, or was simply missing earnings estimates on Wall Street. Sometimes the market was in a bearish phase, and investors were simply not buying anything, let alone unknown quantities. In other cases, it was because the company was a little small or had too short a track record and therefore was ignored by Wall Street analysts. Inevitably, the company’s attractiveness would become more obvious, and its Wall Street coverage improved. With that would come a higher profile and a higher stock price as other investors jumped on board.

•• The following case studies, all major winners for Formula Growth, illustrate at least one of the five characteristics of successful stocks that were, or still are, part of Formula Growth’s investment portfolio.

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• Circuit City • Unit Growth in a Growing Market In the early 1980s, John Dobson was travelling in Florida on a series of company visits with Dick Lilly, an analyst with Tampa Bay– based investment dealer Raymond James. They decided to pop in on the Florida outlets of Circuit City, a Virginia-based retailer then known as Wards Company, which had been founded in 1949 by Sam Wurtzel. Dobson was impressed by what he saw. His instincts told him something big was going on with this emerging company. (Wards was completely unrelated to another legendary US retailer, Montgomery Ward, which later went out of business. In fact, the name “Wards” was simply an acronym composed of the founder’s last initial and the first initial of his wife and sons – W = Wurtzel; A = Alan; R = Ruth; D = David; S = Sam.) Circuit City pioneered “big-box” retailing in the 1970s and 1980s and ended up becoming the second-largest consumer electronics retailer in the United States, with 567 Circuit City Superstores at its peak. These stores represented a revolution in how televisions and other consumer electronics, as well as large appliances, were sold. When Dobson purchased his first shares of Wards, at what later ended up as a split-adjusted price of pennies a share, he knew he was buying into a solid growth company that had plans to expand retail square footage aggressively by building greenfield (new) locations or acquiring existing stores and rebranding them as Circuit City Superstores. The thinking was that this expansion would drive earnings per share higher, and the stock price would follow. What was not obvious at the time, even to Dick Lilly and Dobson, was the coming boom in consumer electronic devices that were being developed following technological breakthroughs in the semiconductor industry. Typical of these new products was the mass-market video cassette recorder (VCR). VCRs first made their appearance in the 1960s and 1970s, but the devices were expensive and difficult to use, making them more of a curiosity than a mainstream consumer

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product. But by the early 1980s, companies such as Sony, JVC, and Toshiba leveraged new low-cost technology to turn the VCR into a consumer-friendly household item. Content suddenly became available thanks to the burgeoning sales of video cassettes and the growth of rental providers such as Blockbuster Entertainment, another great stock once owned by Formula Growth. Before long, household penetration of the VCR in America was over 90 per cent. The initial high price points associated with this kind of revolutionary product allowed for strong margins for both manufacturers and retailers. Randy Kelly still recalls that his first bonus from Formula Growth was a VCR from JVC that cost a whopping $1,500. Dobson insisted that the device would be a boon to the perpetually busy Kelly, who would now be able to “time shift” the business shows on TV that Dobson insisted he should not miss. With the rollout of other devices like PCs, CD players, pagers, high-definition TVs, and cellphones, Circuit City went on to become one of the best performing stocks on the NYSE, after graduating to the senior exchange in 1984 from NASDAQ. With high prices, fat margins, and growing square footage for Circuit City, its earnings per share took off, and Formula Growth won the “exacta.” Because Wall Street did not hear of Wards until much later, Dobson was able to pick up the stock at P/E multiples below ten. Formula Growth watched the stock take flight as the Street belatedly discovered the name, and the multiple in time more than doubled. Initial positions in the stock were purchased at less than $0.25 a share, and the stock went on to top out at $40 a share. Formula made 100 times on its investment and owned the stock for about twenty years. Like all good things, the Circuit City story eventually had to end. Competition came to the big-box consumer electronics stores with the arrival of Best Buy and several other serious challengers. Circuit City discovered that its real estate locations were now subpar by comparison, and its store designs were looking stale. At the same time, margins dropped precipitously as manufacturers found new ways to add features and cut prices to stimulate demand. In the

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end, gross margins on TVs ended up in the single-digit range. The arrival of smart phones, featuring many products that used to be sold individually by Circuit City now contained in one device, did not help matters. Circuit City tried to compensate for this collapse in retail margins by attaching extended warranty contracts to a range of its products. But this proved too little, too late, and the company had no choice but to liquidate in 2009. Fortunately, by then Formula Growth was long out of the stock. A happy side note to the Circuit City story is the 2002 spinoff to shareholders of the company’s CarMax Inc. subsidiary. Circuit City executives had founded CarMax in 1993, believing that the skill sets they had honed as big-box retailers of electronic products and appliances would be well suited to the fragmented market for used cars. They were right. Today, CarMax is the largest publicly traded retailer of used cars, with sales of over $18 billion annually. As Dobson frequently said while he coached his team, “One good management team and investment can lead you right to the next one. Don’t miss it.”

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Figure 8.1: Circuit City

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• Celgene • Innovation, Discovery, and Persistence Celgene Corporation is a biopharmaceutical company engaged in the discovery, development, and commercialization of new drugs for the treatment of cancer and immunological diseases. Founded as a spinoff from Celanese Corporation, the US chemicals giant, it went public in 1987 through the legendary West Coast broker and banker Hambrecht & Quist, with whom Formula Growth had a long-term relationship. Celgene’s initial focus was on specialty chemical products and bio-remediation materials used to clean up toxic wastes. It also aimed to develop lightweight, high-strength polymers for a range of uses through a technology known as biocatalysis. But these businesses went nowhere until the company decided to make a dramatic shift, propelling it to become a major pharmaceutical company and a terrific stock. In the late 1990s, Celgene licensed thalidomide from New York’s Rockefeller University, helping to revive a drug that had become a pariah decades earlier. Thalidomide was introduced in the late 1950s as an anti-nausea drug to help pregnant women deal with the effects of morning sickness. But it was withdrawn from worldwide sale in 1962 after being found to cause birth defects. Despite its removal from the market, thalidomide remained the subject of significant clinical interest and research. Convinced of its potential for treatment of ailments as diverse as cancer and AIDS, Celgene licensed the use of thalidomide from Rockefeller and began to develop a pipeline of anti-cancer drugs. Formula Growth’s Kim Holden, working closely with Bob Power, a one-time Hambrecht & Quist broker who had landed at New Orleans-based Southcoast Capital, built a position in Celgene in the late 1990s at a split-adjusted average price of $1.50 a share. The idea was to participate with the company as it sought approval from the US Food and Drug Administration (FDA) for its innovative approach to an old compound that had been left to fallow.

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By 2001, the company had two products in the market: Thalomid® and Focalin®. Thalomid (thalidomide) was used for indications of leprosy, although with strict protocols to ensure that pregnant women were excluded. Importantly, Thalomid was also being widely used off-label (i.e., prescribed for uses other than what the FDA has approved) in cases of multiple myeloma and other forms of cancer. The growing off-label use and eventual success of Thalomid was exactly what Formula Growth was looking for, and it held on for the ride as Thalomid was further refined into a new drug called Revlimid®. Focalin was licensed to Novartis and is used to treat attention deficit disorder (ADD). Celgene continues to build on its oncology and auto-immune businesses and retains its strategy of making acquisitions to expand its technology portfolio and distribution capabilities. Formula Growth had sold the majority of its position by 2015. In early 2019, BristolMyers Squibb Co (BMY.N) announced that it was buying Celgene Corp for about $74 billion, combining two of the world’s largest cancer drug businesses in the biggest pharmaceutical deal ever. The price was about $100 per Celgene share, or 30 per cent below its alltime high.

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Figure 8.2: Celgene

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• Home Depot • Expansion and Innovation When Formula Growth first invested in Home Depot in the 1980s, it was an obscure Atlanta-based retailer, a long way from being the world’s largest home improvement chain. John Lowenberg from Robinson Humphrey, one of Formula Growth’s network of contacts in Atlanta, thought highly of Home Depot’s management, its innovative concept, and its growth prospects. He convinced Dobson to visit an early Home Depot store. Seeing first-hand the reality behind the story, Dobson bought Home Depot’s stock at the time of the initial public offering (IPO) in 1981 and watched it run up twenty times in the next couple of years. He then sold and was out of the stock by 1983. Again, the discipline of Formula Growth’s price target sheets correctly exited the firm out of what had become an expensive stock. The timing was fortunate, as it was not long afterwards that Home Depot made an ill-fated acquisition of the Bowater Home Centers chain, which turned out more difficult to assimilate than first thought. Given this disappointment, and its already-expensive valuation, Home Depot’s stock price dropped by two-thirds by the beginning of 1986. Those three years in purgatory corrected the stock’s egregious valuation, and Formula Growth again began to build a position. By the 1980s, management had fine-tuned the Home Depot bigbox retail concept and went on to methodically expand its presence throughout the United States. The larger Home Depot became, the more merchandise it would buy, and the better prices it would get from suppliers. Instead of keeping these improved margins, the company chose to pass the savings on to its customers. This virtuous circle of ever-lower prices and higher sales obliterated the competition and grew Home Depot’s market share exponentially. Home Depot’s cross-country rollout was perfectly timed to coincide with the growth of the American public’s love affair with the do-it-yourself concept. Home Depot CEO Bernie Marcus and his

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team soon found that the company’s stores were always full of customers. But while management appreciated the profitability of the busy stores, they knew the customer experience was suffering. As a result, Home Depot would always err on the side of plowing more capital into opening new stores, even when those outlets initially cannibalized sales from existing stores, confident that the end result would squeeze more sales out of an existing market. Even though this use of company capital did not always please Wall Street, management was convinced that this combination of deeper market penetration and broader market share was building a moat around the business. By the end of the 1980s, Home Depot was once again the darling of the investing public, and over the next decade its valuation ran far ahead of the stock. By 1999, shares were selling at seventy times next year’s earnings, clearly an unsustainable level. With stock bought at a split-adjusted price of 50 cents a share trading at $70 in 1999, Formula Growth had sold much of its position, scoring a hundred-fold gain. With a high P/E ratio and a faltering decade ahead for the US stock market and economy, it was inevitable that the Home Depot stock would be in for a tough time. Twice during the 2000s, the stock touched $20 a share as growth slowed substantially. Yet Home Depot has continued to demonstrate its old resilience and has again come back strong.

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Figure 8.3: Home Depot

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• Callaway Golf Co. • Wall Street Coverage, Innovation, and Marketing This was one instance when Dobson did not need any help understanding what the company was making. He could pick it up and swing it! Callaway Golf, which went public in 1992, was all about the Big Bertha driver, which used the latest technology to revolutionize the design of drivers and build a product that became the top of its class. Formula Growth was aware of the company because Randy Kelly was playing with a Callaway driver, and it was obvious to him that the product was different and better than anything else available. Formula Growth’s long association with the game of golf meant that the firm had a solid network of pros, retailers, and competitors who were not reluctant to share their opinions on anything related to the game. Dobson, who helped to run the Canadian Open a couple of times, thought Kelly was nuts to pay a large amount of money for a single club. What was less obvious at the time was that the company’s founder, Ely Callaway Jr, was a brilliant marketer. To Callaway, it mattered little what the product was – it was all in the positioning. He had already been successful marketing wine from his own vineyards, so golf clubs could not be any harder. He convinced Formula Growth of his business plan to build the Callaway brand on the back of Big Bertha and extend it further into other golf equipment. Yet the high price set in Callaway’s IPO turned off plenty of investors, and the stock drifted in its first six months of trading, partially because of this skepticism, but also because it soon emerged that GE Capital, an early investor in the firm when it was still private, wanted to sell its large position. This put a lid on the stock price until a secondary offering was organized and cleared GE out of the firm. Formula Growth was shut out of the secondary offering by the lead investment banker but was able to accumulate stock quickly before and after the deal in the aftermarket at comparable prices. This proved to be a lucky break, since it soon became clear that

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the business was exploding, just as Ely Callaway Jr had promised. Callaway became the first major golf brand, and for five years it was the only brand to own. True to its plan, the company diversified into irons, putters, bags, and balls through innovative product development and occasionally through acquisitions. Revenue growth and profitability were high, and Formula Growth’s return on its investment increased five-fold in just four years. It is inevitable that highly lucrative businesses eventually get replicated, and by 1996, several new companies with big marketing budgets had entered the golf market. While the golf industry is large, it is also fairly mature. Total rounds of golf played do not grow much year over year, and there has been no surge in participation in the sport. As a result, Callaway and its competitors remain locked in an expensive battle for market share. That sort of business environment is not the kind that interests Formula Growth any longer, and it has long since moved on.

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Figure 8.4: Callaway golf co. 2

Callaway Golf Co

® 2019 WILLIAM O'NEIL + CO. INC.

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• Cisco Systems • Castle in the Sky and Unit Growth Being in the right place at the right time is the magical formula for quickly getting a big stock price increase. Formula Growth first noticed Cisco in 1990 after a hot IPO appeared where no one on the Street got as much stock as they wanted. The offering was priced at $18 a share, which works out to about 6 cents a share today after many splits over the past twenty plus years. The stock moved up quickly post-IPO but stalled when 1990 drew to a close as investors worried about the prospects of the Gulf War and its possible impact on the economy and corporate earnings. Formula Growth struck quickly during the stock market malaise and loaded up on what it viewed as a quality player in a fast-growing industry at a reasonable earnings multiple. Formula Growth had been involved in networking companies like 3Com and knew that Cisco was a step ahead of the other players. What began as a technology investment in a company that was simply selling networking routers morphed into an incredible play on the subsequent Internet explosion. As the Internet expanded, Cisco’s networking hardware started to fly off the shelves as the company supplied the routers and other equipment that kept the Internet going. Investors began to make fanciful predictions that the Internet and the companies supplying software and hardware to it would have no bounds. During the1990s, the logic was that if earnings and revenues for companies supplying the Internet were doubling each year and even each quarter, then surely these companies must be worth one hundred times those earnings. A “Castle in the Sky” was built. Enormous price tags were put on stocks like Cisco, which peaked at a P/E multiple of 154 in 2000, giving it a price of $80 a share and a market capitalization in excess of a cool $500 billion. In keeping with its discipline on target prices, Formula Growth sold most of its stock by 2000 as the valuation marched ridiculously skyward and the growth in revenues and earnings slowly came back to earth. In mid-2019, Cisco’s value was about 70 per cent of that peak.

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Figure 8.5: Cisco systems

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• Rent-A-Center Inc. • Consolidation, Poor Credit, and High Returns Founding a business designed to serve customers with low-paying jobs and poor credit histories may not seem like the easiest way to attract investors. However, Rent-A-Center (RAC), which provides low-income consumers with rent-to-own options for acquiring furniture and appliances, was able to beautifully execute its strategy of growing its store base and penetrating the market to build an extremely successful business. The company has grown from sixteen stores to nearly 3,000 since its IPO in 1995. Its revenues have increased twenty-fold. When a business seems illogical or just too tough to pull off, many investors will shy away from the opportunity and instead chase “the next big thing,” even if it is expensively valued. Rent-A-Center is the kind of company that makes you wonder how management does it, but its longevity demonstrates that success is possible. At first glance, it seems crazy to allow consumers with low incomes and no bank accounts to walk out of your store with bigticket appliances, televisions, and furniture. But Rent-A-Center has the systems and management to handle this tricky business. On the front end of the initial rental transaction, Rent-A-Center gauges the stability of the customer by using references, pre-existing relationships, and other methods. On the back end, the company knows that it can cost-effectively repossess the goods if necessary and quickly get them back out on rental to earn a return. Most importantly, the nature of the pricing of its weekly rental contracts allows for sufficient profit margin to compensate for the intricate micro-lending business Rent-A-Center is essentially running. With solid margins and the fact that each piece of merchandise will likely be rented out three to four times to different clients, the company can earn a healthy return on equity and generate strong cash flows. Over the years, Formula Growth has had big successes with public companies, such as Rent-A-Center, that operate in what might

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be termed America’s “shadow banking system.” The portfolio has included companies that sell used cars to sub-prime consumers, collection companies, sub-prime credit card issuers, and nonconventional lenders like pawn shops. Recently, Internet-based micro-lending has been growing quickly, and Formula Growth has a few holdings in that space. While upfront credit losses may be heavy, they are more than offset by far lower loan origination costs. Industry experts estimate that as many as 20 per cent of US consumers are “unbanked” today, and that percentage is staying constant. The mainstream banks do not want to deal with this customer segment and push them away by charging steep fees for cheque writing, NSF cheques, and everything else under the sun. In this landscape, Rent-A-Center has done a great job of putting most of its storefront competitors out of business, giving the company a large market that it continues to penetrate. Unfortunately, these days Rent-A-Center storefronts themselves, like many retail establishments, are being disintermediated by online competition and various other ways to bank.

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Figure 8.6: Rent-a-center inc.

Rent-A-Center Inc

® 2019 WILLIAM O'NEIL + CO. INC.

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• Green Mountain Coffee Roasters • Persistence and Redemption (in other words, “grinding” it out) Controversy and fear can sometimes work to your advantage in the stock market if you maintain perspective and do your homework. Formula Growth had been following Green Mountain Coffee Roasters (GMCR) for several years, but it patiently waited for the right moment to strike. GMCR was a high-flying stock from 2009 to 2011, rising from $6 to $115 as sales of its Keurig brewers and single-serve coffee K-Cups exploded. Household penetration of the coffee systems was very low, and buyers were betting that the platform could expand into other types of beverages besides coffee. Ultimately, the stock commanded a valuation of over 100x P/E. Fast-growing businesses that rely on distributors to get their products on retailers’ shelves often run the risk of over-shipping and creating an inventory glut. That’s what happened to GMCR at the end of 2011. At the same time, a well-known short seller launched a campaign against the company, citing fears of private-label competition, financial misreporting, and rumours that Starbucks, its largest customer, was going to leave. By the summer of 2012, GMCR’s stock had collapsed to the low $20 range, even though its business was still growing at 40% and household penetration of Keurig brewers was a fraction of the potential. The stock was trading at 8x forward earnings. Formula Growth analysts met with management, visited the company’s plant in Vermont, and spoke with prominent funds that were shorting the stock as well as the main competitive private-label manufacturer. Their conclusion: the short case was mostly smoke and mirrors and the potential damage from a private label’s entry into the market was overstated. Convinced that single-serve coffee would continue to be a big secular growth story, Formula Growth made GMCR its largest position at a cost in the low $20s. Over the following quarters its confidence was rewarded: private-label competition

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came in, but the whole ecosystem was growing so fast it didn’t matter; Starbucks signed a new multiyear deal with GMCR; and plans were hatched to introduce a new cold beverage system. After a violent short squeeze at the end of 2012, the stock shot up quickly and Formula Growth exited around $55, about a year after establishing the position. But Formula Growth was not done. Two years later, it shorted GMCR stock after it skyrocketed back to $140 amidst excitement about its cold beverage platform and Coke’s purchase of a 10-percent stake in the company. Formula Growth profitably covered the short a few quarters later at $110. It then watched GMCR stock plunge to the mid-$40s as its cold beverage platform failed to gain traction and rising coffee prices squeezed margins. With the stock back down to 11x earnings, Formula Growth again made GMCR its largest position and was rewarded with a 78-per-cent premium when an investor group acquired the company for about $13.9 billion in cash in 2015 and took it private – a windfall for long suffering shareholders!

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Figure 8.7: green mountain coffee roasters

Keurig Green Mountain GMCR

® 2019 WILLIAM O'NEIL + CO. INC.

IPO 22.3 Years Ago

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• MOVE Inc. • Finding Great Entry Points to Catch the Move MOVE runs the online real estate portal Realtor.com. The company had been public since the late 1990s but was left for dead after the initial management team proved to be fraudulent and was thrown out in 2001. MOVE caught Formula Growth’s attention while its analysts were performing due diligence for Zillow, another online portal that had just gone public. At the time, none of the big banks were covering MOVE and most ignored its existence while examining Zillow for its IPO. Even the company’s competitors didn’t mention MOVE as competition in their investor decks due to the massive valuation premium this would imply for their own stocks. However, aside from a cheap valuation, MOVE had a few major structural advantages that Formula Growth felt were impossible to ignore. The first was that the National Association of Realtors (NAR) held a 10-per-cent stake in the company and a single supermajority preferred share that allowed it to block any takeover attempt or changes to how the website was run. Through its relationship with the NAR, MOVE controlled the pipeline of listing information from 850 local MLSs across the country through which agents fed their new home listings. This meant that the sites to which the stock market was awarding big multiples, Zillow and Trulia, were actually reliant on MOVE for their listings – their lifeblood. This was a big competitive weapon that nobody was talking about. Formula Growth also felt the Realtor.com website was under-monetized versus its peers. This can often be observed when a relatively new management team lays a fresh set of eyes on the business. Effectively, the site only sold a real estate agent’s listing back to the original agent; if they passed on the advertising opportunity, the listing went unsold. A new pricing scheme would allow the company to group all the unsold listings in a given ZIP code and sell them as “leads” to agents. Formula Growth determined that if MOVE successfully introduced the new pricing scheme to agents, its revenues could almost double.

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Formula Growth bought the stock in early 2013 at around $8 a share. It was trading at less than 10x earnings while its peers were trading at 50x earnings or more. After flying out to the West Coast to meet with a number of companies in the industry and making stops in San Francisco, Palo Alto, and Seattle, Formula Growth analysts were convinced that its general thesis was correct and made MOVE a top-5 position. While there were certainly ups and downs in the stock over the next year and a half, MOVE was eventually taken out by News Corp in October 2014 for $21 a share. Formula Growth more than doubled its money. The lesson: if you can find a sector that’s becoming a market darling, in this case online real estate, and identify a significant player that has been forgotten by the sell side and other investors, it can lead to big profits once everyone else catches on to its strategic value.

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Figure 8.8: move inc. 60

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® 2019 WILLIAM O'NEIL + CO. INC.

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• Recreational Vehicles • When Castles in the Sky Fade One key advantage of Formula Growth’s tenure as an investment firm is its ability to mine industry knowledge accumulated over the past sixty years. Some industries are cyclical, following general economic trends; while others are secular, able to rise (or fall) outside of the cycle. The recreational vehicle (RV) or manufactured housing industry is one that Formula Growth has been involved in several times since the 1980s, and it knows one thing for certain: it is a purely cyclical industry. So in 2017, when RV stocks started to take off and reach all-time highs, Formula Growth sharpened its pencils. Unit sales of smaller RVs, called “towables,” were on pace in 2017 to break records first set in 2006. Curiously, no other highticket, consumer discretionary product was managing to surpass, or even reach, its prior peak unit shipments. Why were RVs so special? A number of analysts and company management maintained that millennials were driving this outsized sales growth and claimed it was set to continue for years. This justified the premium valuations, they argued. However, supporting data was lacking. Formula Growth has found over the years that an industry experiencing above-trend growth levels will always be able to come up with something to justify it, saying this time is different! Formula Growth analysts attended the annual RVIA dealer show in Louisville, Kentucky, in the fall of 2017 to speak with industry players. Two things became clear: due to manufacturing issues, dealers were over-ordering product in the belief that they wouldn’t receive their full allocation; and the rapid industry growth was being driven in large part by unusually easy credit terms. To verify the latter, Formula Growth met with the head of Bank of America’s retail credit division, the largest lender in the RV space. It learned that, starting in 2015, the bank had been providing financing with 0 per cent down, had extended the term available to 20 years, and was accepting used trade-ins at 110 per cent of their fair value.

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Formula Growth concluded that these factors were inflating true consumer demand levels for RVs by 2017. Accordingly, it began to short RV stocks when the group was trading at 15 to 20x peak cycle earnings. Formula Growth determined that dealer inventory levels were going to be far in excess of consumer demand and RV stocks shouldn’t trade for more than 10x cyclical peak earnings, even if business continued to exceed expectations. Specifically, it over weighted a short in a company called Thor Industries (THO). The bet didn’t pay off immediately. But in early 2018, a small brokerage called Northcoast issued a survey report helping to validate Formula Growth’s thesis. RV stocks started to sell off. By the time they had reported their Q2 results in the summer of 2018, the stocks had been cut in half and management teams across the industry were admitting that inventory levels were in fact too high. Formula Growth covered the majority of its positions at that point.

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Figure 8.9: thor industries – RVs

Thor Industries Inc THO

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® 2019 WILLIAM O'NEIL + CO. INC.

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• Carmike Cinemas • Seeing the Big Picture Formula Growth came across Carmike Cinemas when it was researching the US theatre space. It was attracted to the industry because US box office revenues were strong and the stocks were cheap, with very high dividend yields in a low-interest-rate environment. Carmike was trading at a discount relative to the group. As Formula Growth began taking a closer look, it was very impressed with the company’s new CEO, David Passman. He had been hired to turn around the company’s performance and results were starting to improve. Instead of taking all his salary, Passman would buy stock every month, showing he truly believed in Carmike and was well aligned with shareholders. After numerous phone calls with the CEO, Formula Growth portfolio managers were convinced Carmike presented a major opportunity. A couple of months later, they attended Cinemacon, a large cinema industry conference in Las Vegas, to speak with all the CEOs and CFOs of publicly traded theatre companies. They found that cinema companies were actively looking to make acquisitions to grow their circuit and take advantage of low interest rates. They came away convinced that either Passman would turn the company around, closing the valuation gap, or a larger competitor would acquire Carmike, which had a 3- to 4-per-cent share of the box office. Formula Growth continued to build a sizable position in Carmike in the $10 to $14 range, making it one of the largest positions in the hedge fund platform. It rode the stock all the way to $30, exiting the position with a handsome profit when it hit the target price. Towards the end of 2015, the market provided another opportunity to buy Carmike when the stock pulled back to $20, despite fundamentals remaining very strong. Formula Growth re-entered the position and in March of 2016 Carmike was bought out by AMC at a 50-per-cent premium.

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Figure 8.10: carmike cinemas

Carmike Cinemas Inc

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• Air Canada • You Can Make Money in Anything, Even Airlines Although Formula Growth invests primarily in US stocks, there are times when it uses its expertise, developed in analyzing US industries, to make very selective investments north of the border when it sees a significant opportunity. Air Canada was one such situation. Formula Growth had done extensive research of the US airline industry following major mergers that occurred as part of a rationalization. Even though Richard Branson once famously said, “If you want to be a millionaire, start with a billion dollars and launch a new airline,” Formula Growth had profited from investments in many airlines over the years. These included Spirit Airlines, United Continental, Ryanair, Copa, and feeder commuter airlines like Atlantic Southeast Airlines and Comair. Formula Growth’s Air Canada experience provides further proof that you can make good money in the airline industry. Through its research, Formula Growth recognized that loyalty programs were very valuable. Air Canada was the only legacy airline that did not control its loyalty program in-house. This was a significant opportunity for the airline, since its contract with Aeroplan was set to expire in the near term. In addition, Canada’s airline industry operates as a duopoly which gives companies solid pricing power amidst steadily increasing air travel. Air Canada CEO Calin Rovinescu was hired in 2009 to turn around operations, and by 2016 he had done a spectacular job. Air Canada’s free cash flow was set to increase significantly as it approached the end of its capital expenditure (capex) cycle, while Air Canada’s stock was trading at a significant discount to its US peers. Formula Growth purchased the stock in 2016 from $9 to $10 and built a sizable position. It was a sound investment because Air Canada’s subsequent results were very strong. The company ended up buying Aeroplan and began generating significant free cash flow that narrowed the valuation gap to its US peers. Formula Growth sold the stock around $30 CAN and investors made a hefty profit.

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Figure 8.11: air canada

Air Canada Vtg.&.Var. Vtg.Shs. AC.CA

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® 2019 WILLIAM O'NEIL + CO. INC.

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• Ring Central • Disrupting a Large Legacy Market An important part of the investment process at Formula Growth is turning over as many rocks as possible and looking for opportunities, especially among new stock offerings. Doing the work early, forming opinions, watching them evolve – and then picking your spots – has led to many very successful outcomes. One such opportunity was Ring Central, a communications software company founded in 1999 by Vlad Shmunis and based in Belmont, California. The company’s core product is a cloud-based PBX (Private Branch Exchange) phone system that replaces the old PBX hardware boxes found on walls and in closets of businesses everywhere. The modern cloud-based product supports a mobilefirst approach with better functionality and improved total cost of ownership (TCO). Formula Growth attended Ring Central’s IPO roadshow lunch in New York City in September 2013 and its portfolio manager was so excited about the story he followed CEO Shmunis to his taxi to get answers to his questions. Traditionally serving companies with fewer than 1,000 employees, Ring Central said it planned to move “upmarket,” capturing bigger customers then dominated by legacy; on-premise incumbents like Avaya, Lucent, Cisco; and some hybrid offerings (onsite and cloud) by Microsoft Lync and Broadsoft. While many found Ring Central’s business plan ambitious, Formula Growth determined that a partnership with AT&T was a major asset for the company, providing a strong stamp of approval for the merits of its technology. It started building a position in Ring Central in May 2014 when it had fallen below the initial offering price. Confidence in the business continued to build as Canadian telco Telus joined forces with Ring Central to launch TELUS Business Connect™ (a full bundle of communications capabilities) in the Canadian market. (A few years later, Formula Growth contracted with the companies for its own PBX system.) The market fretted over

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the company’s stock valuation and its chances of success upmarket. The concerns turned out to be overstated. At IPO, Ring Central’s largest customer had 800 users; in 2019, one of its largest wins was a 45,000-user deal. The company’s sales had grown from about $150 million in 2013 to over $860 million in 2019, and the stock followed suit from the $13 IPO price to over $140. The move upmarket had clearly been executed. This would be the beginning of many years of Formula Growth ownership of the stock, which is still held today in the Formula Growth Fund.

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Figure 8.12: ring central

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• Twilio • Pioneering the Cloud Communication Platform Formula Growth first heard about San Francisco-based Twilio through its investment in Zendesk, a customer service software company headquartered in the same city. A local analyst noted that Zendesk was experiencing exciting growth with a new product offered in partnership with Twilio. In May 2016, the company was also cited as a leader in its market at a JP Morgan technology conference in Boston. In June 2016, Formula Growth was one of many participants in Twilio’s IPO, with the stock price climbing from $15 to the high $20s on its first day. Twilio develops Application Programming Interfaces (APIs) that allow real-time communications to be embedded into software applications at companies from Airbnb to Morgan Stanley, Paypal to Nike. Formula Growth was impressed by the company’s early penetration of the large CPAAS (communication platform as a service) market, its 71 per cent revenue growth in the quarter leading into the IPO, and its capable CEO Jeff Lawson, a founding product manager at Amazon Web Services. At the time of the IPO, Twilio had 28,600 active customers and was coming off 2015 revenue of $167 million. Formula Growth saw a good investment opportunity in May 2017 when Twilio stock fell to the low $20s after its biggest customer, Uber, decided to move to a multi-vendor strategy and there were fears other customers could follow suit. Formula Growth felt the fears were overblown and the stock undervalued for a market leader that would still grow annual sales at 60 per cent even without Uber. Indeed, Twilio revenues were set to surpass $1 billion in 2019 with a 162,000 active customer base. Its stock price had jumped to $140 and market cap stood at over $21 billion from $1.6 billion at the IPO. Twilio continues to have a plethora of avenues for future growth and as CEO Jeff Lawson often says, “This is Day One and we’re just getting started.” The Formula Growth Fund continued to hold shares in Twilio in late 2019.

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Figure 8.13: twilio

Twilio Inc Cl A TWLO IPO 3.2 Years Ago

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• Facebook • Growth at Scale, the Power of ARPU, and User Growth When Facebook went public in May 2012, it was already an established household name with some 900 million monthly active users. A movie, The Social Network, had come out two years earlier detailing its founding story, making everyone a Facebook expert. A month before the IPO, Facebook had also purchased a thirteen-person pre-revenue startup called Instagram for $1 billion. Facebook’s IPO was followed by several major shifts in its business, including a move away from the FB desktop app and changes to the architecture of its mobile application. Facebook priced its IPO at $38 and the stock fell by more than 50 per cent between May 2012 and August 2012, remaining below its IPO price until September of 2013. Company leaders Mark Zuckerberg and Sheryl Sandberg offered honest and insightful views into the business during quarterly calls and broadcast the June 2013 annual general meeting live via a webcast. A passionate Zuckerberg readily fielded questions from shareholders and kept the Q&A period open for what seemed like an hour. The stock never again saw the low $20s as the headwinds in mobile and product transition turned to tailwinds and Facebook delivered significant growth at scale, both in revenues and users across all products. Formula Growth was involved in the IPO and built a more meaningful position during the subsequent selloff. Despite the large scale of the FB user base at IPO, monetization was still in the very early innings. The key to understanding the Facebook upside was simple: a “double play” was going to happen. In 2011, the average revenue per user (ARPU) was just over $4.00. By 2018, it had skyrocketed to over $24. Moreover, monthly average users (MAU) exploded to 2.4 billion from 901 million thanks to growth in FB’s core, the ramping up of Instagram users to 1 billion from 30 million, and the acquisition of WhatsApp. These developments resulted in a trifecta-type outcome:

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a six-fold increase in revenue per user coupled with a more than doubling of users. When multiplied together, these produced a better than 12-fold increase in revenues and profits thanks to unit growth, pricing power, and margin leverage. Facebook revenues grew from $3.7 billion in the year of its IPO to $55.8 billion in 2018 and an expected $70 billion in 2019. Since the IPO, Facebook’s value has increased from $100 billion to nearly $600 billion. Formula Growth added to its position during the Cambridge Analytica controversy and the December 2018 market pullback and currently owns shares in the Formula Growth Fund and its hedge fund platform.

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Figure 8.14: facebook

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• SS&C Technologies • Industry Consolidation SS&C Technologies, a leader in technology and outsourcing services for the financial services industry, was founded in 1986 by Bill Stone out of the basement of his house in Connecticut. Previously an employee at KPMG, a financial services consultancy and accounting firm, Stone started SS&C with $20,000 in savings and four employees. Over the next decade, SS&C Technologies’ revenues climbed to $18 million from the sales and development of software for asset managers, bankers, and insurers looking to manage their books digitally. The company went public in 1996 under Stone’s guidance, and he remained a major shareholder. Stone represents the exact type of owner/operator that Formula Growth looks for in a company leader: someone who is a large owner of shares in their company and who is actively involved and looking to maximize shareholder value. The firm acquired it first shares in SS&C in 2004. But in November 2005 Carlyle Group acquired the company, leaving Stone as a major holder. Formula Growth posted a gain, but it was disappointed it wouldn’t get to enjoy the potential growth offered by the business. It felt shortchanged by Carlyle, which left SS&C with significant debt. Formula Growth got a second chance in March 2010 when SS&C was again brought into the public market. With its deep knowledge of the management team and business, it acquired another stake in the company at approximately $7.50 a share (split adjusted). It has since built the position to #1 in the Formula Growth Fund. By late 2019, the stock was trading at over $60. The firm continues to view SS&C as a solid long-term holding. (Formula Growth actually became a client following SS&C’s acquisition of Toronto-based fund administrator Commonwealth Fund Service in 2017.) The SS&C experience yet again underscores the wisdom of famed investor Peter Lynch’s maxim that you should invest in what you know, and back good management!

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Figure 8.15: ss&c Technologies

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The “Growth Formula” Is Working in Asia, Too! • Anta Sports • “Marathon Man” Anta Sports has emerged as a sportswear leader in China and is starting to make waves on the global stage. But you wouldn’t have guessed it 15 years ago. Founded in 1994, Anta had revenues of only 300 million Chinese yuan ($50 million US) as recently as 2004. Today, after leveraging its early success in the domestic athletic shoe market to acquire Fila’s China business in 2010, the company generates roughly CNY 30 billion ($5 billion US) of annual revenue. The company has been one of the more consistent growth stocks in China, achieved through a combination of shrewd acquisitions and sharp execution of a focused business plan. In 2018, it announced its largest acquisition to date by snapping up Amer Sports oyj, a sporting goods company headquartered in Finland with brands that include Salomon, Wilson, Louisville Slugger, DeMarini, Atomic Skis, Arc’teryx, Suunto, Armada, ENVE Composites, and Peak Performance. The company had long been on Formula Growth’s radar screen, given the growth in consumer spending in China, as well as the growth in participation in sports of all kinds. It has not always been smooth sailing. Anta and other players in the athletic-shoe business learned some hard lessons about controlling inventory in the distribution channel and the necessity of offering steep retail discounts when product did not move. There were periods of time, from 2010 to 2012, when it was more profitable for Formula Growth’s funds to be short rather than long shares in Anta. But Anta’s management learned lessons and applied more discipline to the distribution channel. As consumer spending kept rising in China and Anta became an accepted alternative to the overpriced foreign brands, revenues and profits rose dramatically. From a low of $3 (Hong Kong) in August 2012, the stock rose steadily to reach

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HK$60 in August of 2019. Anta’s expansion into winter sportswear dovetails with Beijing’s hosting of the 2022 Winter Olympics and the dramatic expansion of the ski industry in China, which is expected to grow from 12 million skiers in 2018 to 120 million by 2023. To put that into perspective, there are estimated to be 120 million people globally who consider themselves to be skiers today. Those new ski enthusiasts are going to need a lot of ski jackets in China! Formula Growth began accumulating long positions in Anta in 2012 when the stock was HK$5 per share. There have been many buy and sell trades in the stock since that time, but it has been an almost constant member of Formula Growth’s portfolios. Management has consistently beaten expectations, and despite a number of high-profile bears on the stock, the company has been executing powerfully and has taken advantage of the sweet spot that it finds itself in. It’s a Formula Growth classic if ever there was one.

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Figure 8.16: anta Sports

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• Wuliangye • Ganbei! (Cheers! in Chinese) As the Chinese market has modernized and matured, consumers are becoming more brand conscious. Chinese companies are responding by building strong brand equity. The common belief that Chinese companies make cheap, low-quality products is being disproved, especially in the consumer sector. One consumer product unique to China is the white-rice wine spirit called baijiu, which can contain up to 70 per cent alcohol. Baijiu is consumed at all celebrations and gatherings and is often given as a prestigious gift. Indeed, it became the gift of choice between business executives and politicians in the early 2000s, and gift bottles were said to help lubricate the awarding of contracts. When president Xi Jinping took office in November 2012, he promised a crackdown on lavish government spending and corruption, and the shares of companies selling baijiu nose-dived as one of their largest customer groups suddenly stopped buying their products. However, with the rise in incomes and consumer spending, sales of baijiu started picking up again and by 2016 profits had stabilized. The Formula Growth Asia team saw the potential for companies with strong brand franchises that were still selling at reasonable valuations because of the government’s continued austerity campaign. After analyzing the earnings potential and valuation of the top two players, Kweichow Moutai (the number one player) and Wuliangye Yibin (number two), the team chose Wuliangye, and started building positions in early 2017 with the stock trading around CNY 40 (about $5.50 US). A detailed comparison of Wuliangye’s financials compared to global spirits leader Diageo revealed that the Chinese company had a better return on equity, stronger growth, and a much better balance sheet. The investment in Wuliangye quickly paid off, with the stock rising 136 per cent in 2017, beating the 11-per-cent rise in Kweichow Moutai. The stratospheric increase in the stock drove it past the

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initial target price, and Formula Growth harvested partial profits late in 2017. A 35-per-cent pullback in 2018 allowed the position to be rebuilt in early 2019 ahead of another doubling in the stock during the first three quarters of the year. The resilience of the company’s margins as demand regularly exceeded supply allowed it to beat earnings expectations on a regular basis and make it a foreign favourite in the “A share” universe.

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Figure 8.17: wuliangye

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• Techtronic Industries • Power Profits Techtronic is a classic example of a Hong Kong industrial success story that started off manufacturing components (in this case, batteries for professional cordless power tools) and slowly grew its product line to include a full line of branded consumer products. The company’s breakthrough came when management realized that retail-level DIY customers would want cordless power tools and found a way to produce cost-effective battery packs. Its success allowed the company to make several acquisitions of power tool brands like Milwaukee and to become the largest supplier of both retail and professional tools to US retail giant Home Depot. Techtronic is hardly an undiscovered company, but the market constantly frets that a slowdown in US demand will hurt sales. However, the company’s ability to create new products and open new distribution channels has resulted in steady growth and a share price that rose from HK$1 in the early 2000s to $60 in 2019. This company has been in Formula Growth portfolios for many years and has been a consistent positive contributor to returns throughout Formula Growth’s involvement in the Asian markets. Given its strong management team’s time-tested track record, Techtronic is one of those stocks that the team will always look to buy if it has a soft quarter, or when there are concerns over US retail sales and weak hands sell the stock. Techtronic’s founder, Horst Pudwill, who started the company in 1985, remains as chairman, but there is now a professional management team in place that includes Horst’s son Stephan.

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Figure 8.18: techtronic Industries

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• Haier Smart Home • China’s Appliance Giant One of Formula Growth’s first investments in China was in appliance maker Haier. In 2010, Randy Kelly and Nelson Cheung travelled to Hong Kong to attend investment conferences in the Asian region. James Soutar (Ian Soutar’s son), co-owner of Hong Kong–based PhoenixInvest Group and consultant to Formula Growth at the time, had been following Haier for a while. He first visited the company in the mid-90s in Qingdao, northern China, long before foreigners could buy Chinese domestically traded A shares. Haier had risen from very humble beginnings in the 1920s to a company doing CNY 2.6 billion (approx. $363 million) in annual revenues by the time Soutar first visited all those years ago. By 2010, revenue had grown to a sizable CNY 73 billion (over $10 billion), a nearly 30-fold increase. Soutar encouraged Kelly and Cheung to visit Haier, and the pair from Montreal liked the company’s story. Haier was in the midst of a transition from making cheap fridges and air conditioning units to building brand equity and an extensive distribution network. The Haier Group continued to develop, setting up factories in the US and other countries and making strategic acquisitions in the white-goods industry. In 2012, Haier bought New Zealand–based Fisher and Paykel, and in 2016 it bought GE Appliances from General Electric for $5.4 billion US. While the market initially thought Haier overpaid for GE, the synergies from the deal and the product improvements in GE’s offering since the acquisition have made it look very favourable in hindsight. Haier is now considered a leader in smart-home appliances and the company’s brands are recognized globally for their quality and value. And the share price? The Hong Kong stock has gone up nine times in the last ten years, and the A shares have risen 100-fold since James Soutar’s first visit to Qingdao in the mid-90s.

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Figure 8.19: haier smart home

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Chapter 9

Formula Growth Hedges Its Bets “Our hedge funds are a wonderful complement to our long-only business, the original Formula Growth Fund.” — Randy Kelly

Formula Growth entered the 1990s in trouble: it had difficulty marketing its funds and faced a high level of redemptions from unhappy investors. “By 1990, nothing’s going right,” says Randy Kelly. “We’re getting fired by our institutional accounts. The pensions are under water, and we’re getting reallocated out. We’re losing customers by the boatload. It’s looking bad.” The stock markets were hard hit by a recession in the United States that lasted from July 1990 to March 1991. It was the deepest recession since the early 1980s, and it contributed to George H.W. Bush’s re-election defeat in 1992. Although mainly attributable to the workings of the business cycle and restrictive monetary policy, the 1990–91 recession demonstrated the growing importance of financial markets to the American and world economies. The Iraqi invasion of Kuwait in August 1990 also played a role, causing the Dow Jones Industrial Average to drop 18 per cent in three months, from 2,911 on 3 July to 2,381 on 16 October. However, over the long term, the first Gulf War helped fuel a subsequent market boom. “This was kind of the catalyst the market needed,” says Kelly. “And as proof, we started to go up sharply. In 1991, we were up over 70 per cent. In 1992 and 1993, we gained over 25 per cent. In 1994, we were flat, but in 1995, we were up another 37 per cent. And then the Internet boom took off for another leg of big increases.”

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In fact, from the end of 1990 to 2000, when you include the effect of the strengthening US dollar, a unit of Formula Growth Fund went from the equivalent of about $380 to $5,400 in Canadian dollars, and Dobson was once again a hero to unit holders. “Everybody loved Dobson in a way because he was a genius,” says René Catafago. “The genius was that he had made so many people wealthy over the years.” The 1990s were a great decade for the Formula Growth Fund because it was heavily weighted to technology stocks, which took off with the Internet boom. “We were off to the races again. Kind of like 1975–83, the period 1991–95 was great,” says Kelly. “There was lots of volatility. But that’s not bad when the direction is mostly up and to the right. The markets were on fire, and there was a birthing of a whole bunch of great stories, like the emergence of the first browser, Netscape. Every telecom company had to start rewiring. Cellulars were birthing. It was a good time to be a growth investor again. By the end of the decade, the NASDAQ hit a record 5,000.”

• A New Player Comes on Board • A new player entered the world of Formula Growth during this period: John Liddy, who is now president of the firm’s wholly owned, New York City–based US subsidiary, Formula Growth Management Corporation, and a senior portfolio manager. His arrival would coincide with a major shift in Formula Growth’s business strategy: the launch of a hedge fund platform that would significantly boost the firm’s institutional clientele, and lead to a major expansion in Asian markets and explosive growth in the firm’s assets under management (AUM) over the next quarter-century. Liddy, a graduate of Waterloo and York Universities, was working at Midland Walwyn as an analyst covering Canadian stocks when he met Dobson and Randy Kelly in October 1994 after giving an address at an Acorn Society dinner in Montreal. The Acorn Society was a small, informal group of Montreal portfolio managers

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and analysts who would meet occasionally to hear from visiting CEOs and others in the field of finance. Founded in 1975 by a group that included Ian Soutar, it kept up its periodic meetings until 1997. “They spoke to Pembroke Management to help pick candidates for a new portfolio manager,” Liddy recalls. “I had never heard of Formula Growth because they managed only US stocks and didn’t have much of a relationship with the Canadian brokerage community.” John Liddy met with Dobson, Randy Kelly, and Bette Lou Reade and heard the Formula Growth story for the first time. “Their terrific investment record got me interested, and I joined five months later. There were only four staffers then, but they were growing. Their investment success was unlike anybody else’s in Canada. They were working in the United States with very exciting companies and had incredible corporate success stories. They had owned Cisco since its 1990 IPO and Home Depot in 1988 at the dawn of big-box marketers.” Liddy says that what impressed him the most was that Dobson’s main motivation was not the love of making money. “It was never a question of having returned 18 per cent versus 17.5 per cent. It was all about feeling that you’re a participant in growth in these successful growth companies. That’s what fired him up.” Liddy liked Formula Growth’s approach, which was to invest in entrepreneurial companies led by their founders. “When we went to hear a story, the guy telling it was the founder,” he says. “We’d be getting a real, personally driven energy level that’s different from the corporate overseer level. This approach melded well with John’s passion for interpersonal relationships. What John liked to do was make friends, and he was good at it. The basic premise is: who are these people, are they likely to be successful? Then he’d check around with his network. This is a fantastic way of investing – very primal, very straightforward.” Dobson’s measure of success was the return he was able to deliver to his clients. “That was his 100-per-cent preoccupation,” says Liddy. “The greatest moment for John professionally would be when

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a golf pro who invested $10,000 back in the day said twenty-five years later, ‘You’ve really done a wonderful job for me. Everything I have is thanks to what you did.’ That, for John, is the exact goal he would have had.” In a note marking Dobson’s eightieth birthday, the late MP Heward Grafftey said, “I originally invested $10,000 in Formula Growth, and within a year, my investment increased to $20,000. With the profit, I built a swimming pool and tennis court at a new estate in the Eastern Townships. Much to John’s amusement, I called it the ‘Formula Growth Sports Complex.’” John Liddy, who was only thirty when he joined Formula Growth, said his youth was never a shortcoming in Dobson’s mind. “John’s whole life had always been about interacting with young people who were starting a business, starting a life. That energy level was very appealing to him. He always acted as a mentor to younger staffers, giving them side projects, stocks he thought were interesting.” “We all travelled extremely intensively for investments,” Liddy adds. “We were typically on the road twenty weeks a year. John had a nose in all industries in the United States that were on the cutting edge of making the economy interesting. He always operated within a universe of three degrees of separation – he knew so many people. He felt most comfortable if he could check somebody out personally. It’s not about the numbers. It’s much more about the people. His disappointment was thinking somebody’s a good person and finding out that was not true.” Money management firms usually create a very difficult working environment. Those companies are highly competitive, Liddy explains, and staffed by people who are smart, aggressive, and opinionated. “My way to judge any money management firm is, ‘Do people stick around or not?’ Here, at Formula Growth, everybody sticks around. The number-one thing John stood for was loyalty – friends and co-professionals. His band of friends and band of brothers were very important.” Liddy adds that while the portfolio management business was demanding, Dobson never allowed the demands of the business to

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infect the work culture at Formula Growth. “His philosophy was that business should be enjoyable, and you should have fun doing it. You should find things that work for you, improve society, and make money. He enjoyed the ‘treasure hunt’ part of this job. He thought that was fun and should be central.” Formula Growth has always competed against a thousand other groups, most of them much larger, but has managed to persevere for sixty years. “Professional money management has become a bit of a grey, boring business over the past twenty-five or thirty years,” says Liddy. “John was an old-fashioned gunslinger. We like that here. He wanted to find the next thing that will make you ten times your money – that’s why you come to the office.” John Liddy was born in Toronto, grew up in Ottawa, and worked in Toronto until he moved to Montreal in 1995 with his wife and three daughters, who are now all in their twenties. After thirteen years, during which the city enjoyed a resurgence, he moved to New York to open a research office for Formula Growth. “We saw it as an addition to our toolkits,” he explains. “Professionally it’s great because it offers much easier access to management teams, and a lot of our counterparts in the brokerage community are headquartered there. It has allowed us to develop personal relationships with some of those brokers, which have been very valuable.” Formula Growth’s decision to establish a physical presence in the US came after some heady times for the firm. After spectacular stock market results during the 1990s, the tech bubble burst around 2000. Formula Growth was better insulated than others because of its disciplined approach, but the market sell-off still hurt. “Fortunately, our discipline and our targeting wouldn’t let us get into the grocery. coms and drugstore.coms because we thought they were garbage,” says Kelly. “In 1999, we were in better tech companies with real businesses underlying them. We were in telecom service companies that serviced the Internet dot bombs. We were one step removed. But guess what happened? As the dot bombs unspooled, the whole thing imploded. So 2001 and 2002 were worse for us, and it was

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worse for everybody.” Of course, adding to the downturn were the traumatic events of the 9/11 terrorist attacks in the US and the subsequent recession. Formula Growth started coming back in 2003, but because of market breakdowns in 2001, 2002, and 2008, the entire decade was a slow one for the US market. “It was a tough period for American stocks, but Canadian stocks did extremely well because they were dominated by commodities,” explains Kelly. “That started to change in the second decade of the new millennium, when the US stock market began to once again hit new highs and the Canadian market dragged due to lower commodity prices.” René Catafago notes, “In the first decade of the 2000s, the United States had been steadily weakened with slow growth. It really started after the dot-com debacle when things blew up and people lost a lot of money. And then you had 9/11, and the government started to spend too much money for one reason or another and went to war. So the United States lost a lot of its clout. It was all very harmful to their capital markets. Now markets are recovering, but the biggest problem with the United States remains the fact that they have so much debt.” Printing money may be the only option for paying back that debt, which will lead to a lot of inflation, Catafago adds. “In this environment, one of the best places to hide would be stocks. Companies at least will have pricing power with inflation. If we go back to the best years of Formula Growth’s existence, it was during high-inflation years, between 1975 and 1982.”

• A New Hedge Fund Platform • The dot-com debacle of 2000 prompted Formula Growth management to re-evaluate its approach and for the first time in its fortyyear history consider broadening its investment offering. “Until then, Formula Growth had simply been a long-only (buy) shop investing in aggressive growth equities,” explains Randy Kelly. “Given the

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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 and less volatile product. We felt it was important, and the clients were demanding a product that took less risk and therefore would have less volatility.” Tony Staples, long-time portfolio manager of the legacy Formula Growth Fund, notes that at the turn of the millennium the firm ran into what he describes as “an institutional rebellion,” driven in part by the shift to index investing strategies. “They wanted a more passive investment approach using exchange traded funds (ETFs) and other index tools, which offered lower fees than active investment managers,” says Staples, whose father, Bob, had worked as Formula Growth’s auditor back in the 1970s and joined the firm in 1997. “They were increasingly turning to indexing and pulling out of active management. We were a victim of that a little bit in the early 2000s. We launched the long/short platform because our clients were demanding a little more of a risk-controlled investment experience.” At the same time, the reality was that the Formula Growth Fund’s client base was shrinking due to the simple fact that its traditional clients were getting older, which prompted them to seek more conservative investments, or were passing away. “Understandably, with succession, an estate gets settled and the kids want to benefit from the many decades of compounded investments,” says Staples. “It’s a bit sad to see the assets go. The investors have been so patient with us, compounded their money and created a lot of wealth for their families over the years. Then it gets split up amongst their offspring.” The Formula Growth Fund’s assets under management peaked at around $600 million in the 1990s but had fallen to about $260 million by 2019. Randy Kelly and John Liddy decided that the best way to counter this trend was to develop a hedge fund platform. “We came up with a long/short equity fund where we could avail ourselves of the same research process we use to buy stocks long as well as to sell stocks

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short,” explains Liddy. “We short stocks when our research indicates that stories are unspooling and the stock is likely to decline.” Setting up hedge funds represented a bit of a departure from John Dobson’s investment philosophy, but he accepted it. “John could never understand shorting stocks, saying there is no free ride, you know, embrace risk – that’s part of investing,” says Staples. Much of Formula Growth’s focus since the end of 2002 has been on building out its long/short business. It includes: • The Formula Growth Hedge Fund (FGHF), launched in 2002. This so-called “directional” fund maintains some exposure to the stock market to get higher-than-expected returns for the amount of risk it takes. In 2019, it had approximately $520 million Canadian in assets under management and an annualized return of 16.4 per cent in US dollars since inception. • The Formula Growth Alpha Fund, an “absolute return,” or market-neutral fund, designed to generate a steady return almost no matter what the market is doing by having an equal number of longs and shorts. Launched in 2011 and relaunched a year later with increased risk controls, it had approximately $680 million Canadian in assets under management in 2019 and produced an annualized return of 7.9 per cent since the relaunch. • The Formula Growth Global Opportunities Fund, an Asia directional long/short fund established in 2009 as the Small Company Opportunity Fund and renamed in 2010. It has about $80 million in assets under management and an annual return of 4.4 per cent as 2019 drew to a close. • Two Asia-focused funds that Formula Growth took on when it acquired Hong Kong–based PhoenixInvest Group

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in 2016, which primarily cater to European investors: Javelin Select China, a long-only fund; and PhoenixInvest Pacific Fund, a long/short fund focused on Asia-Pacific equity securities. “Our hedge funds are a wonderful complement to our long-only business, the original Formula Growth Fund,” says Kelly. “The fact that we’ve been able to do this is a tribute to John Dobson’s outstanding work in building an organization that is able to apply the same core skills to a different product. We simply have added to the hedge fund process a portfolio of shorted stocks and hedges in order to mitigate the risk that’s associated with investing in the stock market. Additionally, we control risk by a tighter use of price stops to help avoid large losses in any single holding. We let our “bottom-up” approach to longs and shorts dynamically dictate our net exposure to the market.” By 2019, about 85 per cent of Formula Growth’s approximately $1.6 billion (Canadian) in assets under management were in its long/ short hedge funds. “The customers are voting with their feet these days and seem to prefer the relative safety of our hedge funds,” notes Kelly. “Interestingly, you don’t really make a lot of money shorting, but a properly constructed short book helps control downside risk. You control the shorts, and if the market decides to implode on you, your short book will mitigate the losses. Additionally, in our long/ short philosophy, we use cash defensively. We don’t disrespect cash to the same extent that we did in the original Formula Growth Fund, where the fund was virtually always 100-per-cent invested. We see tremendous potential in all these funds.”

Chapter 10

Formula Growth Hedge Fund and Alpha Fund “It’s just steady growth year after year. We’ve been around for a long time so we can explain what we do in a pretty clear way to investors.” — John Liddy

The Formula Growth Hedge Fund (FGHF) was launched on 1 December 2002 after several years of study, taking in new investors with a similar profile to those in the original Formula Growth Fund: wealthy individuals looking for something a little less volatile. “It was successful right away,” says John Liddy. “We started with $2 million, basically all insiders, and a couple of outside investors. The offering memorandum was available only to net high-worth individuals, but it has grown steadily since then.” Liddy says one of the primary motives for establishing the fund was to give clients a wider array of choices. “Formula Growth Fund has been a great product with a terrific return track record, but it does go down significantly at the end of every business cycle. This made life hard on our clients; you’d have these 40-per-cent selloffs and then have a five-year stretch where you were trying to get back to the old high. No matter how long their time horizon, we were bound to lose clients in the middle of every one of those episodes.” The idea was to take Formula Growth’s proven research skills and offer a more defensive structure so that clients wouldn’t have to suffer such significant drops in the value of their investment. “Over the long haul, we believe they can get a decent enough return out of

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the FGHF, although not as high of a return as they could’ve gotten from being fully invested at all times in the Formula Growth Fund.” Criteria for going long (buying) stocks for the FGHF are consistent with those employed for the Formula Growth Fund, and there is considerable overlap in the holdings in both funds as a result. “But on the short (sell) side, obviously it’s quite different,” notes Liddy. “In some ways it would be the opposite of what we’re looking for on the long side.” Secularly challenged businesses, losers in the long arc of constructive obsolescence, are good candidates for being shorted by the fund. For example, when online streaming company Netflix came on the scene, it signalled hard times for video/DVD rental companies such as Blockbuster because customers no longer needed to go to a store to get their favourite show. At its peak in November 2004, Blockbuster employed 84,300 people and boasted over 9,000 stores worldwide. But it filed for bankruptcy protection in 2010. “You see these evolutions occurring in every industry, and on the short side you want to be exposed to companies with a losing hand,” explains Liddy. These include companies facing cyclical downturns. For example, building-products companies in 2007/2008, as we were headed into the rollover of the housing cycle, were all great shorts.” On the other hand, FGHF is cautious about shorting “concept stocks,” such as those issued by cannabis and crypto-currency companies, because they can be highly unpredictable and volatile over a multi-year period. “They’re typically not the greatest shorts in the world,” says Liddy. “Far better to stick with the things that you know are actually in secular decline or are looking at significant challenges.” Essentially, FGHF evaluates stocks on a case-by-case basis. “What you’ll end up with is a short book of many different names from multiple sectors and timeframes, some of which you’re going to be short for a year, or some of which the catalyst is going to come and go in the next two or three months. So it ends up being a very eclectic mix.”

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Liddy describes identifying shorts as a “cousin” of the same skill set Formula Growth uses on the long side. “Certainly the key variables are all related very highly to what we’ve been doing for years and years on the long side.” Assets under management at FGHF increased from about $150 million in 2013 to about $520 million (Canadian) in 2019 (including AUM in several offshore structures offered by the fund). “It’s just steady growth year after year. We’ve been around for a long time so we can explain what we do in a pretty clear way to investors,” says Liddy. In the world of hedge funds, FGHF is relatively small, but the upside is that the fund’s size enables it to be nimbler and enter and exit positions more easily than some of its bigger counterparts. “But you’re less important to your broker counterparts, so you have to work harder to get corporate access, to get resources from the street to complete your fundamental research,” notes Liddy. “That’s why we have a New York office to compensate for being so small. It makes it easier for them to visit us!” The majority of FGHF’s clients are accredited wealthy Canadian investors, family-controlled investment groups (“family offices”), and some institutions such as pension fund managers and universities. “It’s the same constituencies that we’ve done well with in the Formula Growth Fund over many decades,” explains Liddy. “An ideal client is someone that we end up having a personal relationship with, so we know them well and they know us. We want to work on their behalf for many years – the longer the better, basically – because then we’re in a position to really generate significant return on their capital. Clients have to worry about you a little less every single year because you’re a known quantity doing a nice job. We’ve added a few new clients every quarter and lose many fewer than we add. You end up in a place where they know you really well; you’re accessible and honest and co-invested, and they stick around.” In the past, Formula Growth managed money for a host of pension funds and endowment assets and other institutional plan sponsors. It has managed to attract a number of these to the FGHF, but

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they are currently not a dominant part of the mix. “It’s pretty hard to hang on to the institutional business for multiple decades, whereas with private individuals and family offices, you do have the opportunity to work with them for a very long time,” says Liddy. However, after obtaining registration with the US Securities and Exchange Commission (SEC) in April 2017, the fund has started to attract more institutional business, as has its cousin, the Alpha Fund. To keep growing and attracting new clients, the FGHF recognizes it needs to get several things right. One is not to suffer heavy losses during a cyclical downturn in the market. One of the bigger tests was 2008, when the fund dropped only 15 per cent in US dollar terms compared to a drop of more than 37 per cent in the S&P 500. “While the key is not to go down too much, you also need to have enough good things in the fund to enable you to get clients back to that old high pretty quickly,” says Liddy. “And we did that by the summer of 2009, so the turnaround was very fast. People want to know you’ll defend them well in the downturn by exploiting some of the opportunities that a downturn creates, and get back their losses quickly. We’ve done well in this regard: our longest downturn has been nine or ten months since the fund’s inception.”

• Survival of the Fittest • Running a hedge fund is notoriously difficult, and many managers fail. New hedge fund launches slipped to an 18-year low in 2018. According to data provider Hedge Fund Research (HFR), new hedge fund launches totalled 561 in 2018, while 659 funds closed their doors during the year, including big names like Highfields Capital Management, Criterion Capital Management, and Tourbillon Capital. In 2018, hedge fund industry assets, estimated at well above $3 trillion, reached an all-time high nine years in a row, as did the number of funds: over 15,000. But this increase in both assets and competition has made the hedge fund industry significantly more

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challenging from an investing and asset-raising standpoint. “The increase in the number of hedge fund managers and the growth of industry assets . . . is making the capital markets more efficiently priced,” noted an article posted on Hedgeweek. “This, in turn, makes it much more difficult for most managers to find sustainable inefficiencies from which to generate strong returns. As the hedge fund industry becomes increasingly Darwinist, the stress level of managing a hedge fund organisation increases.” “It’s a very tough business and you have to be very engaged,” agrees Liddy. “You can lose money two ways, on longs and on shorts. So when markets are in serious decline it’s a problem for everybody, including hedge funds. You’ve got to be managing your risk, covering stocks that you know are costing you a lot of money, trying to refresh the book with new stocks. It’s like twice as much work for half as much return. So a lot of people get burned out. You’ve got to have a team with the right temperament, and we’re a pretty evenkeeled team here.” Another major contributor to the challenges faced by hedge fund managers is the trend away from the active manager of investment portfolios and the rise of the passive manager. “We are as active as you get and are a participant in an ever-shrinking part of the ecosystem,” notes Liddy. “We’ve seen a significant amount of the share of the dollars in the industry accrue to passive managers, as much as 40 per cent. At the same time, we don’t know how those managers will do in a period of extended underperformance and whether the clients will stick around. That’s why we believe there’s still a role to be played by hedge funds, which can employ shorts to mitigate negative returns.” Bull, or rising, markets, also present a challenge to hedge funds because when stocks are consistently rising investors are better off being in a long-only product. “If you’re a hedge fund manager and you’re in a 10-year rising bull market, you’re kind of like the last thing that people want to know,” quips Liddy. “And we’ve been in the longest economic expansion in the history of the United States.

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Australia’s had an economic expansion that’s twenty years old and Canada has also been going relatively strong since the early 1990s. Could things continue? Perhaps. Are they likely to continue? No. Every expansion of the last 150 years had no good reason that it ended, but it ended, so this one probably will end too.” FGHF tends not to look at macro-economic factors or market timing. “We’re just trying to have an overall roadmap that we think is logical and coherent. It doesn’t usually involve calling for the end of an economic cycle and a crash. It’s much more built around the opportunity set. This is what we’re seeing on a stock-by-stock basis.” Liddy is envisioning continued steady growth for the FGHF. Formula Growth may consider other product introductions that make sense to its client base and that fit with its skills set. There would have to be sufficient demand and a need to be filled, however. “We’d have to ask ourselves whether we have the skills to do a good job at it and whether those skills amplify and improve the job that we’re doing in our core products. We’d also have to see whether we could build a large enough product for it to make business sense.” Liddy says the introduction of the Formula Growth Hedge Fund and the firm’s other hedge fund products has complemented Formula Growth’s initial long-only product and been good for both the firm’s clients and the business. “They have allowed our business to continue to prosper even though the core fund is much smaller than it used to be. Our view of the industry is: if you can’t deliver a superior return experience and stand apart in the industry, then ultimately you’re not going to be in business. This is the cold reality faced by many money-management companies over the last 10 years because of the rise of passive products. They’ve been exposed as basically average asset gatherers. The good news for us is we are always a little scrappier than the average money manager. And so we’ve been able to survive and prosper during what’s been a tough five to ten years for the industry. I think the kind of art and science that we bring to stock picking should further set us apart from the industry as a whole and certainly from that passive constituency that has gobbled up half

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the industry. We’re energetic and competitive, the same people that John Dobson hired. We want to do well and we’re disappointed if we don’t. We’re willing to work hard to improve and innovate.”

• Formula Growth Alpha Fund • As Formula Growth entered its 50th year at the beginning of the second decade of the millennium, it was offered a new investment opportunity that would translate into a big success. In 2011, HR Strategies (HRS), a Quebec investment-management company, established the Fonds Stratégique à Rendement Absolu HRS (SARA Fund) and invited Formula Growth and nine other Quebec money managers to manage an initial $175-million investment. The main investors were Caisse de dépôt et placement du Québec ($50 million), Fondaction CSN ($55 million), Fonds de solidarité FTQ ($50 million), and the Régime de retraite de la CSN ($10 million). The fund aimed to deliver an average annual return of 5 per cent above the treasury bill rate of return while supporting the development of Quebec’s financial expertise. “We wanted to develop the financial space in Montreal,” says Mathieu Boisvert, a senior executive at HRS at the time, now a vice-president at Formula Growth responsible for business development. “We got seeding capital to invest in locally based hedge fund managers, but we were specifically looking for hedge fund managers that had no directionality to their strategy. In other words, clients wanted funds that did not move at all with the market and therefore had zero correlation. In investment jargon this is called “no equity market beta and only alpha generation.” By holding an equivalent amount of dollars “long” (stocks we buy) and “short” (stocks we sell short), your expected return is always zero, with one side of the portfolio offsetting the other. So you make money only if your long stocks go up more than your short stocks, if your short stocks go down more than your long stocks, or, ideally, if your long stocks go up and your short stocks go

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down. It has nothing to do with market movement; it is all about stock picking.” This so-called “market neutral” strategy produces lower expected returns than one that relies more heavily on simply buying stocks. But it offers the advantage of being less volatile and provides investors with a return that doesn’t move in tandem with the general stock market. Boisvert says HRS was impressed by Formula Growth and the performance of its initial hedge fund, Formula Growth Hedge Fund (FGHF). “The portfolio had demonstrated its ability to add value over and above the exposure to the market through strong stock picking and already had a long track record. The performance of the Formula Growth Hedge Fund in 2008 and 2009 was particularly impressive. So we approached Formula Growth and said: we have this new product and we’re looking for market neutral managers. Would you be open to manage such a strategy? And they took it on.” Formula Growth was an obvious name on the list of potential money managers because it already had significant experience in the hedge fund space, a rarity in the Montreal investment community. It was allotted an initial sum of about $20 million to manage and ran it in a similar manner as the FGHF but with more short positions in the portfolio. The HRS initiative had a rocky start, however, due to the lack of experience that most of the selected Quebec fund managers had in the tricky world of hedging. “I had warned HRS from the beginning that this may end badly because the horsepower within those small firms was less than ideal,” says Randy Kelly. “So one by one they fell apart and we ended up getting more of the pool.” Even Formula Growth’s portion of the assets underperformed in the beginning, acknowledges Charles “Chuck” Haggar, a Formula Growth vice-president and portfolio manager. “We didn’t have a good 2011 because the fund’s exposures were not well matched between the long positions and the short positions. While the new strategy had an equivalent amount of investments between the long side and the short side, some sectors had more long positions while others had

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more short positions. There was also an over-concentration in financials, which meaningfully cost the strategy.” The fund was costing the firm money, rather than generating fee income. “A hedge fund really lives on the performance fees,” explains Haggar. “Each investor has a ‘high-water mark,’ the level at which they invested in the fund. At the end of every year, if the value of the investment is above that level, a performance fee is paid to the manager. We were roughly 12 per cent below high water because of the performance in 2011 and had to recover the lost capital before hoping to collect performance fees on the product. Let’s just say it was a challenging start.” By April 2012, HR Strategies and Formula Growth had had many meetings to improve the product and ensure a better match between the long and the short positions. Both allocated more money to the improved strategy that would become the Formula Growth Alpha Fund. “HR Strategies understood the situation and we were very transparent with them,” says Haggar. “We agreed on a new set of parameters to mitigate the volatility of the product and came up with what we believed should be a truly market neutral strategy. In fact, despite tighter risk controls and a better balance between the long and short positions in each sector, we ended up with a fantastic snapback year in 2012, returning nearly 22 per cent to investors, and another 12 per cent in 2013.” After three years, the remaining hedge fund managers selected by HR Strategies were having a hard time. Many ended up with close to a zero return and several were in the red. In fact, SARA itself eventually shut its doors and the funds entrusted to it were transferred to a product managed by another investment group. Despite outperforming them all, Formula Growth was not raising much capital from other investors and the Alpha strategy had few clients. With the seed investor, HR Strategies, redeeming, the fund was facing the risk of shutting down. But Formula Growth’s faith in the product remained firm. “We got people internally at Formula Growth to try to put as much money into it as they could, and launched a big marketing push to get more capital,” recalls

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Haggar. “Of $100 million in assets under management, the product lost approximately $50 million from its seed investor, HRS, in 2015. But the new capital brought it back up closer to $75 million in just a few months. We gradually won more clients, both institutional and retail (through investment advisors), by demonstrating we could generate a good performance.” With the product increasingly becoming an established portfolio of the firm, Randy Kelly decided to assign a dedicated team to its management, headed by portfolio managers Mike Gentile (since retired) and Charles Haggar. “We were pretty passionate about it and were convinced we could make this a real product for Formula Growth, one that we could grow considerably in the future to a size similar to the directional Formula Growth Hedge Fund,” says Haggar. Another person who firmly believed in the Alpha Fund’s potential was Mathieu Boisvert, who decided to join the Formula Growth team from HR Strategies in 2014 and lead the drive to bring in more institutional investors. Boisvert had been working in the hedge fund space for over a dozen years, helping institutional clients find hedge fund managers who were credible in a space that often had a less-than-stellar reputation when it came to regulatory compliance and transparency. He travelled the world meeting hedge funds and performing due diligence in terms of investment performance as well as operational compliance. He gained a deep knowledge of best-in-breed hedge funds but admits he did not have much experience in business development or marketing when he came to Formula Growth. “Until that time, Formula Growth did not have a legacy of proactive marketing and business development,” he says. “After all, in its early days, I am told that John Dobson did not care much about marketing and that he did not like the idea of answering to clients.” As a result, while many investment firms have an almost equal number of marketing people to portfolio managers, Formula Growth had few dedicated team members over the years looking after business development and investor relations.

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Boisvert had never raised capital or been in a marketing position prior to joining Formula Growth. “But I had seen probably thousands of hedge fund managers across the world and I had my opinion of what was required to grow the business in terms of the business model and strategy.” His first move was to meet with every member of the investment team and revamp the firm’s marketing presentation, simplifying it and explaining what the hedge fund business was all about. “I felt it was very important to provide a lot of transparency to clients. We needed clients to clearly understand what we do, why we do it, and what the expectations are in terms of the risk and returns of each strategy. I always made sure to put myself in the shoes of the investor and provide the information they want and need. I really believed in the investment team and the Formula Growth process; the idea was to pass along the message and have others see what I saw in Formula Growth.” At the same time, Formula Growth put substantial effort into shoring up its compliance and operations standards, which led to it to obtain full registration with the US Security and Exchange Commission (SEC) in April 2017, after a rigorous and in-depth audit. “We had to demonstrate to investors that we have outstanding operational risk management processes, which is especially valued by institutional investors,” says Boisvert. The efforts did not produce results right away. One major headwind was the fact that equity markets in the US continued to perform strongly throughout the second decade of the millennium. “The market had been going strong, so people weren’t seeing the need to have a portfolio or strategies that would mitigate a downturn,” says Boisvert. “They didn’t feel the value in hedging because the market’s been going strong for so long.” The first year, Boisvert brought in a few high net-worth clients to the Alpha Fund. By the second year, he really started to get some traction. “The inflow started to come in big, the majority from institutions, multi-family offices, and some single-family offices. We also

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had a breakthrough in the US, securing a large pension fund that invested over $100 million US in 2018.”

• Remarkable Asset Growth • By 2019, the Alpha Fund’s assets under management had exploded to some $680 million Canadian. “Formula Growth had lots of success raising assets for the Alpha strategy,” notes Boisvert. “In Canada, there are not that many hedge funds that raised as much money over a four-year period, or even much longer periods. The proportion of institutional investor assets at Formula Growth went from approximately 10 to 15 per cent to about 50 to 60 per cent. With new clients also joining the FGHF, we are now at over $1.3 billion in hedge fund assets, one of the biggest hedge fund platforms in Canada.” “Mathieu Boisvert has done a fantastic job bringing in big wins, including many institutions in Montreal and across the country,” says Randy Kelly. “We have had success with other customers as well – high-worth individuals and ‘corner office’ brokers who can invest their accredited client’s money on a discretionary basis. That’s where the growth has been: the risk-averse clients, either big pensions or high net-worth people. They like the 5-per-cent targeted returns at low risk.” By the first quarter of 2019, the Alpha Fund had produced an annualized return of around 7 per cent since its inception, suffering only one negative year of return, in 2018, when it fell by 4.1 per cent. The Formula Growth Hedge Fund and Alpha Fund invest in many of the same category of stocks – US small- to medium-caps – but the Alpha adopts a more market-neutral strategy, having an equivalent of longs and shorts in every sector. “We do a fundamental bottom-up process,” explains Haggar. “As an example, we may find 10 stocks each with a specific story as to why we believe they will go up by over 30 per cent in a twelve-month timeframe. And then we may find four or five stocks in that same sector that we think will materially go down over the same timeframe. If we have more longs

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or more shorts in a particular sector, we will balance it out with a basket of stocks or sector indices to make sure that each sector has a balance between longs and shorts. In contrast to most market neutral managers, we rarely use “pairs.” An example of a pair would be if you are long a restaurant stock for a specific reason and short another very similar restaurant stock just to mitigate the risk of the long position. We’d rather have conviction in both our longs and shorts even if they are a little bit different from one another. We could, for example, be long a restaurant stock for a specific reason, and short a retailer stock for another specific reason. While both are not exactly the same line of business, they are both consumer discretionary stocks and will protect us whether the US consumer is healthy or not.” The Alpha Fund is proving to be sufficiently steady that some clients use it as a substitute for bonds. “In a time of low interest rates, bonds generally don’t perform well, so the market neutral fund can offer a good alternative,” says Haggar. “This strategy is particularly attractive to older investors who don’t want to have a big swing in their equity portfolio. We feel like it’s a good strategy through thick and thin.” Randy Kelly says he’s particularly pleased with the way Formula Growth and its team have built out the firm’s long/short business over the past decade. “The customers at Formula Growth always come first, and over the years many of them requested a lower-risk investment approach. We developed the products and skill sets to reduce volatility to accommodate them, and many have voted with their hard-earned money to invest in the Formula Growth Alpha Fund. It has been very well-received, attracting strong asset flow from institutions and other risk-averse investors who want to sleep easier at night.”

Chapter 11

A Move into Asia “We have a great team and a proven formula that we’re using in a market that shows similar characteristics to the US back in the eighties and nineties.” – Nelson Cheung

In 2009, Formula Growth made another bold move with the launch of the Formula Growth Small Company Opportunity Fund (renamed the Global Opportunities Fund, or GOF, in 2010), a directional hedge fund focused on Asia. This was a “back-to-the-future” move, reminiscent of the early days of Formula Growth when John Dobson met with great success by going off to Europe and Japan in the 1970s to find growth stocks. Formula Growth had been eyeing a move into Asia-Pacific, and China in particular, since the beginning of the millennium when China was accepted into the World Trade Organization (WTO), and its economy – and stock markets – exploded as it became more integrated into the world economy. With WTO membership, China’s service sector was considerably liberalized. Foreign investment was allowed while restrictions on retail, wholesale, and distribution ended. Banking, financial services, insurance, and telecommunications were also opened up to foreign investment. Part of the reason for turning to China was that it represented a way to expand the playing field for Formula Growth’s stock picking. “When I began in this business 35 years ago, there were close to 10,000 public companies in the US; today there are fewer than 4,000 due to significant consolidation,” notes Kelly. “To continue to find

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great ideas and sources of quick-growing companies, we decided to expand our investment universe by going to Asia because there are another 4,000 to 5,000 public companies that trade in China and the Asia-Pacific stock markets. Essentially, there are about as many public companies in Asia as there are in the United States.” China was particularly attractive because its stock market is the second-largest in the world after that of the United States. It has two markets on the mainland: the largest, Shanghai, trades mainly big, state-owned companies, while the Shenzhen stock exchange trades the shares of smaller, more entrepreneurial companies whose growth is a critical component of China’s economic reform. It offers many tech companies, which makes it similar to the NASDAQ and fertile ground for Formula Growth’s savvy stock pickers. The third exchange is the Hong Kong Exchanges and Clearing Limited, or HKEx, tracked by the Hang Seng Index. In November 2014, the Chinese government linked the Shanghai exchange with the Hong Kong exchange through the ShanghaiHong Kong Connect program. The Connect program allows foreign investors to buy shares of Chinese companies; previously only Chinese citizens and a few foreign fund managers could trade mainland China stocks. Many companies are now listed on both the Shenzhen and the Hong Kong exchanges. Many investors have tended to ignore the Asian markets because for years the Shanghai and Shenzhen exchanges were not included in worldwide stock indexes. But now Morgan Stanley and the other index companies are building mainland China stocks into their indexes, and China will soon become too big to ignore. “As the second-biggest stock market in the world, asset allocators will be under the gun to invest in China in order to match the newly constructed global indexes,” notes Kelly. “The new additional funds flow will find its way into the best stocks. The valuation of Asian stocks is among the cheapest in the world, and the growth rates in earnings are among the highest. Suffice it to say, we are pretty excited about Asia.”

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Formula Growth had been dabbling in the Chinese market for several years, mainly purchasing Chinese companies listed on US markets. For market intelligence, it often relied on PhoenixInvest Group, a Hong Kong–based investment company owned by James Soutar, the son of long-time Dobson colleague and Pembroke Management president Ian Soutar, and Giampaolo Guarnieri. Soutar and Guarnieri are long-time Asia hands and a natural fit for Formula Growth. James Soutar already had close ties with Formula Growth – he worked there as both a summer intern and a junior portfolio manager – so it was no surprise that he would eventually play an important role in the firm’s Asia strategy. His father and John Dobson were close friends and would often invite businesspeople to the Soutars’ family home in Québec’s Eastern Townships. “When I was a little boy growing up, I was surrounded by all of these entrepreneurs, listening to their stories of investing in companies, and it definitely got me interested in the investment business,” says James Soutar. While studying business at Tufts University in Boston, Soutar secured a summer job in Edinburgh, Scotland, at Ivory & Sime, another long-time brokerage ally for Dobson’s Formula Growth and Ian Soutar’s Pembroke Management. He worked for the firm’s director in charge of Asian investments, who subsequently set up the Hong Kong office of Ivory and Sime. “I went over to join them in Hong Kong in June of 1988, three weeks after I graduated, and ended up staying in a lifetime,” says Soutar. “Giampaolo was another one of the junior portfolio managers working there and we became fast friends, in part because we both spoke French. I was 22 years old, fresh out of college.” Soutar had also had a summer job at Formula Growth in Montreal, so after he had been in Hong Kong for five years, John Dobson convinced him to come back and work for the firm. But Soutar missed the action of Hong Kong, and when Swiss private bank Lombard Odier approached him to become the first non-Swiss citizen to open a new office for the bank in over a century – in Hong

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Kong – he jumped at the chance. “Telling John Dobson that it hadn’t worked out for me and I wanted to go back to Asia after only one year in Montreal was probably one of the more difficult conversations I’ve had. But he took it very well,” says Soutar. “In fact, he was super supportive, saying ‘You’ve got to go where your heart tells you to go’.” Around the mid-2000s, Soutar and Giampaolo started picking Asian stocks for FrontPoint Partners, an “absolute return” hedge fund. They became partners with Steve Eisman, the famed financial sector stock picker who was chronicled in Michael Lewis’s book The Big Short: Inside the Doomsday Machine and the movie adaptation starring Steve Carell. In 2009, the duo set up their own shop in Hong Kong after FrontPoint was acquired by Morgan Stanley, and then established two China-focused funds, the long/short PhoenixInvest Pacific Fund and the long-only Javelin Select China. They had considerable success with both, especially among European investors looking for exposure to the Asian markets, leading Formula Growth to call on them frequently as consultants. At the same time Formula Growth was tapping into the expertise of Phoenix, it decided to bring another young portfolio manager onto the team to take the lead in expanding the firm’s Asia-Pacific activities. Nelson Cheung had a proven talent for stock picking and a solid track record in investing in the region. A commerce graduate from Concordia University’s John Molson School of Business, he had received the prestigious Calvin Potter Fellowship from the university’s Kenneth Woods Portfolio Management Program. This stock-picking exercise has been supported for years by the John Dobson Foundation and has been the recruitment source for several Formula Growth portfolio managers, including Mike Gentile, Charles Haggar, and Cameron Fortin. Since graduating in 2002, Cheung had been focused on global and Asian equities, helping to manage $8 billion in equity investments for the pension fund of CN Railway and later developing a

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global equities effort at Toronto-based Acuity Funds. He had always had a special interest in Asia Pacific and China. “I think partially it had to do with my personal interests and the fact I speak the local language,” he says. Cheung arrived at Formula Growth in 2010 amidst heady times for the China markets. “Growth was exploding; their stock markets had risen by 500 per cent in six years, making it the best-performing market in the world,” he notes. “The growth was accelerating in China and it was driving all emerging markets known as the BRICs – Brazil, Russia, India, and China.” Even when the 2008 housing crisis devastated markets in the US, China was a bit of a saviour economically. At the end of 2008 it launched a massive 4-trillion renminbi stimulus, close to $600 billion US, or 13 per cent of China’s GDP, to mitigate the impact of the stock meltdown in North America. Randy Kelly saw that China was asserting its strength and wanted to get in on the action. His and Cheung’s interests jibed. “I wanted to focus my efforts on the next big growth driver of the world, which is not the US, but China,” says Cheung. “When I came on board I brought more of a local flavour with my global experience in various firms that I’d been at. I brought expertise in the Hong Kong markets, in Japanese markets, Singapore, Taiwan, and other Southeast Asian markets. I’d been directly investing in those markets for a long period of time and travelling back and forth to the region for nearly 10 years at that point.”

• Back to the Future • Cheung began picking stocks for the Global Opportunities Fund with support from Phoenix, often visiting companies in China with Kelly, Soutar, and Guarnieri. “James and Giampaolo had many of the same characteristics in terms of how they viewed the market,” says Cheung. “Having them act as an advisor on the ground was very important because relationships really matter in Asia; you need to have someone meet clients in person and kick the tires locally. In

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the beginning, I was also working out of their Hong Kong office for two to three months out of the year. We would basically share ideas, very much like John Dobson and James’s father, Ian Soutar, did back in the day. History repeats itself!” In 2015, Formula Growth started talking more seriously with Soutar and Guarnieri about gaining a local presence in Hong Kong. “They were also looking to dense up their operations, to scale up and have a brand name in Canada,” says Cheung. “They were running a boutique investment shop and wanted a little more leverage. So we suggested they join us, and we consummated an acquisition of Phoenix in February 2016, which included its two investment funds.” Soutar said combining forces as one team made perfect sense for both parties, and because Formula Growth and Phoenix had similar cultures, approaches, and a long history of working together, the merger was seamless. “Acquisitions in the investment management business are notoriously difficult and more have failed than have succeeded because often the people cultures don’t match and there’s conflict,” he says. “That was certainly not the case with us. And the fact Randy and I have known each other for over thirty years really helped.” With Nelson Cheung in Hong Kong, Formula Growth now has an office in the city with six staff managing its three Asia funds with total assets under management of about $130 million Canadian: • Global Opportunities Fund, a China-centric hedge fund similar to the Formula Growth Hedge Fund with a long bias. By the first quarter of 2019 it had returned 4.4 per cent (annualized) in Canadian dollars since its launch in January 2009. • An offshore platform that basically mimics the Global Opportunities Fund, PhoenixInvest Pacific Fund. • The Javelin Select China Fund, a long-only fund that has an uninterrupted track record since 2000 until today.

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Cheung and Soutar both acknowledge that Formula Growth’s foray into Asia, and especially China, has produced underwhelming results due to unexpectedly flat stock markets in Asia since 2010. “We had expected the growth in the region, and especially in China, to translate into stock market returns. But there has been a disconnect in terms of that relationship, and the China markets have been very choppy,” says Cheung. “In the context of the resources we have applied to the region, our performance has been a bit disappointing.” In the US, stock markets had jumped some 300 per cent since 2010; by comparison, China’s markets were up only 15 per cent, despite an economy that was growing by an average of 6 to 7 per cent annually. Says Cheung, “There’s been a leakage of sorts given that the economy has doubled in a decade. We expected this growth in the economy, in companies, and earnings to lead to a similar performance in the Chinese markets, but it hasn’t transpired. The last ten years has really been a bit of a lost decade in Asia, at least from a stock market perspective.” Government meddling has played a major role in the disconnect. “The central government has wanted to encourage growth in the economy but has been reluctant to loosen its grip on the economy,” explains Cheung. “We need a free-market element to be able to expand, but there’s been this constant tug of war between private enterprise and public enterprise.” China has been talking about opening up its markets and its economy to the rest of the world for years. In 2014, it improved international investors’ access to the local onshore market, and the market rallied by 60 per cent. But then the government decided to slow things down in 2015, putting in more regulations on such things as margin financing and halting new account openings. The market plummeted and retail investors were especially hard hit. “Investors were rattled because there was a confidence issue with the stock market,” says Cheung. “The Chinese government was basically going back on what they had said they would do.”

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Adding to the mix was the arrival of Xi Jinping as China’s new president, who turned out to be much more of a strong man than most of the world expected. He launched a lengthy anti-corruption campaign to consolidate power and put many government officials behind bars. In early 2018 he passed a bill that essentially made him president for life, further impeding the democratic reforms needed for a dynamic stock market. After a strong recovery in 2017, Chinese markets dropped in 2018–19 amidst a trade war between the US and China sparked by President Donald Trump, who complained that China was too slow in reforming its economy and was continuing unfair trade practices with the US, including manipulating its currency. “All of these macro factors are hindering business owners who should be thinking about earnings growth and how to maximize profits for shareholders,” laments Cheung. “Nevertheless, we’re comfortable about the future as long as we can actually get through all these issues. China has to be able to continue to open up to the world, and the central government needs to fade into the background. All these expectations being brought forth by the Trump administration, such as economic reform and fairer trade practices, are actually a good thing for stock market investors. The end result should actually be very good.” Randy Kelly says many observers also tend to overlook the fact that China has two economies: the new and the old. The old economy is composed mainly of state-owned industries like utilities and heavy industry, while the new economy is made up of consumer discretionary companies and technology. “These new companies are on fire and represent more than half of the Chinese economy today. This is where all the cool, exciting stocks are showing up on our screens, and what we are investing in. Education is gigantic in Asia, as is technology. There are more scientific journal pieces and more university graduates per capita than anywhere in the world.” Cheung notes that the fundamentals in China remain strong despite all the worries caused by the heavy-handed actions of the

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central government and the trade tariffs imposed by US President Donald Trump. Moreover, stocks in 2019 were trading at an average 11 times earnings, making them very cheap by international standards. “The challenge is that investors are feeling a bit of fatigue and we need more confidence in the stock markets. There are a lot of great trends happening in the local markets. China boasts the largest auto market in the world, including in electric vehicles. and it’s a tech leader in such areas as artificial intelligence and facial recognition. The online marketplace is the biggest in the world.” Formula Growth is staying focused on what really matters: business models, earnings growth, and management teams. “What we see is highly positive, and all the ingredients are there for a stock market uptick similar to what we saw in the US in the ‘80s and ‘90s,” says Cheung. “The markets continue to be very attractive in all respects: from a growth perspective, from a valuation perspective, and from an opportunity-set perspective. We have a great team and a proven formula that we’re using in a market that shows similar characteristics to the US back in the ‘80s and ‘90s. I think it’s super exciting.” Adds Soutar, “The long-term plan is to continue to generate performance and to expand the business in Asia. I’d like to see Asia eventually grow to something like half the size of Formula Growth’s North American business.”

Chapter 12

Creating Wealth through an Exceptional Team Effort “A big positive for Formula Growth is we’ve been around for so long. We all know each other and work well together.” – Charles Haggar

As it marks its sixtieth year in business, Formula Growth has a team of about two dozen loyal and highly dedicated staff members and is 100-per-cent owned by insiders who oversee long-term planning, developing and implementing investment strategies, and managing the company on a daily basis. “Having skin in the game makes all the difference, and I am proud of what this team has built,” says long-time CEO Randy Kelly. “It gets more and more experienced every year and is making better decisions, which in my mind is our stock in trade.” Formula Growth’s seasoned investment team is highly experienced in navigating small- and mid-cap global stock markets; uncovering high-conviction investment ideas in this large, inefficient, and often less-understood segment of the market; and using the information to build winning portfolios. It has substantial leeway in determining what weighting to give the stocks it selects depending on the objectives of its portfolios. A risk committee, led by CEO Randy Kelly and Chief Compliance Officer Ari Kiriazidis, is responsible for ensuring compliance to security regulations, investment policy and procedures, and the highest ethical standards. (Formula Growth is registered with the Autorité des marchés financiers [AMF], the

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Securities and Futures Commission of Hong Kong [SFC], and the Securities and Exchange Commission [SEC]. It is a member of the Alternative Investment Management Association [AIMA] and a signatory of the Standards Board for Alternative Investments [SBAI], [a standard-setting body for the alternative investment industry], as well as the Chartered Financial Analyst [CFA] asset manager code.) Each Formula Growth investment professional typically has two to three sectors of expertise and benefits from a vast network of regional brokers and contacts that founder John Dobson and his colleagues have meticulously developed over multiple decades. They also have access to a constantly updated database containing information on more than 3,000 companies that have been thoroughly researched and often visited through extensive travel. Formula Growth has devised sophisticated screening systems that reveal the key characteristics of a stock and a company that will provide it with the right investment opportunity and the highest return with the lowest possible risk. “Our entire focus is on touching and analyzing the companies, talking to their competitors and clients, visiting tradeshows, triangulating as many sources as possible to create a true picture of these companies,” says CEO Randy Kelly. Another investment approach that has proven successful is knowing the management team of successful companies and following strong, entrepreneurial managers and their teams from company to company. “Great entrepreneurs who have built successful businesses often sell their existing companies and move on to launch new business ventures that eventually have the metrics Formula Growth is looking for in its investments,” he adds. Formula Growth’s investment professionals work as a unified team, generating ideas and sharing trading tips. They are capably supported by colleagues in business development and a strong back office that ensures smooth trading and settlements and sound financial administration, client relations, and regulatory compliance. “The portfolio managers may feel like they’re driving the business. But the mid-shop, led by Mathieu Boisvert – those guys explaining

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the business to clients and bringing in new assets – and the back shop, led by Ari Kiriazidis – the compliance and administrative folks – are equally important and doing a terrific job,” says Kelly.

• A Clearing House of Ideas • Tony Staples, the veteran portfolio manager who leads the Formula Growth Fund, likens the investment team to a clearing house of ideas. “The more ideas, the better the attitude. It’s also a fluid process where sharing is important. We have people meeting companies every day and reporting back. We share information about what companies we’re looking at and everyone can see each other’s transactions in real time. You can choose to participate or not depending on what is right for your product.” Staples was studying economics at McGill University when his father, Bob, Formula Growth’s former auditor and John Dobson friend, suggested he speak with Randy Kelly about the investment world. “Randy asked, ‘Have you considered becoming a CFA (Chartered Financial Analyst)?’ I had never heard of it!” He also suggested that Staples read best-selling books written by Peter Lynch, one of the most successful and well-known investors and the legendary former manager of the Magellan Fund. “That just lit a fire. It was exactly what I wanted to do in life. Randy was good to me and mentored me into the CFA, which I completed in three years postgraduate.” After four years with a Montreal-based investment management firm focused on private equity investment, Staples joined Formula Growth in 1997. “I got to stay in Montreal and work in the US equity market in the asset class that I really wanted to be involved with. It was a home run, a real stroke of luck.” Hiring Staples was in keeping with Dobson’s practice of taking on people with whom he had a personal relationship or whom he knew through connections. “Over the years there are very few people who have come in without having worked here as a student or through a personal reference,” says Staples. “John Liddy was probably the only person who came

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from prospecting from outside of the firm. As a result, we have an extraordinarily low turnover and high degree of loyalty.” Staples says a major strength of Formula Growth is its transparency and open-mindedness. “The team generates ideas every day for all the products. If I buy something for the Formula Growth Fund, everyone is aware of it. We have a common blotter that says so-and-so is buying this stock, and the group can opt in or out according to their mandate. The whole secret sauce of this shop is the intensity of research going on that results in generating a lot of investment ideas. They may not fit across all the products, but they are useful nonetheless. I’m chasing growth stocks and sometimes the others are more risk-restrained. They don’t necessarily want to chase some of these emerging growth companies. I try and hold on to a stock for as long as I can, while the hedge funds will try and monetize the investment a little bit sooner.” John Dobson was a real holder and that’s the characteristic of a good growth investor, Staples notes. “If you don’t hold those winners to the max, you will never make a superior return. You have to have winners and hold them. It’s really challenging because you can sometimes overstay your welcome. These companies can have a tremendous amount of volatility within a year, but if the story remains intact fundamentally, then you have to hang in.” A big part of John Dobson’s investment philosophy was prospecting for new ideas and concepts, an approach Staples says is still favoured today at Formula Growth. “We’re trying to continue his curiosity because it’s what makes you a good investor. John Dobson is still the Holy Spirit here. We often ask ourselves: What would the Dobber do?” As the lead portfolio manager for the legacy Formula Growth Fund, Staples manages about 100 stocks, with the top 40 accounting for nearly 60 per cent of the assets. “So it’s concentrated at the high end. We have our starters, and then we have a bunch of farm teams that we might not have been able to build to a full position yet, but may do so over time.”

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While most of Formula Growth’s new assets are coming through its hedge fund platform, Staples believes the Formula Growth Fund has a bright future. “It’s a product that helps tell the story and I think it’s an important legacy. There are very few firms with this sort of track record and with continuous management. We’ve been a team managing this fund since the early ‘80s. It’s resulted in a resilient firm that’s lasted through multiple crashes and wars. Our business goal is to compound this product for the next fifty years at the mid-teens level.” In keeping with Dobson’s belief in giving back and supporting young entrepreneurs, Staples is a part-time lecturer in applied investments at McGill University and a mentor in the Kenneth Woods Portfolio Management Program at Concordia University. “The thing with Montreal is that you have four universities in town and that’s just the magic pill. It creates this vibrancy. We’ve been really fortunate to find some really talented folks in Montreal, not having to be in New York or Toronto or Boston.” One of those talents is Cameron Fortin, who studied commerce at Concordia University and participated in the Kenneth Woods Portfolio Management Program with future Formula Growth portfolio managers like Mike Gentile, Nelson Cheung, and Charles Haggar. Fortin had four internships during his studies, including one in Toronto, one at Standard Life, and two at Formula Growth. Impressed by Formula Growth’s hands-on research, Fortin would have stayed, but Randy Kelly recommended he join a larger firm first to make sure he really wanted to work at a smaller firm. He got a job at Standard Life. “It was not something that really got me all fired-up,” Fortin recalls. “I remember the guy that I shared an office with. He’d been there for three years and he’d never met with a company the entire time. I asked my boss if I could invite the CEO of an oil company I was looking at to come to the office. He readily agreed, but when I asked my officemate if he wanted to join in, he didn’t.” Fortin came back to Formula Growth for another work term and then, as he says, “kind of just stuck around. I never left.” He

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was offered a full-time job as a researcher in January 2006, and he worked his way up to portfolio manager. In 2008, Fortin moved to New York City to help John Liddy open Formula Growth’s office there. It was just months before the worst stock market crash since the Great Depression. “I was still pretty young and didn’t have that much money to lose, so it was a great experience,” he says. “The market came back so quickly, it was crazy.” Fortin recalls how in December 2008 Grand Central Station had many vacant stores. “It was like a dead zone walking through there. But by January new things started popping up again. I still laugh at how low the markets went during the meltdown; the S&P index fell to 666 on 3/6/9. You couldn’t make that up!” At the end of 2019, the S&P index was over 3,000. Most of Fortin’s time is spent picking stocks for Formula Growth’s long/short hedge funds. “We use ideas to cross-populate the names that fit the mandate of the funds. Sometimes the idea will start in the long/short fund and we’ll buy them long only. The Formula Growth Fund is able to take a longer time horizon, which proves to be extremely valuable.” Fortin, who specializes in consumer products and technology, says it’s a real team effort. There are about 100 stocks in any given fund, with the largest positions driving most of the gain. “The path to getting to be a big position is not always linear. It’s not like you wake up and say, ‘This is a phenomenal idea, this needs to be a topfive position.’ It could start small and then evolve over time. The smaller positions are an entryway. It’s a learning process: by owning them, doing all the work, meeting with them, developing the relationship with the management teams and the companies, you can separate the wheat from the chaff. There can be four companies that on paper look like they do the same thing, but that doesn’t mean the four companies are equal. There’s a big difference between the number one and the number two.” Fortin, a father of three children under the age of ten, is active in the local Montreal community and the long-time volunteer treasurer

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for the fair-trade non-profit store Dix Mille Villages. Despite a busy schedule, he pays visits to individual companies, but he finds the most efficient way to gather market intelligence is on the conference circuit. “In two or three days I’ll meet over ten companies a day in mainly small group meetings. I really enjoy meeting with the companies that we invest with and looking for new ideas. We’re passive, not activist investors, but that doesn’t mean we can’t build a relationship with these management teams that are building some really cool companies and offer our advice along the way.” James Sinclair, a vice-president and portfolio manager who works with John Liddy out of Formula Growth’s New York office, mines the city’s extensive financial ecosystem to contribute ideas to the firm’s investment pool. “You go for a drink or a coffee with somebody in the business and ask, ‘What’s your top idea right now?’ And he or she gives you five minutes on it and then you go to work on it yourself if it seems worthwhile. That’s a very good use of your time because he or she has already spent hours and days on this idea. This has led to some pretty profitable outcomes.” Originally from Ottawa, James Sinclair attended McGill University and started working as an intern at Formula Growth a year before he graduated in 2007. “I used to wear a suit to school, which was perhaps seen as a bit odd at the time, and would shuttle back and forth between McGill and Formula Growth’s offices, which were just across the street. When I graduated I was hired full-time as a stock trader. I would execute John Dobson’s and John Liddy’s trades during the day, and in my spare time I was allowed to look at stocks.” Sinclair also helped to open the firm’s New York office with John Liddy and Cameron Fortin in the fall of 2008, just weeks before the market crash. “We weren’t even settled in and it was just chaos, especially in New York. I was twenty-three at the time and shared an apartment with three roommates, all in finance. By the time the following spring came around, I was the only one left with a job.” The crash taught Sinclair that anything can happen with stocks and stock markets. “People always say a stock could never go this

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high or this low. But having gone through this you realize that a stock can actually go from $10 to $1.50 and then from $1.50 to $90! In these little micro-time horizons that people seem to have these days, they have got a pretty narrow point of view in terms of the potential.” Sinclair says the market crash taught him another lesson: always be ready to take a calculated risk and remain calm. Formula Growth had the ability to buy at the March 2009 low, which few people did because they were just so exhausted and scared. “It’s the only way you can get more than your dollar back in a short period of time. And sure enough, if you were invested in the Formula Growth Hedge Fund, you had more than your initial capital back within nine months, while it took the S&P until about 2013 to get that back.” Sinclair notes that Formula Growth’s investment professionals are basically one team sitting in different places. The various fund portfolios are also effectively the same with different exposures. “Every morning we all send out what we call our traffic to each other, and that basically says, ‘Hey guys, today I’m looking at such-and-such worldwide.’ A one-sentence kind of blurb on what’s going on. And so we know what we’re all up to. At the end of the day we discuss what we did: ‘We shorted this, we bought that. Here’s why, here’s what I’m hearing.’ And that’s helpful too because you can bring perspective to each other. It’s a formula that works well!” Charles Haggar, a vice-president and senior portfolio manager who oversees the Formula Growth Alpha Fund, also sees his main job as populating all the portfolios with the best ideas. “A big positive for Formula Growth is we’ve been around for so long. We all know each other and work well together.” Over the years, the team has basically looked at every single stock that is within the investible universe of market cap requirements and developed a file on all of these stocks. “We’ve looked at them at different times in the economic cycle and this really provides us with a tremendous amount of perspective,” says Haggar. “We also have a tremendous broker network. John Dobson made a huge effort to get

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to know every single regional broker, regardless of size, in America. We continue to have these relationships with them today. This network provides us with really great intel on the earlier stages of companies and management of those businesses. Maybe they share a golf course together or their kids go to the same school. We’ve always viewed them as partners. We want to grow with them, do more business with them, and hopefully grow together.”

Chapter 13

A Foe of Excessive Government “I’ve always believed that the cost, mental frustration, and waste of time caused by unproductive regulatory and government intrusion stifle the entrepreneur and must be challenged.” — John Dobson

As a passionate stock market investor, John Dobson never made any excuses for his defence of the capitalist system as the best way of organizing a nation’s economy. He understood the role of government in providing social services, particularly for the less fortunate; in building roads and schools and providing society with the level of security it needs. But when it comes to business, Dobson, like his father before him, believed strongly that government can be most effective when it steps aside and allows entrepreneurs and investors the fullest opportunity to create wealth, jobs, and the economic development that any society needs. For those reasons, he railed throughout his life against excess taxation and over-regulation. “I’ve always believed that the cost, mental frustration, and waste of time caused by unproductive regulatory and government intrusion stifle the entrepreneur and must be challenged,” he said.

• Capital Gains Taxes • For over forty years, Dobson was a fervent opponent of capital gains taxes, arguing with unrelenting passion that these levies hurt investments and were detrimental to society as a whole. In 2000, he presented a brief to the Standing Committee on Banking, Trade, and

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Commerce and enjoyed a victory the following year when the government partially reduced Canadian capital gains taxes. The Canadian government first introduced a tax on capital gains in 1972, declaring that it needed the revenue to finance the country’s expanding social safety net and that the tax would assure a more equitable taxation system. Between 1972 and 1988, the inclusion rate (the amount of capital gains subject to taxation) stood at 50 per cent. Then in 1988, it was raised to 67 per cent. Two years later, it rose again to 75 per cent. Under sharp criticism from the business community, the government re-established a lower rate of 67 per cent and then reset it again to 50 per cent, where it remains today. In other words, if you have a capital gain of $1,000, half of that sum is taxable. Individuals in the top tax bracket are taxed at approximately 43 per cent, so the tax on a capital gain of $1,000 now equals about $215. That was still much too high for John Dobson. In fact, he wanted a tax rate of zero. “A high rate of capital gains tax is bad for all Canadians, not just the privileged few,” he argued. “As investors, we are interested in wealth creation. That appears to be a bad term in Canada, so bad that it is neither used nor discussed. But I think that everyone accepts that the creation of jobs in the private sector requires someone to have capital. A high capital gains tax seriously eliminates opportunity and significantly contributes to the brain drain.” Dobson noted that what he termed “negative capital policies” could seriously harm the power of compounding interest, which he described as one of the great wonders of the world. He loved to remind people that $1,000 compounded at 20 per cent for forty years, untaxed, becomes $1.5 million. However, $1,000 compounded at 20 per cent for forty years, with an annual capital gains tax of 40 per cent, becomes just $93,000. “Over forty years, the government receives, if [the investor is] taxed annually, $22,000. If the government only collected the tax at the end, it would have $600,000. What has happened here is that an individual ends up with $93,000

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instead of $1.5 million of wealth creation, and the government gets $22,000. It is not a very good deal for anyone.” Insidiously, Dobson explained, during periods of high inflation (generally caused by bad government policy), much of the return on an investment merely represents inflation. “In that instance, a capital gains tax simply represents a tax on inflation, or nominal return at best. There is no regard for real return, and that’s wrong.” Moreover, because of capital gains taxes, many people hesitate to make changes to their investment portfolios, leading to unnecessary losses when securities decline. “This locked-in factor is enormous and experienced by many portfolio owners and managers. There is a big economic loss from staying invested in lower investments and not switching to newer, faster-growing companies.” Some investors are also loath to invest money in Canada, choosing to go offshore instead, Dobson noted. “The biggest negative of all is the loss from entrepreneurs who never get started because of the effects of high capital gains tax. First, for those who choose to remain in Canada, there are not enough “angels” to finance startups because of the lack of wealth creation. Second, Canada loses when Canadians set up in the United States rather than in Canada because of the perceived uncompetitive climate caused by capital gains tax. That correlates directly with job creation.” Dobson argued that the revenue the federal government receives from capital gains taxes is not very significant due to cost and regulations. “The cost for collection and policing must be subtracted from the revenue. Because the capital gains tax is applied over a long time period, it is very complicated to keep score.” In their 2000 appearance before the Senate Committee on Banking, Trade, and Commerce, chaired by Senator Leo Kolber, Dobson and Ian Soutar summed up their opposition to the capital gains tax as follows: “Canadians’ well-being has been substantially lessened by the high capital gains tax that has been imposed by our government. First, the tax significantly reduces the wealth creation process. Second, the lock-in effect of the capital gains tax has badly

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affected returns by keeping Canadians from switching into higher-returning assets. Third, this high tax has either prevented our most talented entrepreneurial businesspeople from getting started in Canada because of a lack of angel financing, or has driven them from the country. A reduced capital gains tax will not just help the rich. It will materially help all Canadians to enjoy a higher standard of living by creating the wealth that is needed to provide our citizens with better education, health care, or whatever else we choose collectively to spend it on.”

• Need for Investment Education • Dobson regretted that the investment process itself is commonly perceived as something limited to the rich. “I strongly believe that this is a very unfortunate perception caused by a lack of understanding of the process. Once you understand the wonderful power of compounding over long periods of time, you realize that the nation is losing enormously by not letting the egg grow to a great size.” Part of the problem, he believed, is that people are not educated at an early stage about the benefits of wealth creation. “There is a perception, generally, that if people get rich they are getting rich by some shady activity, whatever it may be. I also think there is a mentality in this country of envy – if the government does not do it for us, it is not right – and a mentality of dependence, where people would rather have the government do things for them than do them themselves. However, it is unfortunate that we do not have a more positive attitude about this issue. We seem to pride ourselves on writing articles in newspapers about people’s salaries, about how much money they are making, and about their stock options. It is a very negative spin that we seem to put on it collectively, rather than putting a positive spin on it and saying ‘Is it not wonderful that someone is getting rich, because if he or she gets rich it will benefit all of us.’” Dobson pointed his finger at schools and colleges, where entrepreneurship is not often taught. “The economists – my dear friends

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– are giving a tremendously misleading statement about facts of life to our students in the schools. They say that in economic-growth theory, innovation and technology are not part of it. We at Formula Growth have been investing for over fifty years in companies that are growing. Here is what is going on in the practical world.” The principal argument for a capital gains tax has traditionally been fairness and equity. But in Dobson’s view, it had to do with a larger pie. “If you talk to the taxi drivers in Montreal, they want business to boom. They want to see some more fat cats. There are not enough of them around. If you talk to the beggars and the various people in the street, for them to get off welfare they need for someone to make the pie bigger, particularly in the private sector.” Dobson believed the best way to help society’s disadvantaged is to make the safety net better and bigger, and the only way we can do that is to increase the size of the economy. “What are we going to do to increase the pie? We have to create some more productivity and wealth, and to do that, we have to have some capital.” In Dobson’s ideal society, there would be much less government and an incentive system for the private sector to play a bigger role. “This issue about fairness gets in the way of making the economic pie larger for everyone,” he said. “I believe that we’d all be better off if Canadians understood the process of wealth creation and the benefits they would derive from it. Let’s face it, in the world all is not fair.” In the presentation to the Senate Committee, Dobson listed Canada’s chief attributes: a very small population, lots of fresh air and water, a low crime rate, and a population that is generally sympathetic to looking after the poor. “There are many wonderful things about Canada that have kept us all here, not just money. We have well-educated people and a great labour force. Many people here speak more than one language. We have all kinds of advantages. This is a very attractive place. However, in my opinion, where we are really uncompetitive is in this issue of capital gains tax. Yes, some of the money will go out, but more of it will be invested here. In general, I am very certain that we will be better off as a result of a lower capital gains tax rate.”

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• Battles over Securities Regulations • Dobson believed that he probably could not have started Formula Growth Fund in the twenty-first century because of the capital gains tax and increased regulation. “I came out of industry. I had not been in the business. The Quebec Securities Commission would have thought that I probably would not be very suitable to run a fund.” In fact, over-zealous securities regulation and government red tape had long been sources of frustration to Dobson. From Formula Growth’s earliest days, he was engaged in a tug-of-war with Quebec securities regulators over whether Formula Growth should be subject to the same oversight as mutual funds several times its size with a wide distribution to the public. From the outset, Formula Growth saw itself as an “investment club,” perhaps larger than most, but definitely not a mutual fund. It had no salesmen, and it paid no commissions to anyone for the sale of units. It was like a club because nobody could simply walk in off the street and buy units. “In fact, we knew every client who invested in the fund,” says CEO Randy Kelly. “We were ahead of our time in this respect. Today, financial institutions and others are ‘getting to know their clients,’ preparing personal profiles, and so on.” The fund’s success quickly attracted the attention of the Quebec Securities Commission (QSC) – since 2004 known as the Autorité des marchés financiers (AMF) – which argued that Formula Growth was essentially a mutual fund and, as such, it should be required to issue a prospectus that pointed out the risks to investors. “The QSC was very alarmed when we had a fair chunk of the fund in Japan,” recalls Walter Cottingham, who helped to establish Formula Growth in 1960. “In those times, Japan could impose currency controls, and the Commission wanted us to put in our prospectus, in big print, that there is a danger that you could not get your money out of Japan. I remember hashing that out with the QSC.” The give-and-take with the QSC went on for years, with Formula Growth eventually being forced to acquiesce and issue a prospectus.

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But it was not without a fight. On 6 September 1963, the three managers – Dobson, Walter Cottingham, and John Rook – wrote to QSC commissioner J.B. Doran, arguing that Formula Growth shouldn’t be forced to issue a prospectus. “After speaking with executives of several of the large funds in Montreal, they said the common opinion was that Formula Growth was an investment syndicate rather than a mutual fund,” the managers wrote. “It had no sales load or salesmen. It was far below the $10 million in assets generally accepted as being a minimum for an economic business operation. Further, without the use of salesmen and a sales commission, it was felt that we would never attain this figure. The fact that the Formula Growth Fund units are not transferable gives the management absolute discretion as to what type of person will be permitted to become a member of the fund.” The fund managers also balked at a QSC concern that some investors could be hurt by Formula Growth’s plans to borrow money to invest, and by its intention to levy a “performance fee” of half of 1 per cent per year (up to a maximum of $50,000) if the fund performed 5 per cent better than the Dow Jones Industrial Average during any calendar year. “We feel that in the draft prospectus, we have bent over backwards to spell out our method of operation and have provided ‘full disclosure.’ Perhaps we should put the information about leverage in capital letters or write a new leverage section. We feel it is not fair to all our unit holders to be put in a position where collectively they are unable to take advantage of prudent operations just because some individuals might get hurt. The big thing is to make sure that all unit holders understand what they are buying.” Because 20 per cent of the fund belonged to the managers and their families and much of the rest belonged to their friends and associates, with unit-holders investing an average of $9,000 apiece, Dobson, Cottingham, and Rook argued that they should be trusted to manage other people’s money as if it were their own. “We would not wish to be put in a position where we ask people to invest with

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us but are not able to do for them what we do for ourselves. People can invest dollar for dollar on the same basis as our own money. Theoretically, if the fund is denied the intelligent investment practice of a conservative degree of leverage, we should take our own money out of the pool and invest it individually.” “As far as we are concerned,” the trio concluded, “we are members of a private syndicate, albeit a large one in numbers (although I am sure that there are much larger private syndicates in dollar amount), who have banded together to increase our access to information and influence in obtaining favourable participations in attractive new issues throughout the world.” Despite their protests, Formula Growth was ordered in the mid1960s to file a prospectus, albeit a thin one, which it continued to do for several years until reaching a compromise with the QSC in the 1970s. It came to that agreement with the help of Stuart (“Kip”) Cobbett, who was Formula Growth’s secretary and lawyer. “I was successful in negotiating a specific arrangement with the QSC that permitted Formula Growth to operate without filing a prospectus,” says Cobbett, a retired partner at law firm Stikeman Elliott and former chair of McGill’s board of governors. “It was not a private investment club in the sense that it had members of the public as unit holders. But the QSC recognized that it was a very limited universe of people that were investing in Formula Growth, and they were prepared to treat it on a different basis than a normal mutual fund.” Nevertheless, the damage had already been done. Even though it stopped issuing prospectuses, Formula Growth was subject to QSC rules and regulations for years to come. René Catafago, the company’s former CFO, says, “When we would make presentations to the QSC, we’d say we were a private fund, that we’re not subject to all those rules and regulations of a particular fund. But they’d say we were because we had a prospectus thirty years ago. Even though we never used one, once you’ve issued a prospectus, you’re bound to have the same rules and regulations. We couldn’t get [around] those specific regulations.”

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The legacy of the QSC’s requirement of a prospectus resulted in more paperwork, staff, and expense for over forty-five years. “We used to manage a lot of money with very little staff because the regulations were not the same in those days,” says Catafago. “We used to do business on a handshake. If somebody wanted to come into the fund, there wasn’t even a subscription agreement. Now there are a lot of people in administration because there’s so much red tape.” Catafago used to get a lot of requests for administrative information about Formula Growth from brokerage firms, investment banks, and other interested parties. He admits that he often would simply ignore them, figuring that if they really needed a written response, they would ask a second time. “And it worked! A hallmark of Formula Growth is that our word or our handshake is our bond,” he says. “We do not need the extra administrative burden of writing everything down, especially with the expensive help of lawyers. When we say we are going to do something, we do it.” Employees of Formula Growth are also very large owners of its products, which ensures the firm’s behaviour will always be beyond reproach, Catafago adds. “There has never been a number out of place. We have been able to focus on just one thing, and it is the wealth of our clients. And we have done a damn good job of it, because a lot of people have made a lot of money with us.” Dobson believed that over-regulation was wasteful and misguided, not to mention counterproductive. “What I think the regulators are doing wrong is that they’re taking money raised from fees and levies and building nice offices and teams of sleuths to investigate honest companies. What they should be doing instead is using that money to educate the public, beginning at a young age, on how to invest – and especially on what not to do when they invest. I don’t see anything on billboards or on TV telling you how to invest wisely and avoid being cheated. As a result, we still have crooks like Bernie Madoff, who take advantage of people and hurt public confidence in investing. It’s not right.”

Chapter 14

Supporting Entrepreneurship and the Free Enterprise System “My father showed me how important it is to use all the means at one’s disposal to create opportunities for others and contribute to a better society.” — John Dobson

John Dobson has been described as “the venture capitalist of entrepreneurship education” in Canada – someone willing to buck tradition, take calculated risks, and change the game. And for good reason. Through his John Dobson Foundation, he funded dozens of initiatives across the country – from university centres offering courses in entrepreneurship and outreach programs in the community, to thinktanks promoting free markets and low taxation. His philanthropic support and willingness to try new approaches have helped to change the way entrepreneurship is taught and promoted, and spawned generations of new entrepreneurs. “John Dobson was a visionary and outstanding leader for entrepreneurship in Canada and across the world,” says Teresa Menzies, a professor of management at Brock University’s Goodman School of Business. Menzies, who published a series of national reports on entrepreneurship education and entrepreneurship centres in Canada funded by the John Dobson Foundation, adds: “His ideas and support ignited and fuelled a pragmatic approach to universities and entrepreneurship development.” “John Dobson was almost unique in the way he understood the need to instill entrepreneurship in young people, particularly at the

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college and university level, by giving them the tools and stressing that it doesn’t have to be related to a business degree,” notes Kelvin Ogilvie, a retired Canadian senator. “Many of John’s proteges have become very successful entrepreneurs.” Dobson said the creation of his Foundation was a natural outgrowth of a lifelong passion for investing in promising and entrepreneurial companies and a fitting way to give back to the community. “From a very young age, my father gave me a deep respect for free enterprise and self-reliance. At the same time, he showed me how important it was to use all the means at one’s disposal to create opportunities for others and contribute to a better society.” For Dobson, the formula was simple; a more entrepreneurial country meant more jobs and more wealth for everyone. He was driven by a few simple goals: to increase opportunities for creating entrepreneurs, leading to more jobs; to get more people to create enterprises; and to better understand the process of enterprise creation. Dobson’s main goal was to give people an opportunity, a chance to reach their full potential. If he saw people with talent, he tried to give them an opportunity to fulfill their dreams. He was constantly on the lookout for somebody who was an innovator and wanted to do something different. And Dobson believed that universities have a role to play in fostering entrepreneurship. “For years, John was ahead of his time because, in the early days, there was not a significant academic body of knowledge supporting that word ‘entrepreneurship’ in universities,” says Ogilvie. A former president and vice-chancellor of Acadia University in Wolfville, Nova Scotia, he led the development and implementation of the acclaimed Acadia Advantage Program. “It was considered something for others to do. Universities did not really embrace it until recent years. Now, it’s part of the academic curriculum in virtually every school, and it has gained a lot of legitimacy.”

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• Creating the Foundation • Dobson decided to take a more formal approach to educating the public about the free enterprise system and entrepreneurial activities in Canada by establishing the John Dobson Foundation. Created in 1986, the Foundation was initially endowed with a donation of $1.8 million from Dobson’s personal investment portfolio, much of it generated by a highly successful investment in Jackson National Life, a US insurance company. Joining Dobson as the Foundation’s first directors were David Laidley, Ian Soutar, and Jacques Tétrault. The Foundation strives to stimulate the formation and growth of small companies by promoting tax incentives, less bureaucratic interference, and a wider understanding by the Canadian public of the positive impact that new companies have on job creation. The basic mission of the Foundation is to educate the public about entrepreneurial activities and to make Canada a dynamic and entrepreneurial country. Over the years, its emphasis has evolved more toward promoting entrepreneurship, with a secondary focus on supporting think-tanks that encourage free-market thinking, and a third mandate to promote investment education. Today, the Foundation has grown to over $90 million, bolstered in part by a $30-million infusion from the estate of John Dobson (the bulk of his estate) after he passed away in 2013, and strong returns from investments in Formula Growth’s various funds. “The Foundation has increased its assets substantially since 2013 thanks to the performance of its investments in the Formula Growth Fund and our hedge funds,” notes Ari Kiriazidis, Formula Growth’s chief financial officer and chief compliance officer, who serves as the Foundation’s president. “These returns have consistently exceeded the Foundation’s annual 3.5-per-cent minimum spend, which ensures it will be around for a very long time.” In 2019, the Foundation ranked 112 in the BIG Online Top 1000 Canadian foundations by assets. Kiriazidis, who joined Formula Growth in 2001 after obtaining a bachelor of commerce degree from McGill University, is one of

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six directors of the Foundation, along with Formula Growth CEO Randy Kelly; former Formula Growth executives René Catafago and Kim Holden; executive director of the Montreal Economic Institute Michel Kelly-Gagnon; and president and CEO of Pembroke Private Wealth Management Ian Aitken. The Foundation meets on a regular basis to review current and potential projects for support. “Our mission has basically been the same since the beginning,” notes Kiriazidis. “It has three main pillars: entrepreneurship, free market, and investment education. Much of the focus now is on supporting initiatives that encourage young kids to consider entrepreneurial careers. It’s important to reach them in their formative years. We want to get these kids interested in learning, in expanding their horizons – figuring out that there are possibilities other than going to work for large companies. We want to emphasize to them that they can do something on their own if they have a great idea. We believe that reaching the younger generation is key because they are the future leaders, the future entrepreneurs. We want to embed an entrepreneurial mindset into them at a young age.” Kiriazidis says that the John Dobson Foundation has played a major role in promoting entrepreneurship and making it more mainstream in Canada, as is reflected by the large number of accelerators and support networks throughout the country, as well as the popularity of TV shows about entrepreneurship such as the CBC’s Dragon’s Den. “If John Dobson were still around, he would be thrilled. He’d be over the moon because when he started in 1987, entrepreneurship was basically a four-letter word. People weren’t that interested and there was little understanding of what it was all about. So to me, John was a visionary. He was the lone reed in the wilderness when he said, ‘Wait a minute, here’s a great option. You can start your own company!’ Nowadays it’s completely changed, and Canada is the better for it. There are so many Canadian successes that are now emerging thanks to this greater acceptance of entrepreneurship.” Kiriazidis believes that new technologies have also helped to significantly boost entrepreneurial efforts in recent years. “Thirty years

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ago, entrepreneurs wanting to start their own company basically had two options: provide a service such as consulting, or a new manufacturing process that largely required outsourcing to low-cost markets such as China. Today, many entrepreneurial companies are based on coding or creating a new App. If you know how to program and you have a great idea, you can start your own little business that could potentially grow into something much more significant. So there are a lot of really cool things that are happening. All you need to do is have a great idea and find an MBA student that can help you balance the books and you’ve got a business!” Because it wants to reach potential entrepreneurs in their formative years, the John Dobson Foundation has long focused on supporting entrepreneurship centres in universities across the country. “We have tried to foster an educational environment that will set the stage for creating productive jobs for Canadians,” explained Dobson. “One of the major activities within this mission is to encourage educational institutions to expose their students to the benefits and opportunities of pursuing entrepreneurial activities. Historically, over 90 per cent of new jobs come from small companies.” To date, the John Dobson Foundation has assisted in supporting entrepreneurship programs in more than twenty universities and colleges across Canada. It has also sponsored several entrepreneurial-related competitions, including the Enactus Student Entrepreneur National Competition, the SHAD-John Dobson Entrepreneurship Cup, and a competition at Loyola High School in Montreal.

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Support for Quebec Universities Separately, Formula Growth Limited has also been a supporter of business programs at Canadian universities. In 2014, after John Dobson’s death, it announced a $1.1-million donation to Concordia, Bishop’s, and McGill, as well as HEC Montréal. The money is earmarked to support several initiatives: the John Dobson-Formula Growth Investment Room at Concordia’s John Molson School of Business; the DobsonLagassé Entrepreneurship Centre at Bishop’s; the Dobson Centre for Entrepreneurship at McGill’s Desautels Faculty of Management; and the Dobson/Formula Growth experience as part of the Parcours entrepreneurial Rémi-Marcoux at HEC Montréal. “Formula Growth’s $1.1- million gift is a vote of confidence in higher education. It is an investment in our city, in Quebec, and Canada,” said Formula Growth CEO Randy Kelly. Formula Growth’s investment in Quebec’s landmark institutions is designed to foster new thinking, propel business research, and stimulate economic growth in Montreal, Quebec, and Canada. Said Marc Weinstein, vice-principal of Development and Alumni Relations at McGill University: “John Dobson recognized that McGill-based ideas have the potential to be transformative on a global scale; it is our mission to integrate teaching, research, and practice to move these ideas into action with maximum impact. Mr. Dobson’s great support and vision have helped our McGill Dobson Centre for Entrepreneurship achieve extraordinary results, and with this generous gift, we will continue to educate our future entrepreneurs.”

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Formula Growth has also been a supporter of Concordia University’s Kenneth Woods Portfolio Management Program, launched in 2000 to provide a select group of undergraduate business students with hands-on training in investment management by working with a real-life portfolio of over $2.8 million. Randy Kelly is a member of the Client Committee, which consists of ten senior investment management and management consulting professionals. The role of the committee is to ensure that the fund managers are investing the money in a professional and prudent manner. Several Formula Growth portfolio managers have acted as mentors for the program, including Mike Gentile (retired) and Tony Staples, portfolio manager of the Formula Growth Fund. They help to bring a practical approach to the financial theory students learn in class.

In the John Dobson Foundation’s early years, many of these programs were assessed and evaluated for the purposes of Foundation support by the late Norm Keesal, a former professor at McGill’s Management Institute and a trusted confidant of Dobson’s. “After I retired, John asked me to help the John Dobson Foundation set up entrepreneur institutes similar to the one at McGill in other institutions across Canada,” said Keesal, who attended Harvard Business School at the same time as Dobson. “Other universities had started to approach him, and he wasn’t sure exactly where to go. I spent much time in the Maritimes visiting the schools that were asking for help and coming back and telling John where I thought he ought to put his money.” Keesal described Dobson as a man who always put his money where his mouth was. “He was one of the most practical and vigorous supporters of Canadian growth by backing an incredible range of programs and activities designed to help our bright young people develop as the builders of our country by building companies and programs of their own.”

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Norm Keesal and Dobson had crossed paths for decades. After graduating from Harvard, Keesal went to work for two years with investment counselling firm Stein Roe & Farnham in his hometown of Chicago. “We had some very good clients, including two former US presidents. It was a big operation. I thought I was going to pass out when I realized how much money I had been responsible for. Hundreds of millions! But I would do research and came to the conclusion – probably like John did – that sitting around watching other people do things was no good for me.” In 1954, a former classmate asked Keesal to partner in a small company he had started in Montreal. Keesal gave his notice and drove up to Canada. He left that venture to help another friend run Cartier Chemicals, a company specializing in industrial and sanitation chemicals. Soon he started teaching part-time at the Executive Development Course run by Bill Turner. “At the same time, John started to teach there, and we became much closer friends. We’d have dinner every time we’d both be teaching our classes.” Working as a consultant to the John Dobson Foundation, Norm Keesal acted as a source of information about how things were done, evaluating what the schools were doing with their grants and guiding them. “Our focus was first and foremost on student involvement. We wanted to get them involved and interested in what’s going on. We wanted to help get things started. We didn’t want long-term commitments. The initial push is always the hardest, but that’s where we come in. One thing universities don’t do very well is get students ready for the real world, so we pushed that pretty hard.” The Foundation has continually emphasized the need to get faculties, outside of business schools, involved in entrepreneurship education. “We have found that the majority of successful new ideas and innovations come from entrepreneurs who attended nonbusiness school faculties,” said Dobson. It turns out that business students are not natural risk takers. In fact, statistics show that it is non-business students who are most likely to go into business for themselves. “Simon Fraser was one university that liked the idea of

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getting courses and programs on entrepreneurship into the other faculties,” said Keesal. “They bought in. We gave them some money to start, and a smaller amount for the next two years to help them get it going.” McGill is another example. Some years ago, it started offering an entrepreneurship course for engineering students, which has evolved into a minor in entrepreneurship. The University of British Columbia (UBC) also has a program that mixes business and engineering students, noted Keesal. “Engineers have ideas and don’t know what to do with them. Business students have no ideas, but would know what to do with them!” Nevertheless, Teresa Menzies says that most Canadian universities still have a long way to go in terms of offering entrepreneurship courses to non-business students. A census she prepared in 2009 showed that only 2.4 per cent of Canadian university students took an entrepreneurship course in the 2008–09 academic year. “I know that John was disappointed, as am I, in our slow progress toward getting entrepreneurship as a core course for every student at every university in Canada. This should be the norm. It is fast becoming the norm in some countries. But Canada, which used to be in the forefront of entrepreneurship education, looks like it could be left behind. What do we do? We are up against prejudice, tradition, politics, turf wars, and so on. That said, much of the success achieved to date is due in large part to John Dobson. He was the charismatic leader who supported and challenged the Canadian entrepreneurship group. What John Dobson did was phenomenal. He was unbelievable. In the States, there’s the Kaufman Foundation that has been doing this for a very long time. But in Canada, it’s the John Dobson Foundation.” The Foundation also promotes mentoring and encourages college students to get involved in their communities, and members of the business community to collaborate with local colleges. “Our most recent new successes have come from our projects involving precollege students,” noted Dobson. “For mentoring, the Foundation

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looks to support and promote passionate individuals who in many cases have practical business experience. Students respond to, get motivated by, and learn most from people who have created and run businesses.” Throughout his life, Dobson had been reluctant to give large endowments to universities, since he was skeptical that money donated this way would be well invested or wisely spent. “John, in a sense, viewed universities as quasi-governmental organizations and was suspicious of bureaucracy, as we well know,” explained Randy Kelly. “That’s why he never funded a university chair, preferring instead to target money for specific programs, which can be carefully monitored. He also was not impressed with the rather paltry rates of return earned by many university endowment funds, and felt it was better for him to earn a much higher return and donate the proceeds accordingly.” Dobson also believed new activities should be funded by his foundation for only a limited number of years. “Our view is that if they are successful, projects will be self-sustaining or they will attract others to support them,” he explained. “As a result, the Foundation can exit and find new entrepreneurial projects that need funding. We’ve never wanted to create a dependency.” Dobson ran the Foundation to achieve maximum impact while keeping costs low. There is no fulltime administrator, and Formula Growth’s regular staffers volunteer their time to provide all the support, thus assuring that funds are available for projects rather than for administration.

• The McGill Dobson Centre for • Entrepreneurship One of the first initiatives undertaken by the John Dobson Foundation, and which remains a centrepiece today, is the Dobson Centre for Entrepreneurship at McGill University, established in 1989. However, finding a director took some time, in part because of Dobson’s insistence that the Centre be led by someone with practical experience.

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When a suitable candidate could not be found, Dobson suggested Montreal businessman Peter Johnson (whom Dobson had met through David Laidley, an old friend and a former chairman of Deloitte Touche). Johnson had no academic background, but he was a long-time entrepreneur who had recently sold his two companies – equipment-rental firm Perco Ltd., and Aqua d’Or, a water-treatment concern. Johnson was about to buy another company when Laidley, who had provided Johnson with professional services over the years, approached him about leading the McGill project. Dobson and Johnson immediately clicked, and Dobson decided he had found his man. “My interview with the dean of the management faculty was about thirty seconds long, since John Dobson had recommended me,” Johnson recalls. “John gave McGill about $1.4 million for the Centre, and the Zeller Family Foundation, which I chaired, gave another $1 million dollars. The mandate was to teach entrepreneurship and start the Centre.” Dobson’s judgment proved right on the mark. Despite Johnson’s lack of university experience, he was named by students as the best teacher in the management faculty at the end of his first year. Johnson has no regrets about taking on the job. “David Laidley asked if I would take two years out of my life to work at McGill, and I ended up spending sixteen years there,” he says. When the Dobson Centre for Entrepreneurship was set up, there were only two other universities in Canada that did entrepreneurship mentoring: Acadia and Brock. “John basically funded the three of us [McGill, Acadia, Brock] right off the bat,” says Johnson. “Now there are two dozen universities with programs like this.” David Lank joined three years later. “The emphasis was on experience rather than theory,” he says. “The Centre became the finest centre for entrepreneurial studies in North America thanks to its courses, distinguished professors, and outstanding lecturers from across McGill. It was also innovative by combining arts, music, and philosophy with entrepreneurship.” UBI Global has ranked the McGill Dobson Centre for Entrepreneurship number 8 in the

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category “World Top Business Incubator Managed by a University” (2017–2018). Lank, a long-time director emeritus of the Centre, first met John Dobson nearly fifty years ago when Lank’s father was chairman of DuPont Canada. Dobson’s promotion of entrepreneurship was particularly important in Montreal at a time when it was losing its attraction as a head-office city and business graduates could no longer depend on finding good corporate jobs locally. “John was very enthusiastic and a risk taker, a really powerful, positive influence,” says Lank. “He trumpeted the importance of SMEs [smalland medium-sized enterprises] and entrepreneurship in a city where universities are trying to satisfy a head office market that’s no longer there. He wanted to introduce concepts of entrepreneurship at the high-school level. He believed entrepreneurship is really important.” Lank, a founder of Helix Investments, a large venture capital firm, worked for eleven years at the Dobson Centre for Entrepreneurship and also sat on the board of advisors of the John Dobson Foundation. “I pushed for John Dobson to become a brand, to do things under his name. He made a huge contribution, and we’re all indebted to him.” The Dobson Centre for Entrepreneurship has become the symbol of what can happen in a research-oriented institution when practical people are given the support and encouragement of a practicing visionary. Thousands of students have been taught, inspired, and polished through their interaction with real people with real experience, and through sharing the accumulated wisdom of the business world and of their professors. The Centre today has a core team of educators and coaches with a wide array of practical experience and research knowledge, including former entrepreneurs, venture capitalists, and researchers in the field of entrepreneurship. Since its founding over thirty years ago with John Dobson’s support, it has become the hub of entrepreneurial activity at McGill, with a mission to identify, teach, and develop world-class entrepreneurs through tailored education, applied entrepreneurial frameworks, and iterative mentorship. The Centre has played

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a central role in advancing entrepreneurial innovation and discovery through its flagship annual startup competition, the McGill Dobson Cup, and other initiatives that have followed, including the McGill X-1 Accelerator Overall. The McGill Dobson Centre for Entrepreneurship has offered mentorship to more than 2,200 McGill entrepreneurs, and launched more than 150 successful startups that today employ over 1,350 people and have raised over $200 million in venture funding. Angela Burlton was involved with the Centre from the late 1990s until she passed away in 2018. Her father-in-law, Roger DeSerres, was an investor and an early board member of Formula Growth. Burlton herself first met Dobson in the late 1970s and was taken with him from the start. “He was very engaged and had a real heart of gold,” she said. After obtaining her CA, Burlton joined McGill’s management faculty in 1999, where she was adjunct professor of entrepreneurship and accounting, and took over leadership of the Centre from Peter Johnson. “Our goal was to help people become more familiar with what it is to be entrepreneurial,” she said. Burlton noted that the number of students who want to launch their own companies right after university has grown in recent years. She said that because of a shift to cheaper markets, people have to be more ingenious about how they earn a living. Her classes attracted different kinds of students. She explained, “There are the born entrepreneurs. You could drop them in the middle of Shanghai and, within two weeks, they’ll have created a business. Then there are the entrepreneurs who need a little help to get started. And the third type is those who will always work for employers but will bring an entrepreneurial edge to their work.” All told, the John Dobson Foundation has helped more than sixty organizations involved in entrepreneurship in Canada. “Sometimes John wouldn’t give money to certain people for various reasons, but he made decisions quickly,” says Peter Johnson. “He had an unbelievable passion of more, more, more! He was always willing to take a chance and try things.”

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In Johnson’s view, Dobson drove a model to be emulated by the rest of the world. “It’s all about changing the job mix to more service-oriented fields and to have more entrepreneurial companies. Manufacturing will keep going to China and India, which have over two billion people and much lower labour costs. We need to educate people to change the job mix with more services. The Quebec and Ontario governments, to their credit, have centres across the provinces that provide mentoring and help for people to start their own businesses. The Business Development Bank of Canada has done an extraordinary job over many years, and John Dobson also funded various projects through them.” Johnson notes that when he and Dobson used to go to entrepreneurship conferences across the country, the two dozen universities that the Foundation funded were the kingpins. “John Dobson was at the forefront of this in Canada. No one else has done work like this. Sometimes he’d call his friends from across the country and share in the making of documentaries of successful entrepreneurs, which are shown in class.” The Dobson Centre for Entrepreneurship is also involved in outreach in the broader Montreal community, with students mentoring hundreds of people at a time to help them start businesses. Building on this, the John Dobson Foundation helped to launch a centre called YES (Youth Employment Services), a non-profit organization that provides English-language support services to help young Quebecers find jobs and start businesses. YES also offers advice to young people starting businesses with the help of mentors, most of them retirees, and holds an annual entrepreneurship conference that often showcases business owners who started their enterprises at a young age. The John Dobson Foundation further enhanced its support for McGill University in July 2017 with a donation of $2 million over ten years – its largest gift to the school yet – to fund the McGill X-1 Accelerator program run by the McGill Dobson Centre for Entrepreneurship. Said Dobson Foundation chairman Randy Kelly,

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“McGill was always close to John’s heart and he would be very pleased with the continued commitment.” Launched in 2015, the McGill X-1 Accelerator is an intensive ten-week summer program designed to accelerate the growth of later-stage McGill startups toward investment readiness and launch. The program runs annually from June to August and is open to teams, of which at least one member must have an affiliation to McGill, either as a student, a recent graduate, or a faculty or staff member. The overall curriculum builds upon the MIT startup methodology of Disciplined Entrepreneurship, an integrated and proven framework for developing an innovation-driven product towards launch. The McGill X-1 Accelerator culminates with a series of demo day events in Montreal, Toronto, Boston, New York, and San Francisco, where teams have the opportunity to pitch their ideas to groups of McGill alumni, entrepreneurs, and investors. “This program is well aligned with our mission because it is more student-focused, as opposed to supporting the organization structure,” says Ari Kiriazidis. “We want the money to get to students so they don’t have to have a summer job but can bring their ideas on the road. John Dobson always said he didn’t want to pay too much for infrastructure: he wanted to get the money to where the rubber meets the road, so to speak.” The donation from the Dobson Foundation came during a period of crucial development for the McGill Dobson Centre for Entrepreneurship, which resides in the Desautels Faculty of Management. Isabelle Bajeux-Besnainou, Desautels’ Dean, remarked at the time, “Through the vision and generosity of the John Dobson Foundation, the McGill Dobson Centre for Entrepreneurship is affirmed as the leading hub for entrepreneurship on campus. In classrooms, research labs, and across the University, McGill is full of ideas and talented individuals driven to innovate. Thanks to this donation, the McGill X-1 Accelerator will catalyze our community of innovators and entrepreneurs.”

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Gregory Vit, former director of the McGill Dobson Centre for Entrepreneurship, noted that it has played a central role in creating young McGill entrepreneurs. “Many recent McGill startups have had an important impact on the economies of Montreal and Quebec. This significant gift will ensure that we continue to serve the vibrant entrepreneurship culture at McGill. I’m highly confident that our entrepreneurs will have a major positive impact on the planet.”

The Dobson Centre for Entrepreneurship’s First “Unicorn” In 2019, the McGill Dobson Centre for Entrepreneurship marked its first “unicorn” when Sonder, a tech-driven hospitality startup founded by former McGill student Francis Davidson, reached a valuation of more than $1 billion. Davidson entered his company – then called Flatbook – into the McGill Dobson Cup Startup Competition in 2014 while studying philosophy and economics. Flatbook didn’t make it to the finals, but with the help of Tim Tokarsky, a Dobson Cup judge and co-founder of the McGill X-1 Accelerator, Flatbook led to Sonder, a company that leases, designs, furnishes, and maintains higher-end properties with 24/7 on-demand service and high quality standards. It now has an inventory of more than 8,500 spaces in twenty cities and projected revenues of $400 million in 2019. Davidson left McGill before graduating to set up shop in San Francisco but continues to invest in the Dobson Centre through mentoring other startup leaders. In 2018, Sonder hosted a demo day in its San Francisco offices, giving startups from the McGill Dobson Cup and the McGill X-1 Accelerator the opportunity to pitch and connect with successful McGill alumni in entrepreneurial and investment circles. “I am fortunate to have had mentors who believed

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and invested in me, including ones I met through McGill, and to now have the chance to give back through mentoring upcoming entrepreneurs and innovators,” Davidson said in an interview with the McGill Reporter. “I encourage all young entrepreneurs to push the boundaries of what’s possible and never be satisfied with the status quo.”

• Giving Students the Advantage • The John Dobson Foundation was instrumental in turning Nova Scotia’s Acadia University into a showcase for entrepreneurial education in Canada. It all began when long-time entrepreneurial educator Chris Pelham met John Dobson in 1997 through Acadia fundraiser Harvey Gilmour. “Harvey had asked John for financial support to computerize Acadia’s campus,” recalls Pelham. “John said no, but offered to support anything in entrepreneurship, so Harvey asked me for ideas.” The result was key financial support for the Acadia Centre for Small Business and Entrepreneurship (now called the Acadia Entrepreneurship Centre), a non-profit organization affiliated with the university that provides a range of leading-edge entrepreneurial programming. The Centre innovated by reaching out to students in all disciplines and helping them develop the skills and attitudes necessary to think and act entrepreneurially. The overall objective is for students to pursue personal success, says Pelham, who became the Centre’s second executive director in 1991. Pelham was surprised to discover that business students at Acadia were among the least likely to embark on a small business career. Only divinity students showed less interest. “Business students were not interested in becoming entrepreneurs. Music, science, and kinesiology students had a higher interest,” says Pelham. With that in mind, Pelham wanted to find a way to expand the concept of entrepreneurship across the university and to dispel

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misconceptions that it was attempting to teach students how to use business to take advantage of others. “We argued that it’s more complicated than that; we’re teaching a life skill,” he recalls. He made a proposal to Dobson, explaining that entrepreneurship is not only about business; it’s also about developing students’ capacity to take risks, to make decisions, and to take some action. “For example, in music, you don’t just learn theory; you learn how to play an instrument and how to take it apart, tune it, and make it better. It’s the same with entrepreneurship.” Chris Pelham arrived at Formula Growth’s offices with Harvey Gilmour and an Acadia student, armed with a PowerPoint presentation. “I left it up to Harvey to negotiate. Harvey and John were trying to figure out a dollar figure, and it wasn’t going anywhere. Then the Acadia student put her hand up. Everybody thought she had a solution to the impasse. But all she did was ask if somebody would pass the cookies. That broke the ice! We got $125,000 for three years and a promise to help raise more.” That marked the beginning of a fifteen-year relationship between Dobson and the university. He supported a range of activities that Acadia has undertaken to show that entrepreneurship is not just for businesspeople. “From day one, our mantra was ‘Entrepreneurship is the development of a life skill,’” says Pelham, who was awarded the 2005 Life Achievement Award from the Canadian Council for Small Business and Entrepreneurship (CCSBE) for his contribution to the development of entrepreneurial education. But it was not smooth going, especially at first. “We got laughed at a lot in the beginning, even ridiculed,” says Pelham. “We didn’t always have successful ventures with John’s money. We went back and said, ‘This is what we’re trying to do, we’re getting ridiculed . . .’ and he continued to support us. He said this is the right way to develop the entrepreneurship culture. John even went back to his alma mater, Harvard, and said, ‘Look, if you guys want to know how we’re developing entrepreneurship at the university level, talk to Acadia.’ Lots of places have adapted our approach. We are no longer laughed at. Entrepreneurship is now seen as a life skill.”

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Kelvin Ogilvie, a retired Canadian senator and Acadia’s former president, says the Acadia Entrepreneurship Centre has been very successful in involving undergraduates in small businesses around the university. “It tried to trigger entrepreneurial instincts among students, to see what the challenges were. These students would help with the business’s early business plans, websites, spreadsheets, etc. (AEC) is a separate entity, managed outside of any academic department, and its employees were not direct employees of the university.” In 1996, Ogilvie introduced the Acadia Advantage Program, making his university the first in Canada to be totally wired. Each student was provided with a laptop or desktop computer and an Internet connection to each desk. “At that time, students began to undertake more entrepreneurial activities. Software development in the music school, for example, was very successful. There was a natural pull to Acadia for entrepreneurship.” Ogilvie wanted to find a way to raise awareness about the program among other students to encourage them not to be afraid of developing a business. “We launched a competition across all faculties for entrepreneurship, which was supported by the John Dobson Foundation.” In 2008, Chris Pelham helped to organize a colloquium on entrepreneurial education and invited university and community college educators from across the country to Acadia to learn all about the good, the bad, and the ugly. “We thought it would be wonderful to have John make a presentation to sixty or seventy educational institutions. He agreed, to our surprise, but on one condition: that he would stay for an international conference on entrepreneurship being held a few days later. I was responsible for his agenda for four to five days, and we had a grand time. He was opinionated and assertive, but he was a pretty sensitive and fair guy as well. Acadia gave him an honorary doctorate, and I was asked to direct and give the citation, and I’m not an academic. He was taken by the fact Acadia would allow that.” Dobson did not want his name associated with initiatives at Acadia, but a Dobson lecture series was developed and incorporated into faculty programs.

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Dobson also became involved in the Atlantic Institute for Market Studies, an independent, free market–oriented think-tank based in Halifax, founded by economist Brian Lee Crowley. Dobson funded some of the Institute’s special projects, including one conducted by Ogilvie that studied the feasibility of turning a Canadian public university into a private institution. “John was one of the truly unique and great Canadians of our time,” says Ogilvie. “I greatly admired his dedication to our country, to building an entrepreneurial society, and his selfless support of bright young Canadians.” Dobson’s influence was also felt in a big way at Wilfrid Laurier University in Waterloo. In the early 2000s, the university decided to create a centre for entrepreneurship and wanted to hire an entrepreneur, rather than a pure academic, to lead and direct it. Scott Carson, dean of Laurier’s School of Business and Economics at the time, had spoken with Dobson, who agreed to pay for the executive director’s salary for three years. The director chosen was Steve Farlow, a lifelong entrepreneur who had just sold his company, Superior Safety, a distributor of health and safety products, to a publicly traded company in Houston. “Back in those days, if John Dobson liked you and the program fit his general mission and purposes, then you were in,” quips Farlow. “It took sixty seconds for him to make his decision.” Farlow was appointed founding executive director of the Schlegel Centre for Entrepreneurship that operates within Laurier’s School of Business and Economics. “John Dobson invested in creative initiatives that are outside the norm, outside the standard curriculum,” he says. “He was always interested in very distinctive programs.” In addition to the Foundation’s seed funding, which helped attract financial support from elsewhere, the John Dobson Foundation provided Farlow with lots of coaching, mentoring, and support. Dobson and Peter Johnson would also occasionally bring heads of entrepreneurship schools to Montreal to compare notes. “We’d report on our programs with a view of the challenges we were facing, and how we could all help each other,” says Farlow. “That’s a role the John

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Dobson Foundation played that was very helpful. He would always want to know how the projects would be sustainable. As a result, there are programs across the country that are now part of the culture of universities and colleges. This may not have happened had it not been for the early support of the John Dobson Foundation.” The next stage in the evolution of an entrepreneurship program at Wilfrid Laurier is to create opportunities for students to launch and build real enterprises within the academic curriculum. As such, students get course credits for creating businesses, with the John Dobson Foundation providing financial support to get the entrepreneurship programs going. Several schools now run an “incubator” – at Laurier, it is called an accelerator centre – right within their campus. The Laurier Entrepreneurship Accelerator Program (now the RBC Entrepreneurial Accelerator program) brings together students from a number of faculties – including social sciences, arts, and music – along with alumni, mentors, and other partners, to create real businesses. “John Dobson was the first one in and allowed us to raise additional money,” notes Steve Farlow. “When I made presentations to the Ontario government, other foundations, and entrepreneurs or companies, I always pointed to the John Dobson Foundation’s early support as a clear indicator that brings legitimacy to the program. John loved this. In my pitches to him, I told him the plan and how we’d use his funds to raise additional funds. My dealings with John were tremendously high-energy, cordial, professional, but to the point. He didn’t suffer fools. When you saw him, you had to know exactly what you wanted to discuss, be succinct, and to the point.”

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The EntreNet Experience Not all of the initiatives supported by the John Dobson Foundation have worked out. A significant disappointment was the “EntreNet,” which was designed to host an online community of entrepreneurship educators across Canada. EntreNet was conceived around 2006, when online communities were just becoming mainstream. “After one of our big networking sessions, we decided to create an online platform to share course outlines and so on,” says Steve Farlow. “It was designed to be basically an online version of our meetings. It was a superb idea. But good ideas don’t always work.” With about $300,000 in Foundation money, Steve Farlow, Peter Johnson, and others worked with a technology platform developed by CIGI (Centre for International Governance and Innovation) in Waterloo, Ontario, to create EntreNet. “The plan was to charge $2,000 for a university to have access to it. We created a robust platform, but we were ahead of our time,” explains Farlow. The organizers soon found that professors were reluctant to share their course information, making it hard to generate content. At the same time, institutions resented paying the $2,000 sign-up fee. “All of a sudden, technology started to catch up, and people expected it to be free,” says Farlow. “We did go after some sponsors to display logos. It was such hard work! An entrepreneurship community in the United States did the same thing subsequent to us but offered it for free and with a simpler technology platform. After two or three years, we closed EntreNet down since it was not being adopted. Technology had caught up, and we could share this

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information for free. It brought a lot of people together, but ultimately it failed. But you have to take risks and chances.” Farlow says Dobson was respectful about the failure. “He discussed lessons learned and we moved on. There was no finger-pointing or blame. We acknowledged our responsibilities in this project. It was not for lack of effort. It just didn’t work. It shows that the John Dobson Foundation is willing to try things that others won’t. Lots of programs worked, but this one didn’t. We learned a ton from this project’s failure.”

Dobson’s support of entrepreneurship extended far beyond the university community, as reflected by his support for three organizations: Enactus Canada (a Toronto-based organization formerly known as Advancing Canadian Entrepreneurship, or ACE, and prior to that, the Association of Collegiate Entrepreneurs), NEXT Canada (based in Toronto, formerly The Next 36), and the Montreal Economic Institute.

• Enactus Canada • Ian Aitken, founder of Enactus Canada and an ardent supporter of entrepreneurship, first crossed paths with Dobson while working as a summer student at Pembroke Management in Montreal in the mid-1980s. He later joined Pembroke and rose to become its president and CEO. At the time, Pembroke and Formula Growth worked closely together on investment prospecting. Aitken met Dobson again while attending the University of Western Ontario, where he was studying commerce, and became heavily involved in entrepreneurial activities. “John was impressed with these activities and arranged for me to be on scholarship, so I was very grateful. I made a point of staying in touch with him and letting him know what I was working on.”

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While he was a student at Western, Aitken was a founding member and later president of an entrepreneurs’ club, which went on to have over 800 members. In 1986, he also created the Canadian Association of University Student Entrepreneurs (C.A.U.S.E.), an umbrella group for entrepreneur clubs from across Canada, with the goal of exchanging best practices and encouraging the formation of new clubs. “I wanted other clubs to benefit from what we were doing and help create clubs in other universities.” Aitken told Dobson about his initiative, and Dobson asked how much money he needed. “He wrote a cheque the same day. I was stunned. But this is typical of how John worked – he tried to back good people who do interesting things. He backed them early and was often the first to do so.” (Over thirty years later, Aitken continues to work closely with the John Dobson Foundation and has been a member of the board since 1999. Around 2006, he bought a house on Mountain Street in Montreal and invited Dobson over. It turned out that Dobson had lived in the house as a child. “He knew I had bought a house near where he lived, but they had renumbered all the houses so he didn’t know it was the one until he walked in the front door.”) During 1987, C.A.U.S.E. changed its name to Canadian Association of Student Entrepreneurs (C.A.S.E.) so that college campuses could be included. A year later, it became the Association of Collegiate Entrepreneurs Canada and then Advancing Canadian Entrepreneurship (ACE). Known today as Enactus Canada and chaired by Ian Aitken, it remains one of the driving forces for entrepreneurship in Canada. The John Dobson Foundation, Enactus Canada’s first donor, is still one of its largest single donors today. “If John hadn’t written that first cheque, this progress would never have happened,” says Aitken. “Enactus became one of the projects he felt was a good example of what he wanted to do more of.” “The Foundation is very selective of the causes it wants to support because Dobson didn’t want a hundred people asking for money,” Aitken explains. “That’s why the Foundation keeps a relatively low profile.” But Enactus Canada has long been a favourite. Dobson said

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the reason was clear. “We have supported Enactus for so many years because it has delivered results in an efficient and effective manner. Of all the organizations we have supported, Enactus is the jewel in the crown.” Enactus president Nicole Almond says the organization has grown significantly over the past thirty years, and the John Dobson Foundation has been instrumental in its development. “Each year, we grow not just in numbers, but in terms of the impact we have on youth and the impact they have on their communities. We are transforming lives and building a better Canada. We would not be where we are today without John Dobson. Not only did he invest his money, he helped engage others in our network and was a pillar of support for our organization and the values on which it rests.” Enactus Canada believes in the potential of youth to make a difference, and John Dobson believed in this, too, Almond adds. “Across Canada, our student teams are taking an entrepreneurial approach to solving local community issues. We never settle for the status quo. We pursue targets that are well beyond our means, and we generally hit them. Our community-empowerment projects and business ventures would not be possible without the support of entrepreneurial champions like John Dobson, who recognize us as very hungry entrepreneurs who are constantly reaching for new levels of success, while maintaining a progressive value system.” Many famous young Canadian entrepreneurs have belonged to Enactus Canada, including Brian Scudamore, CEO and founder of 1-800-GOT-JUNK, who credits the organization with giving him a forum to dream, share, and discuss ideas. Under the leadership of Ian Aitken, Enactus Canada started as a collection of entrepreneurship clubs in various universities. “We were simply looking for a national platform to talk to one another,” says Nicole Almond. “At first, the majority of our activities revolved around conferences. We would bring together university students to hear from entrepreneurs and to talk about what it means to be an entrepreneur. But after more than thirty years, we are now

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a truly national movement with thousands of students engaged annually at almost eighty universities and colleges, from St John’s, Newfoundland, to Victoria, British Columbia.” Enactus students start and operate businesses and develop projects that go out into the community. They identify a need and fill it. For example, at Memorial University of Newfoundland, the Enactus team is running an entrepreneurship transition program for military personnel. The program identifies military personnel who are in transition, returning to civilian life, and brings them to St John’s for a week-long intensive “boot camp” with the goal of getting them to start businesses. This is coupled with a year of mentorship that covers all aspects of running a company, from developing a business plan to marketing a product. The program, originally known as Based in Business, is now called Prince’s Operation Entrepreneur. “Prince Charles, through his Prince’s Charities Canada, identified the program as one of the best military entrepreneurship mentorship programs in the world,” notes Almond, “and it is now present in additional locations across Canada.” While Enactus Canada works with young students, it also partners with industry and academia to fulfill its objectives. It is supported almost entirely by corporate Canada, generous individuals, and associations like the John Dobson Foundation. “Our organization sets itself apart because of its focus on experiential learning,” says Nicole Almond. “Our students take their in-class experience and apply that knowledge to solve problems in their communities. Having achieved success in their own sectors, our academic and corporate partners appreciate the importance of this hands-on learning.” In addition to investing the first dollar, the John Dobson Foundation played a key role in Enactus Canada’s development by working with it to pioneer the John Dobson Enactus Fellowship. This recognizes an elite group of faculty members who, on their own time, without additional payment, act as coaches for Enactus Canada’s student teams on campus. “Because of their efforts and dedication to the students’ experience, the Fellowship recognizes those who meet certain criteria,” says Almond.

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“Because of the reputation that Dobson developed as a pioneer of entrepreneurial education, faculty are proud to say they are a John Dobson Enactus Fellow,” she adds. Fellows are awarded a $1,000 stipend, but the vast majority direct the money to the community programs run by the students. To date, there are over 267 individuals who have been inducted to the John Dobson Enactus Fellowship. “Before John Dobson agreed to start the Fellowship with us, we had virtually no involvement from faculty advisors or administrators of the institutions we dealt with,” Almond notes. “His name, support, and stamp of approval all allowed us to be heard by the faculty and administrators, and we see this as a tremendous addition to the student experience. The John Dobson Fellowship has been critical to us in terms of growing sustainably.” Almond describes the academics Enactus works with as its “entrepreneurial faculty.” “These people are really passionate about education. They’re not just about the lecture, about telling students what to do. They want to show them and watch them grow as they experiment, try their own thing, build their own concepts and skill sets. They do things differently and look at education differently.” To celebrate the entrepreneurial spirit of young Canadians, Enactus Canada also runs the annual Student Entrepreneur National Competition, designed to highlight the success of full-time students who operate businesses that are creating jobs and furthering investments in their economic future. Every year, student entrepreneurs present their businesses to panels of Canada’s industry leaders in regional and national competitions. The student named Enactus Canada’s national champion is awarded $10,000. Enactus began running the program in the 1990s; when it was at risk of closing due to insufficient resources, the John Dobson Foundation helped to bail it out. “Thanks to the Foundation, students get access to a network of Canadian entrepreneurs and business leaders, media coverage, and recognition for their incredible achievements in business as they continue to pursue their post-secondary careers at the same time,” explains Nicole Almond. “The Student

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Entrepreneur National Competition is the only program of its kind in Canada.” “John Dobson and others understood how one young person, not just with a great idea, but with a great business, can totally revitalize an economy. We believe in them, and we celebrate their desire to pursue their business and academic dreams. If anything, there is greater potential for success because they are doing both,” Almond adds. There’s a global element to the Enactus program, too. “Canada is one of thirty-seven countries that operate the Enactus program,” says Almond. “Due to John Dobson’s initial investment, which encouraged others to get involved, we were able to bring the international competition to Canada for the first time in 2005. This is important because it put Canada, our organization, our students, and our entrepreneurs on the global stage. Today, we have solidified our place as a leader in our global network.” The global competition came back to Toronto in 2016. Canada has won the Enactus World Cup three times: in 2008, 2016, and 2018. In conjunction with the Enactus World Cup, the John Dobson Foundation supports the John Dobson Accelerator Program, which fosters the growth and development of Enactus teams and student leaders by building leadership capacity, promoting best practices, and establishing global connections among student and academic leaders who attend the competition. “This comprehensive leadership training fosters innovation, encourages results, and most importantly, serves as a once-in-a-lifetime experience for Canadian students and faculty,” says Almond. “Formal training was delivered by Enactus Canada program staff, including a session called ‘Making the Most of Your World Cup Experience,’ which covered a variety of ways for teams to gain as much as possible from observing all three rounds of competition throughout the event.” The Enactus concept is team-based. Each team includes an executive member, project managers, faculty advisors, and John Dobson Fellows, who serve as coaches. Many teams also have a business advisory board of local community leaders who mentor them.

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The John Dobson Foundation also supports a research fund for Enactus Canada faculty advisors who are interested in pursuing research aligned with the foundation’s mission; a founder’s bursary program that provides up to $25,000 annually to ten deserving student leaders within the Enactus Canada network; and recognition funding for winners in both the Enactus National Competition and the Student Entrepreneur National Competition. Moreover, in 2019, the Foundation provided Enactus Canada with support to launch alumni programming. Plans include an online platform to efficiently track, manage, and engage Enactus alumni, and local alumni chapters that will provide engagement opportunities across the country.

• NEXT Canada • NEXT Canada is a national, non-profit organization that received invaluable support from the John Dobson Foundation. Founded in 2010 as Next 36 by a group of pioneering business leaders and academics, it was launched with the goal of increasing Canadian prosperity by developing high-impact entrepreneurs. Today, NEXT Canada is a leader in the delivery of cutting-edge programming designed to foster lifelong entrepreneurship in four streams: NextAI, Next 36, Next Founders and NextED. NEXT Canada has directly impacted over 370 alumni who have built companies such as Bridgit, Deep Learni.ng, Kira Talent, Nymi and Thalmic Labs. These alumni have created over 1,300 jobs and $319 million in economic impact. Claudia Hepburn, co-founder and former executive director of NEXT Canada, says that the Dobson Foundation was quick off the mark when it was approached for seed money to start the venture. “We’d put feelers out to Ian Aitken about the John Dobson Foundation supporting us, and soon a cheque showed up in the mail. It was a great endorsement early on. This was in January 2010, months before our first board members’ and founding patrons’ donations arrived.” Hepburn said it was important psychologically that the John Dobson Foundation’s support was backed from the start by more

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than just a promise. “We had lots of people saying good things and offering their support and promising they would give us financial support. To actually have a cheque arrive in the mail, with no strings attached, saying ‘This is great, we believe in you,’ was a vote of confidence early on.” The Foundation’s initial donation was $25,000. Next 36 is NEXT Canada’s flagship program, built for seniorlevel undergraduates and recent graduates who are in the early/idea stage of building a high impact startup. Each year, 36 high-potential applicants are selected from across Canada. Over the course of an eight-month intensive program, they are provided with the skillset and resources necessary to become high-impact entrepreneurs. Next 36 teams have access to up to $50,000 in seed capital, world-class faculty and guest speakers, a network of Canada’s top business leaders and entrepreneurs, workspace in downtown Toronto, startup perks, and more. Hepburn explains, “We provide an extraordinary set of experiences and relationships for a small number of students who we believe have a high potential to build internationally competitive organizations.” According to Claudia Hepburn, there is no other program like Next 36 anywhere in the world, not with the level of resources or the focus on backing top undergrads as they are about to graduate from university. “We give them a special level of investment resources, a special quality of academics, and the benefit of high-calibre business leaders and entrepreneurs.”

•The Montreal Economic Institute (MEI) • Over the years, the John Dobson Foundation has also provided support to a number of nonpartisan, public policy think-tanks as well as groups of activists, including the National Citizens Coalition (NCC), a conservative lobby group that campaigns in favour of smaller government and lower taxes while opposing the power of public-sector unions. NCC was headed by Stephen Harper from 1998 to 2002, before he re-entered electoral politics and became leader of the

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Canadian Alliance, and later prime minister of Canada. Another long-time beneficiary of Dobson’s support was the Vancouver-based Fraser Institute, a politically free-market think-tank whose mission is “to measure, study, and communicate the impact of competitive markets and government intervention on the welfare of individuals.” The Montreal Economic Institute, a think-tank founded in 1987 by a group of Quebec intellectuals and businesspeople interested in promoting free-market ideas in the province, was also a beneficiary of Dobson’s moral and financial support. It was initially a continuation of the Institut économique de Paris à Montréal. The new think-tank’s activities really took off in the late 1990s with the appointment of Michel Kelly-Gagnon as its President. Kelly-Gagnon would develop a close personal relationship with Dobson and eventually join the board of directors of the John Dobson Foundation. Playing a role similar to the Fraser Institute, the MEI has established a leading place in debates on Quebec economic policy, generating on average fourteen media mentions per day, a level of coverage rarely (if ever) seen for a think-tank of its size. With eight permanent staffers, it has produced research on a range of issues, including a ground-breaking ranking of Quebec high schools published in L’actualité magazine every fall from 2000 to 2008. In 2004, MEI was awarded the prestigious Templeton Freedom Award Grant for Institute Excellence based on its overall performance, including operating practices and public relations. The MEI is the first Canadian think-tank to be honoured by this award, created by Sir John Templeton. From 1998 to 2009, MEI’s reach was mainly within the province of Quebec, but it subsequently became active in national publicpolicy debates, including (but not limited to) those about energy issues. Approximately 50 per cent of its funding now comes from outside of Quebec, reflecting the nature of its work. Since 2018, the MEI has been focusing its expertise on developing Canada-US comparative studies in several specific, non-trade topics, including health care and the contracting out of airport security.

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Michel Kelly-Gagnon, an entrepreneur himself, founded a company that conducted in-house training for large manufacturers before joining the MEI. He was introduced to Dobson in 1999 by a mutual friend, investment manager Reford McDougall, who felt Dobson might be interested in supporting the Montreal Economic Institute, which until then had been struggling to gain traction. “I remember our first encounter with John clearly,” Kelly-Gagnon recalls. “Reford had organized a lunch at the University Club down on Mansfield Street. At the time, I was using broad, abstract language to describe the MEI, referring to it as ‘classical liberalism.’ This university-type language did not agree with John, who interrupted me for clarification. But I repeated with my university language. He interrupted me again and directly asked, ‘Are you right wing?!’ and I said, ‘Yes,’ and he said, ‘Oh, okay, that’s good.’ He was always very straightforward.” Kelly-Gagnon soon came to appreciate Dobson’s level of commitment to the fledgling think-tank during the Montreal Economic Institute’s first big public event in December 1999. The keynote speaker was to be the mayor of Indianapolis, Stephen Goldsmith, who had made his name as a reformer of urban America and was credited with introducing new techniques to make public services more efficient. “The Institute had confirmed [the attendance of] a whole bunch of journalists who weren’t familiar with us, and we had confirmed the attendance of the mayor of Montreal, too,” says KellyGagnon. “This was to be our moment of truth! It was our launch. We had only two full-time employees at the time – me and an administrative assistant.” Goldsmith was due to fly in from Indianapolis through Pittsburgh. Kelly-Gagnon received a call from his secretary at 10:30 a.m. with bad news: Goldsmith had missed his connecting flight and would not be able to make it. “Dobson’s first contribution was $10,000 as a sponsorship for this conference,” recalls Kelly-Gagnon. “So I called him up and told him the speaker he had sponsored was stuck in Pittsburgh and that the event would no longer take place. He said,

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‘Well, get him down here!’ I told him I couldn’t. There was a silence, and then I heard him say some numbers. He ordered me to write them down. He said, ‘That’s my credit card. Use that to get a private jet to get him down here!’ I thanked him and told him how much I appreciated it, and he said, ‘Stop talking and get to work!’” Kelly-Gagnon found a private jet and says the rest of the story was right out of a movie. “Goldsmith had to fly to St Hubert Airport, which is on the South Shore of Montreal. We were so late. The room was packed. I’m explaining the whole sequence to the guests, apologizing for the tardiness. As I’m speaking, an ovation begins as Goldsmith walks in. So it went from a disaster to a dramatic success!” Michel Kelly-Gagnon says the experience proved to be a big inspiration. “Now, whenever someone asks me something, I try to make decisions rapidly and try to act on these decisions rapidly. My approach to doing things without hesitation has been heightened by John Dobson and his model. For example, we’d discuss calling John Doe, and before I’d know it, he’d ask for the secretary to get him Doe’s phone number immediately. I feel this philosophy explains his success. He was very action oriented. Any two directors of the John Dobson Foundation can make a decision to have something happen, without the need to wait for a discussion and consensus. As a result, the Foundation has a quick-turnaround approach, which has really made a difference for us and many other organizations.” Eschewing bureaucracy and lengthy application processes for funding, the John Dobson Foundation is lean and simple. “With John Dobson, we were able to have a conversation followed by a two-paragraph letter to get it approved,” notes Kelly-Gagnon. “Sometimes it was a project, sometimes it was annual donations. It would vary. But the decision-making process was different from [that of] all other foundations that I knew.” According to Kelly-Gagnon, Dobson’s greatest contribution to Canada was getting college and university students involved in entrepreneurial projects. “He often used the expression ‘MBAs are for managers of bean counters’ and believed that, while many Canadians

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are interested in business administration, they are not so much interested in entrepreneurship. He always made a clear distinction between business schools, which he thought were inept, and actual entrepreneurial experience, which he valued. He believed many entrepreneurs would come more from arts, music, and so on, rather than business or engineering. In fact, most of the entrepreneurs of our era do not have formal educations in business administration.” Dobson’s entrepreneurial spirit and hot-blooded approach made him different from most people Michel Kelly-Gagnon knew. “I’ve dealt with other successful people, but John was in his own category because of his no-bullshit and quick approach. We were like-minded people in terms of political philosophy, as well as spirit and mentality. I never knew either of my grandfathers, and John was the closest to a grandfather figure that I’ve ever had. That’s the emotionalpsychological relationship I felt toward him. It was more than just a business relationship.”

Chapter 15

Looking to the Future “I am inherently very bullish, because I learned from John Dobson that pessimists don’t make any money.” —Randy Kelly

On 27 June 1960, John Dobson and a small group of visionary partners officially launched Formula Growth Fund, one of Canada’s earliest mutual funds and arguably one of the world’s most successful, long-standing equity funds. Their unwavering faith in the power of entrepreneurship, the value of bottom-up growth stock investing, and the free enterprise system supported job creation and built wealth for thousands of Canadians and global clients. It’s a proud legacy that the Formula Growth team, currently composed of two dozen dedicated and highly-skilled investment experts and support staff, is determined to honour by staying true to Dobson’s time-proven “growth formula”: focusing on small- to midcap companies in promising sectors, led by exceptional management, that can offer exponential secular growth. It’s a formula that has enabled the original Formula Growth Fund to deliver a remarkable performance for unit holders, increasing in value one thousand–fold over the past sixty years. At the same time, the Formula Growth team plans to continue to pursue and develop a broadened product offering to serve the evolving needs of its clients and adapt to changes in the money management industry. This includes leveraging its highly successful hedge fund platform, launched at the turn of the millennium, and expanding its investment activities outside of its traditional domain – the United States – to growing stock markets in China and the rest of Asia.

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“We are fine-tuning our business but expect to continue to thrive as an independent boutique investment firm focused on creating wealth for clients,” says Randy Kelly, Formula Growth’s CEO. “With our relatively new alternative investment products and well-established track record, we are having considerable success in broadening our client base as well, attracting institutional investors as never before because of the appeal of our market-neutral hedge fund. Business has been good with the various pivots we have made to enhance our capabilities at Formula Growth, and the clients have been rewarded.” Kelly notes that Formula Growth has been beating the market for sixty years, and he hopes it will continue to do so for another sixty. It will champion John Dobson’s steadfast confidence in equity investments, in the magic of compounding, and in sound risk assessment. “Our view is that people too often misidentify or exaggerate risk. They think they’re going to get eaten by a shark or get hit by lightning. Like your worst nightmare, these things seldom occur! Formula Growth’s hallmark is its ability to assess risk a little more correctly than many other investors.” Formula Growth, like its founder, believes that stock markets will continue to offer the best return over any other type of investment in the long haul. “Equities have historically generated price returns of about 10 per cent annually (including dividends), above the average of economic growth,” says Kelly. “If you’re smart and don’t mess around trying to totally avoid risk, you’ll be Dobson and earn over 12 per cent and beat the market handily. The excess return from beating the market leads to a gigantic difference in accumulated wealth.” Formula Growth steers away from people who make “ridiculously conservative” assumptions in order to avoid losses, Kelly notes, and will always favour a growth mindset. “I want to be in front of somebody who says he’s got twenty restaurants, and can get to 100, then 300. Then I want to objectively assess his staff, his work ethic, his track record, his taste, his food, and yes, see whether

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the bathrooms are clean! Then I want to watch him do it! I want to swing for the fences in a calculated and well-practised way.” Kelly says that he’s inherently bullish because he learned from Dobson that pessimists don’t make any money. “I’m optimistic, because the CEOs I invest along with are inherently optimistic about their business, and they couldn’t give a damn about Brexit or protests in Hong Kong. They want to grow their business and will pivot as necessary. I don’t think the markets are risky over the long term. They’re volatile in the short term because prices dance around so much on sentiment. Risk is low if you’ve done your work and you lengthen your time horizon.” In Formula Growth’s view, occasional economic downturns are healthy because they purge the weak and give birth to new and vibrant businesses. “But you’ve got to buy low. You have to be careful on your entry into a stock. That’s where it all happens,” Kelly advises. “Get the entry price right, and then stick to your target price for your exit.” The basic tenets of good investing remain unchanged despite massive technological advances in the past sixty years. “Today we have email, text messaging, and high frequency trading, but I’m doing the same thing,” says Kelly. “It’s better and quicker, but the philosophy is basically the same. Investing is still about human emotions, about assessing risk and diversifying your risks. It’s about finding new, solid stories and making great decisions. We doubt that robo-advisors and AI can replace our decision-making process.” Formula Growth Fund’s original unit holders are now passing away, and while some units are being inherited by the next generation, their numbers keep shrinking as aging holders redeem their units. “We have some unit holders who have been with us for decades and are incredibly grateful for their loyalty,” says Kelly. “Fortunately, many of their heirs are continuing to invest with us, not just in the Formula Growth Fund but also in our other, less-volatile products, because they recognize the value we can deliver.” Formula Growth expects that its original long-only fund will be part of the investment landscape for many decades to come thanks

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to its rich history and remarkable track record. At the same time, its hedge fund platform, which currently accounts for over two-thirds of the firm’s assets under management, should continue to grow significantly as it attracts an increasing number of institutional investors, as well as the attention of investment advisors seeking alternative placements for their clients’ money. “Our vision is to continue to demonstrate excellence in delivering risk-adjusted returns to our clients in a manner that matches their appetite for risk,” says Kelly. “I think we’ll continue to grow at a measured rate. We should be able to absorb 10 to 15 percent asset growth every year thanks to the depth of our team of portfolio managers. They have a lot of bandwidth!” Formula Growth Ltd. is now controlled by Randy Kelly and John Liddy. The rest of the shares are spread around the team. When team members reach the age of sixty-five, their shares come back to the firm. As a result, the company is owned only by the people who work there. Kelly has shunned offers from outsiders to buy the company because he believes in the business model. “We punch way above our weight. As a firm with just over $1.6 billion (Canadian) in assets, I think we do a good job, pound for pound. The younger guys are dialed into ownership to keep them interested and to make sure the entire team rows the boat forward together. There’s a bonus on performance. Alignment with our clients is paramount.” Taking ownership and having skin in the game were always Dobson’s approach. “The staff members of Formula Growth are some of the biggest customers in Formula’s products, that means everybody who works here,” says Kelly. “So when we’re happy, the outside customers are happy, too.” Kelly acknowledges that he has not yet decided about his own future. But he has full confidence in the future of Formula Growth thanks to the passion and commitment of its employee-partners and the firm’s culture of success initiated and nurtured by John Dobson. After nearly 35 years at the firm, he continues to enjoy the ride.

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“When I first met John, he told me I would be getting into a business that could not be more challenging. He said, ‘Forget about the scientists and the PhDs – the smartest people everywhere in the world are attracted to Wall Street. You’re going to be in the toughest game you could possibly find.’ That’s what really hooked me. And he was right – it has been challenging, with constant ups and downs. But it’s been a more rewarding and enjoyable ride than I could ever have imagined, with a great team and clients that we appreciate beyond words. John Dobson would be proud of us as we celebrate our sixtieth anniversary!”

Epilogue John Dobson never formally retired from Formula Growth, but by the second decade of the new millennium, he had not been active in its affairs for at least a decade. He remained chairman emeritus and was in constant contact with “the office.” He also remained involved in running the John Dobson Foundation, helping to select worthy candidates for support while taking a keen interest in organizations and individuals already receiving it. In 2010, he fell while walking in downtown Montreal, and during treatment, it was found that he had serious vascular blockages in his right leg that required amputation. In his last years, he was confined to a wheelchair in a well-appointed seniors’ home a few miles from his beloved Square Mile, but he remained remarkably robust and passionate about current events and the ups and downs of the stock market. He was also in frequent touch with the large network of what he termed “my cronies,” speaking frequently on the phone and receiving a regular stream of visitors, including old friends like former governor general David Johnston and Ian Soutar, and great boyhood mates like John Gray. In addition to listening to political commentators on television and the radio, he closely followed the PGA golf tournaments, having played on virtually every important course over the past seventy years. Dobson also remained as opinionated as ever, vigorously criticizing things such as US monetary policy, which he believed was crippling the greenback and dimming prospects for young people to have the same kind of investing success that he had enjoyed. But overall, he was happy in his own skin, grateful for the life he had led and the lucky breaks that had come to him along the way. “I always believed in having fun, and I’m still having fun in my own way,” he said with a gentle tone in his voice. “I’ve been fortunate to have always liked what I was doing, and to always have fun doing it. After all, to me, that is what life is all about.”

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Epilogue

On 24 July 2013, the day before his eighty-fifth birthday, Dobson fell ill and was admitted to the Montreal General Hospital for tests. Much to his frustration, he celebrated his birthday in the hospital. Five days later, he passed away peacefully in his sleep of congestive heart failure. On 5 August 2013, some three hundred people gathered in a chapel at Mount Royal Cemetery in Montreal to celebrate the life of their dear friend and colleague, in a service presided by the Reverend Robert Camara, rector of Saint George’s Anglican Church in Châteauguay. Among those in attendance were boyhood pals, golf buddies, family members, Formula Growth unit-holders, and the Formula Growth team. Parker Knox, his nephew-in-law, spoke about the love Dobson had for family, business, politics, and Canada; about his visionary leadership; and about the personal influence Dobson had exerted on his own life. Diana Knox, his niece and closest survivor, described him as “one of a kind” and praised her uncle’s giving nature and humility, noting that he did not want a big funeral or even a memorial service. Her daughters, Victoria and Alex, told amusing anecdotes about their great uncle’s quirks but also spoke of his constant curiosity and interest in young people. Ian Soutar (who passed away in 2016 of multiple myeloma) and Randy Kelly both gave touching eulogies about how Dobson changed their lives, and expressed gratitude for having known him for so many years. At the front of the chapel was an urn containing Dobson’s ashes – which were later scattered at his beloved Mount Bruno Country Club, just like his sister Virginia’s – along with his trusty golf clubs and bag, emblazoned with his name and decorated with flowers. The clubs were a reminder that, in addition to his remarkable achievements in business and his contributions to entrepreneurial education in Canada, golf was perhaps the greatest joy in John William Dobson’s long and productive life.

Appendices

Appendix 1

Formula Growth Fund Annual Performance year fgf ytd s&p 500 tr ytd 2019 20.9% 31.5% 2018 (8.50%) (4.40%) 2017 24.50% 21.80% 2016 2.50% 12.00% 2015 (8.20%) 1.40% 2014 (0.30%) 13.70% 2013 49.44% 32.39% 2012 12.00% 6.6% 2011 5.70% (8.7%) 2010 23.80% 15.1% 2009 41.50% 26.5% 2008 (45.30%) (37.0%) 2007 0.60% 5.5% 2006 10.20% 15.8% 2005 7.50% 4.9% 2004 9.00% 10.9% 2003 59.30% 28.7% 2002 (35.50%) (22.1%) 2001 0.70% (11.9%) 2000 (12.10%) (9.1%) 1999 26.50% 21.0% 1998 9.50% 28.6% 1997 20.90% 33.4% 1996 25.20% 22.9% 1995 37.30% 37.5% 1994 (1.70%) 1.3% 1993 27.80% 10.0%

year 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966

fgf ytd s&p 500 tr ytd 27.50% 7.60% 72.80% 30.40% (28.80%) (3.10%) 24.90% 31.60% 13.20% 16.60% (7.00%) 5.30% 13.50% 18.70% 35.30% 31.70% (11.80%) 6.30% 18.30% 22.60% 40.70% 21.50% (5.10%) 4.90% 64.30% 32.50% 44.80% 18.60% 32.70% 6.60% 15.30% (7.20%) 26.20% 23.90% 71.80% 37.20% (36.20%) 26.50% (34.50%) (14.70%) 28.06% 19.00% 33.30% 14.30% (24.60%) 3.90% (7.50%) (8.40%) 39.80% 11.00% 76.50% 23.90% (15.90%) (10.00%)

Appendix 1

year fgf ytd s&p 500 tr ytd 1965 51.10% 12.50% 1964 7.30% 16.40% 1963 16.80% 22.80% 1962 (28.70%) (8.70%) 1961 56.40% 26.90% 1960 19.10% 3.90%

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Appendix 2

Long-term Formula Growth Fund Performance Chart $14,000,000

fgf cad$ (Net of Fees) $12,000,000

12.0 cad$m

s&p 500 tr cad$ $10,000,000

$8,000,000

$6,000,000

4.6 cad $m $4,000,000

$2,000,000

2018

2014 2016

2008 2010 2012

1998 2000 2002 2004 2006

1994 1996

1986 1988 1990 1992

1982 1984

1974 1976 1978 1980

1966 1968 1970 1972

1960 1962 1964

$0

Appendix 3

Vintage of Formula Growth Stocks chronologically over the decades (price at least doubled) 2010s

name

business

Verzcyte Inc.

Life Sciences

Casella Waste

Waste Management

Pagseguro Digital

Payment Solutions

Sirius XM Holdings

Satellite Radio

Goosehead Insurance

Insurance Agency

Dirtt Environmental

Construction Interiors

Tabula Resa Healthcare

Healthcare Services

Twilio

Communication Software

Vocera Inc.

Communication Software

Costar Inc.

Real Estate Database / IT

Exact Sciences

Life Sciences

Insulet

Medical Devices

Intersect Inc.

Medical Devices

RingCentral

Communication Software

Teladoc Inc.

Healthcare Services

AMN Healthcare Services

Healthcare Services

Axos Financial Inc.

Internet Banking

Callidus Software

Application Software

Cardtronics

Payment Solutions

Carriage Services Inc.

Funerals

Carrols Restaurants Group

Restaurant

260

Appendix 3

Cimpress NV

Printed Products

Facebook

Social Networking

Gentherm

Automotive Parts

Home Bancshares

Banking

JB Hunt Transport

Trucking and Logistics

Jazz Pharmaceuticals

Biotech

Kar Auctions Services

Auto Auctions

Liberty Lilac Group

Cable

LKQ Inc.

Automotive Parts and Services

Mednax Inc.

Healthcare Services

MGP Inc.

Distillery

Micron Technology

Semi-Conductors

Nektar Therapeutics

Biotech

NIC Inc.

IT Services

On Assignment Inc.

Professional Services

OSI Systems

Medical Equipment

PGT Inc.

Window Manufacturing

Popeyes Louisiana

Restaurant

Qorvo Inc.

Semi-Conductors

Shopify Inc.

Internet Services

SS & C Technologies

Application Software

Vantiv Inc.

Payment Solutions

Web.com Group Inc.

Internet Services

XPO Logistics

Trucking and Logistics

DHX Media

Entertainment Media

Acadia Healthcare

Healthcare Services

Cardiovascular Systems

Medical Devices

Celadon

Trucking and Logistics

Copa Holdings

Airline

Interxion Holding NV

Infrastructure Software

Kirby Corp

Transportation Services

Parametric Technology

Technology

RF Microdevices

Semi-Conductors

Appendix 3

Helix Energy Solutions

Oil and Gas Services

The Dolan Company

Application Software

Spirit Airlines Inc.

Airline

Coinstar

Media Services

Entropic

Semi-Conductors

McMoran Exploration

Oil and Gas Services

Northern Oil and Gas

Oil and Gas Services

Shutterfly Inc.

Internet Services

Solera Holdings

Technology 2000s

Arena Resources Inc.

Oil and Gas Exploration

Mindspeed Technologies

Semi-Conductors

Darling International

Waste Recycling

GameStop Corp

Retail Software

Prepaid Legal Services

Professional Services

Arena Resources Inc.

Oil and Gas Exploration

Carrizo Oil & Gas

Oil and Gas Exploration

HMS Holdings

Healthcare Services

Stratasys Inc.

Technology

Ultimate Software

Application Software

US LEC Corp

Telecom Services

Heritage Oil

Oil and Gas Exploration

Cash America International

Consumer Finance

First Cash Financial Services

Consumer Finance

Caremark RX Inc.

Healthcare Services

Immucor Inc.

Medical Devices

New River Pharma

Biotech

Comtech Group Inc.

Engineering Services

American Commercial Corp

Professional Services

Scientific Games Holdings

Lotteries

GMX Resources

Oil and Gas Exploration

261

262

Appendix 3

Ultra Petroleum

Oil and Gas Exploration

Providence Services

Healthcare Transportation

GOL Linhas Aéreas

Airline

Casual Male Retail

Retail Apparel

Essex Corp.

Communication Equipment

Titan International Inc.

Agricultural Equipment

Lions Gate Entertainment

Entertainment Media

MarineMax

Boats

GSI Commerce

Internet Services

Alliance Gaming Corp

Casinos and Gaming

Dynamex Inc.

Transport

ScanSource Inc.

IT Distribution

Guitar Center Management

Retail Music

America Service Group

Professional Services

Taro Pharmaceutical Ind.

Biotech

Performance Technology

Technology

Photo Dynamics Corp

Semi-Conductors

Sonic Corp.

Restaurant

Tuesday Morning Corp

Retail Apparel

AmerisourceBergen Corp

Healthcare Distribution

Novavax Inc.

Biotech

Omnicare Inc.

Healthcare Services

Tier Technologies

Educational Services

Intrado Inc.

Communication Services

Beazer Homes

Home Building

CarMax

Retail Automobile

Take-Two Interactive

Video Games

Applied Films Corp.

Semi-Conductors

Concord EFS Inc.

Payment Services

Euronet Worldwide

Payment Services

Multimedia Gaming

Casinos and Gaming

Perot Systems Corp.

Professional Services

Electronic Arts

Video Games

Appendix 3

Electronics Boutique

Retail Electronics

O’Reilly Automotive

Retail Automotive

Rare Hospitality

Restaurant

SkyWest Inc.

Airline

Sonic Automotive

Retail Automotive

Direct Focus

Sporting Goods

AmeriCredit Corp.

Consumer Finances

Apogent Technologies

Medical Equipment

Eclipsys Corp.

Application Software

Priority Healthcare

Healthcare Distribution

Power One Inc.

Renewable energy 1990s

AMFM Inc.

Radio Stations

PSI Net Inc.

Internet Services

United Global com

International Cable

Healtheon/WebMd

Healthcare Services Internet

Intercept Group

Payment Services

Intervoice-Brite Inc

Communication Services

Seachange International

Application Software

Texas Instruments

Semi-Conductor

Celgene

Semi-Conductor

Infocure Corp

Healthcare Services

ASM International

Semi-Conductor

Aspect Communications

Application Software

Asyst Technology Corp

Semi-Conductor

Atmel Corp

Semi-Conductor

Datastream Sys Inc.

Application Software

Ryanair Holdings PLC

Airline

Valuevision Internationl Inc.

Homeshipping

Armor Holdings Inc.

Consumer Products

CheckFree Holdings

Payment Solutions

263

264

Appendix 3

1-800 Contacts

Retail Mail

CEC Entertainment

Restaurant

US Food Services Inc.

Food Distribution

Nova Corp.

Healthcare Services

RF Micro Devices Inc.

Semi-Conductor

Sanmina Corp

Electronic Manufacturing

TMP Worldwide Inc.

Internet Services

Impath Inc.

Healthcare Services

PSS World Medical Inc.

Healthcare Services

Renal Care Group

Healthcare Services

NTL Inc.

International Cable

Orbital Sciences Corp

Satellite Communication

Cost Plus Inc.

Retail Home Furnishing

Logan’s Roadhouse

Restaurant

Keystone Automotive Inds.

Automotive Parts

Benchmark Electronics

Electronic Manufacturing

ESC Medical systems

Medical Equipment

Countrywide Credit

Mortgages

Palm Harbor Homes

Homebuilding

Protection One Inc.

Consumer Products

Speedway Motorsport Inc.

NASCAR

General Nutrition

Retail Health

Chancellor Media Corp.

Radio

Action Performance Co.

Toys and Games

Bush Industries Inc.

Furniture Manufacturing

Quantum Corp

Computer Hardware

Compuware Corp.

Application Software

Microage Inc.

IT Distribution

Tech Data Corp.

IT Distribution

Access Beyond

Computer Equipment

Bay Networks

Network Technology

Healthsouth

Healthcare Services

Methode Electronics Inc.

Electronic Equipment

Appendix 3

Miller Industries

Automotive Services

Universal Forest Products

Lumber

Raymond James Financial

Financial Services

Sirrom Capital Corp

Financial Services

Sybron International Corp.

Dental Distribution

CKE Restaurants Inc.

Restaurant

Williams-Sonoma Inc.

Retail Home

Tel-Save Holdings Inc.

Communication Services

Comair Holdings Inc.

Airline

World Access

Communication Services

Gulf South Medical Supplies

Healthcare Distribution

Harbinger Corp

Technology

Medic Computer Systems

Healthcare Services

Shedahl Co.

Electronic Components

Theragenics Corp

Medical Device

Healthcare Compare Corp.

Healthcare Services

Clintrials Research

Healthcare Services

American Medical Response

Healthcare Transport

Advantage Health Corp.

Healthcare Services

Ride Inc.

Consumer Products

Stewart Enterprises

Funeral

Greentree Financial Services

Consumer Finance

Pioneer Financial Corp.

Insurance

Renters Choice Inc.

Retail Appliances Renting

ACC Corp

Communication Services

Transaction Network Services

Communication Services

Comnet Cellular

Cellular Communication

Callaway Golf

Consumer Products

Regal Cinemas

Movie Theatres

SunAmerica Inc.

Insurance

American Medical Research Inc.

Healthcare Services

Community Health Systems

Healthcare Services

Coventry Corp.

Healthcare Services

265

266

Appendix 3

Genesis Health Ventures

Healthcare Services

Health Trust

Healthcare Services

Danke Business Systems

Business Equipment

Proxima Corp.

Industrial Products & Services

Revco Drug Stores

Retail Drugstore

Micro Warehouse

Retail Mail Order

3 com Corp.

Communication Network

Broadway and Seymour

Application Software

Chipcom Corp.

Semi-Conductor

EMC Corp

Storage Systems

EIS International

Application Software

National Data Corp

Application Software

Foothill Group

Financial Services

IDB Comm. Group

Satellite Communication

International Cable Casting

Advertising and Media

LDDS Communications(WorldCom)

Communication Services

Paging Network Inc.

Paging

Telefonds de Mexico S.A.

Communication Services

Blockbuster Entertainment

Retail Video

Bombay Co.

Retail Furnishings

CML Group

Consumer

Home Depot

Retail Hardware

Office Depot

Retail Office Supplies

QVC Network

Home Shopping

Tops Appliance City

Retail Consumer Electronics

Broad Inc.

Insurance

Conseco Inc.

Insurance

First Financial Mgmt Corp.

Payment Services

Novacare Corp.

Healthcare Services

Ramsay-HMO Inc.

Healthcare Services

Steris Corp.

Medical Devices

Techne Corp

Medical Devices

Concord Computing

Payment Services

Appendix 3

Mesa Airlines

Airline

American Power Conversion

Computer Products

Cisco Systems

Network Equipment

HBO & Company

Application Software

Kent Electronics

Electronics Manufacturing

CliniCom

Application Software

Centex Technologies

Communication Services

Advanced Tissue Sciences

Biotech

Adobe Systems

Application Software

Comptronix Corp

Electronics Manufacturing

Software Publishing Corp.

Application Software 1980s

Cellular Communication

Cellular Communication

Century Comm

Cable

Occupational Urgent Care

Healthcare Services

Rogers Communications

Cable

St. Jude Medical

Medical Devices

Surgical Care Affiliates

Healthcare Services

Adaptec Inc.

Electronics

American Software

Application Software

Advanta Corp.

Credit Cards

Interleaf Corp

Application Software

MicroBilt

Computer Products

Sun Microsystems

Computer Products

National Education

Educational Services

Old Country Buffet

Restaurant

Circuit City

Retail Consumer Electronics

Liz Claiborne

Retail Apparel

Prime Motor Inns

Hotels

Comdisco

Equipment Leasing

First Executive

Insurance

267

268

Appendix 3

International Lease Finance

Airplane Leasing

SPI Pharmaceutical

Pharmaceutical

Viratek

Biotech

Advanced Systems

Application Software

Atlantic Research

IT Services

Computer Associated

IT Services

SCI Systems

Electronic Contract Manufacturer

Telex

Communication Equipment

V-Band

Technology

Agency Rent-A-Car

Car Rental

Atlantic Southeast Air

Commuter Airline

King World Entertainment

Entertainment Media

Laidlaw Ind

Waste Services

Lorimar Telepictures

Entertainment Media

Patten

Construction Equipment

Rent-A-Center

Retail Appliances Renting

Jackson National Life

Insurance

Moren Energy

Energy Services

Nutrisystem

Retail Mail Order

America Income

Insurance

Sage Energy

Oil & Gas Exploration

Zimmer Homes

Home Builder

Docutel

Application Software

Electrospace

Technology

Telecom Plus

Communication Services

C. Lurie and Sons

Retail Jewelry

Tandy Corp

Retail Consumer Electronics

Dreyer’s Ice Cream

Consumer Products

Jerrico

Restaurant

Pizza Ventures

Restaurant

Saga Corp.

Restaurant

Adac Labs

Medical Services

Charter Medical

Healthcare Services

Appendix 3

Community Psych.

Healthcare Services

Healthdyne

Healthcare Services

HCA

Healthcare Services

Humana

Healthcare Services

Summa Medical

Healthcare Services

Storage Technology Corp

Storage Systems

Intermedics

Medical Devices

Comdata

Payment Services

Data Point

Technology

Lanier

Equipment

Molex

Electronic Equipment

Prime Computer

Computer Products

Redcor

Technology

Western Digital

Storage Systems

269

1970s Service Merchandise

Retail Catalogue

Noble Affiliates

Oil & Gas Services

Rial Oil

Oil & Gas Exploration

Western Co. of N.A.

Oil & Gas Services

Church’s Chicken

Restaurant

Computervision

Computer Products

Fairchild

Semiconductor

Four Phase

Technology

Genrad

Electronics Contract Manufacturing

Kulicke & Soffa Industries

Semiconductor

Lanier

Office Equipment

Sensormatic

Retail Security

Gelco

Financial

National Medicare

Healthcare Services

Biscayne Fed. Stl

Savings & Loan

Gibraltar Financial

Savings & Loan

270

Appendix 3

Golden West

Savings & Loan

Cousins Property

Real Estate

International Aluminum

Materials

Denny’s

Restaurant

Taco Bell

Restaurant

Computer Automation

Computer Products

Midwestern Distribution

Transportation

Shared Medical

Healthcare Services

Blue Bell

Consumer

Executive Industries

Consumer

Pizza Hut

Restaurant

Advance Micro Device

Semiconductor

National Semiconductor

Semiconductor

Olympus Optical

Electronics Optical

Calpis Food Industry

Consumer Products Food

Chiyoda Marine & Fire Insurance

Insurance

Daiwa Securities

Brokering

Kashiyama and Co.

Machinery

Matsushita Electric Industries

Equipment & Electronics

Nomura Securities

Brokering

Taisei Construction

Construction Services

Yasuda Fire And Marine

Insurance

Appendix 4

Formula Growth Current and Former Employees current employees

(22) ..................... title

montreal Mathieu Boisvert .................................... Vice-President Lucy Chher ............................................. Director of Risk Management and Data Analytics Alexa Dorsainville .................................. Director of Finance Cameron Fortin ...................................... Vice-President Gregory Gottlieb .................................... Treasurer Charles Haggar ...................................... Vice-President and Senior Portfolio Manager Dina Iacuessa ......................................... Administrative Assistant Randall Kelly .......................................... Chief Executive Officer, Co-Chief Investment Officer Ari Kiriazidis .......................................... Chief Financial Officer & Chief Compliance Officer Tony Naaman.......................................... Trader Sarah Owen..............................................Analyst, Operations & Investor and Data Analytics Anthony Staples ...................................... Vice-President and Senior Portfolio Manager Nicolas Therrien ......................................Analyst, Operations & Investor Relations Rosanna Vitale ....................................... Administrative Assistant

272

Appendix 4

new york John Liddy .............................................. Executive Vice-President James Sinclair ......................................... Portfolio Manager

Hong kong Nelson Cheung ....................................... Managing Director & Head of Alternative Investments Johnathan Fan ........................................ Senior Analyst Giampaolo Guarnieri .............................. Head of Equity Investments Nora Lau ................................................ Business Manager Kenneth Lee ............................................ Trading and Settlements Officer James Soutar ........................................... Head of Operations & Research former employees

(16) ....................... title

Sonny Aggarwal ..................................... Research Analyst René Catafago ........................................ Executive Vice-President, CFO Mark Culver ........................................... Vice-President, Business Development John Dobson ........................................... Founder, Chairman Barbara Ellis ........................................... Manager, Administration, and Settlements Lise Faski ................................................ Operations Administrator Debbie Gingras ....................................... Secretary Kim Holden ............................................ Vice-President and Portfolio Manager Michael Gentile ...................................... Vice-President and Senior Portfolio Manager Peter Mackechnie .................................... Vice-President and Portfolio Manager Darleen MacWhinnie .............................. Secretary Rodney McCollam ................................. Vice-President and Controller

Appendix 4

273

Ahson Mirza .......................................... Research Analyst Marc-André Pouliot ............................... Director, Risk Management and Client Servicing Bette Lou Reade ..................................... Executive Vice-President and Portfolio Manager Joanne Torch........................................... Secretary founders, directors, advisors

(21) .... title

Drummond Birks .................................... Director Stuart Cobbett ........................................ Corporate Secretary, Director Walter Cottingham ................................. Founder, Officer, Portfolio Manager, and Consultant Peter Cross .............................................. Founder Roger DeSerres ....................................... Director Nassie Godel ........................................... Director Jacques Glorieux ..................................... Founder, Director Heward Grafftey..................................... Director John L. Grossman ................................... Consultant Hugh Hallward ....................................... Director Andy Hugessen ...................................... Founder Neil Ivory ................................................ Director Donald Johnston .................................... Corporate Secretary Robert Midgley ....................................... Founder John Rook .............................................. Founder Frank Schnabel ...................................... Founder, Advisor Lorne Webster......................................... Founder, Director Ian Soutar ............................................... Director and Consultant Scott Taylor ............................................ Director and Consultant Jacques Tétrault ...................................... Director John Turner ............................................ Founder, Corporate Secretary

APpendix 5

Sample of John Dobson Foundation Support Recipients AIMS Acadia Entrepreneurship Centre Bishop’s University Bow Valley Skills Development Brock University Canadian Constitution Foundation Cartwright Centre C.D. Howe Institute Centraide Concordia University Dalhousie University Dans la rue ENACTUS Enactus Okanagan College Fondation Ressources Jeunesse Fraser Institute Frontier Centre for Public Policy HEC Institute for Liberal Studies JA Canada JA of Quebec Justice Centre for Constitutional Freedoms Leave Out Violence Loran Scholarships Loyola High School Ludwig von Mises Institute Canada MAB Foundation - Alex Bilodeau Adapted Sports Macdonald-Laurier Institute Manning Foundation for Democratic Education McGill University Otology and Neurotology McGill X-1 Accelerator Program McMaster University Montreal Economic Institute Memorial University of Newfoundland (Centre for Entrepreneurship)

Appendix 5 Montreal Children’s Hospital Foundation Montreal General Hospital Montreal General Hospital Foundation-Surgical Innovation Montreal Heart Institute Mount Royal College Mount Saint Vincent University NEXT Canada (NEXT 36) Old Brewery Mission Prince’s Operation Entrepreneur Queen’s University Ryerson University Selwyn House Shad Canada Saint Mary’s University Simon Fraser University Sun Youth The Learning Partnership The Montreal Oral School for the Deaf The Study School Toujours ensemble Tyndale St-Georges Community Centre University of British Columbia (Sauder School of Business) University of Calgary University of New Brunswick uOttawa Fund University of Prince Edward Island University of Toronto University of Windsor West Island Cancer Wellness Centre West Island Palliative Care Residence Wilfrid Laurier University Windmill Canada Youth Employment Services

275

APpendix 6

Formula Growth 1974 Letter to Unitholders

APPENDIX 6

277

278

APPENDIX 6

Index Air Canada, 45, 59, 143-4 Aitken, Max (Lord Beaverbrook), 22 Aitken, Ian, 217, 236-7 Almond, Nicole, 238-41 Anta Sports, 155-7 Arbuckle, Govett & Co. Ltd., 44 Ardsley Partners, 56 Argo Construction, 44 Ashford, Ted, 56-7, 65, 72, 76-7 Bailey, Tom, 56 Baillie, Charlie, 54 Bajeux-Besnainov, Isabelle, 228 Bank of Canada, 23 Birks, G. Drummond, 38, 43-4, 49, 64, 66, 68, 86-7 Birks, Henry, 43 Bishop’s University, 219 Boisvert, Mathieu, 180-1, 183-5, 197 Bolton Tremblay, 65 Bremner, Russ, 82, 90 Brenner, Reuven, 12, 61 Bronfman, Charles, 44 Burlton, Angela, 226 Bush Sr, George, 35, 165 Bush, Nancy Walker, 35 Caisse de dépôt et placement du Québec, 180

C.J. Hodgson, 17, 39, 45 Callaway Golf Company, 124-6 Canadian Olympic Committee, 25 Catafago, René, 59, 69, 85-9, 90-1, 96-7, 166, 170, 212-3, 217 Carmike Cinemas, 141-2 Celgene Corporation, 79, 118-20 Chamberlain, Neville, 27 Chambers, Beatrice, 23, 31 Cheung, Nelson, 163, 187, 190-5, 200 Churchill-Smith, John, 15 Circuit City, 80, 114-7 Cisco Systems, 127-8, 145 Cobbett, Stuart “Kip,” 212 Cockfield Brown, 31 Cockfield, Harry, 25-6 Cockfield, Stuart, 25-6 Commercial Trust, 54 Concordia University, 11, 84, 190, 200, 220 Consolidated-Bathurst Inc., 22, 37, 59 Cottingham, Walter, 39-42, 45-6, 49-50, 60, 62, 64, 67-8, 210, 211 Cross, Peter, 41-2, 46 Davidson, Francis, 229-30 Dawes, Sidney, 25 Deloitte Touche, 82, 85, 224

280

Index

Desautels Faculty of Management, 12, 219, 228 Delta Upsilon Fraternity, 32 Dix Mille Villages, 202 Dupuis Frères Department Store, 29 DeSerres, Roger, 64, 68, 226 DeWolf, Tim, 59 Dobson Dinners, 55-7, 76, 79 Dobson Yacht Club, 24 Dobson, Job William, 21 Dobson, John: at McGill, 32-4; at Harvard, 34-5; attempted palace coup, 60-3; birth, 23; childhood, 28-32; early career, 35-9; final years, death, and funeral, 2534; Formula Growth early days, 39-47; golf, 13-19; investment strategy, 94-9; investment primer, 102-5; on free enterprise and entrepreneurship, 214-23; optimism, 63-4; personality, 3-13; philanthropy, 12-3; views on government and taxation, 205-13 Dobson, Sydney, 20-7, 31, 38 Dobson, Virginia, 15-8, 23-4, 30-2, 254 Dominion Engineering Works, 8, 35-6, 39 Douglas Hospital, 25 Dow Jones Industrial Average, 46, 62, 64, 69, 88, 165, 211 Dunn, Sir James, 22 Durrell McKenna, Nancy, 9, 36 Durrell, Alan, 35-6 Durrell, Jim, 8-9, 36 Eagle Investments, 50

Eberts, Edward, 17 Ellis, Barbara, 5-6, 69-71, 85, 91 Ellis, Willard, 38 ENACTUS Canada, 236-42 Facebook, 150-2 Farlow, Steve, 19, 233-6 Fonds de solidarité FTQ, 180 Forest, Dick, 45 Formula Growth Alpha Fund, 172, 177, 180, 182, 184-6, 203 Formula Growth Fund, 41, 46-51, 56, 58-60, 62, 64-5, 69-70, 87-8, 92, 101-2, 146, 148, 151, 153, 166, 171-6, 198-200, 210-1, 216, 220, 248-50 Formula Growth Global Opportunities Fund, 172, 187, 191-2 Formula Growth Hedge Fund, 172, 174-7, 179, 181, 183, 185, 192, 203 Formula Unit Trust, 58-9, 87, 91 Fortin, Cameron, 190, 200-2 Frist, Thomas, 99-100 Gentile, Mike, 183, 190, 200, 220 Gilmour, Harvey, 8, 230-1 Glorieux, Jacques, 41 Godel, Nassie, 45, 64-5, 67-8 Gray, John, 17, 253 Green Mountain Coffee Roasters, 132-4 Guarnieri, Giampaolo, 189, 191-2 Haggar, Charles, 181-3, 185-6, 190, 196, 200, 203

Index

Haier Smart Home, 163-4 Hall, Bobby, 45 Hallward, Hugh, 44, 49, 64, 66, 68 Hammond-Chambers, Alex, 73, 77, 100 Hambrecht & Quist, 55, 79, 118 Harper, Stephen, 243 Harvard Business School, 34-5, 37, 39, 220 HEC Montréal, 219 Heenan Blaikie, 44 Hempleman, Phil, 56 Hepburn, Claudia, 242-3 Holden, Kim, 6-7, 98, 118, 217 Home Depot, 80, 94, 121-3, 161, 167 Honderich, Beland, 23 Howe, C.D., 21, 30 Hospital Corp. of America, 70, 75, 99, 100 HR Strategies, 180, 182 Hugessen, Andy, 41 Hynes, Philippe, 11 Imperial Trust Company, 41 Ivory, Neil, 6, 44, 49, 51, 64, 68, 73 Ivory & Sime, 73-4, 189 Jamieson, Gregor, 18 Jarislowsky, Stephen, 3, 35, 42, 73 Javelin Select China Fund, 172, 190, 192 Jinping, Xi, 158, 193 John Dobson Foundation, 12, 89, 141-66, 171

281

John Molson School of Business, 190, 219 Johnson, Peter, 224, 226, 233, 235 Johnston, David, Former Governor General of Canada, ix, 253 Johnston, Donald, 44, 49, 68 Johnston, Sam Catherine, 10 Kay, Frank, 17 Keesal, Norm, 220-2 Kelly, Randy, 5, 51-6, 59, 82-7, 89, 92, 102, 113, 115, 124, 163, 165-7, 169-73, 181, 183, 185-8, 191, 194, 196-8, 200, 210, 217, 219-20, 223, 227, 248-51, 254 Kelly-Gagnon, Michel, 217, 244-7 Kennedy, John F., 46 Kenneth Woods Portfolio Management Program, 190, 200, 220 Killam, Izaak Walton, 22 Kiriazidis, Ari, 196, 198, 216-7, 228 Knox, Diana, 5, 12, 30-3, 254 Knox, Parker, 12, 172, 254 Laidley, David, 216, 224 Landau, Robert, 17 Lank, David, 224-5 Larock, Clifford L., 44, 73 Lawson, Jeff, 148 Levesque, Paul, 54 Liberal Party of Canada, 30, 38 Liddy, John, 166-9, 171, 174, 198, 201-2, 251 Lilly, Dick, 80, 114 Lombard Odier, 189 London, Bobby, 78-9

282

Index

Lowenberg, John, 77-8, 121 Lower Canada College, 32 Lynch, Peter, 78, 153, 198 Mackechnie, Peter, 4, 6, 18, 54-58, 61-2, 64-5, 67-71, 76, 78, 90-1 Martell, Harriet, 21 McCarthy Tétrault, 29 McDougall, Reford, 245 McGill Dobson Centre for Entrepreneurship, 219, 224, 226-9 McGill Executive Development, 36, 38 McGill Management Institute, 38, 220 McGill University, 3, 11-2, 23, 28, 32, 38, 59, 198, 200, 202, 216, 219 McLaughlin, Earle, 32 Menzies, Teresa, 214, 222 Merchants’ Bank of Halifax, 14, 21 Midgley, Robert, 41 Miss Edgar’s and Miss Cramp’s School, 30 Montreal Expos, 44 Montreal Gazette, 24, 32 Montreal Junior Board of Trade, 36–7 MOVE Inc. 135-7 Mount Bruno Country Club, 11, 13, 14, 30, 43, 67, 254 Ogilvie, Kelvin, 8, 215, 232 Ottawa Senators, 9 Passman, David, 141 Paterson, Alex K., 11

Paterson, Robert, 8, 11, 28, 30, 38 Pelham, Chris, 230-2 Pembroke Management, 42, 44, 62, 73, 75, 99, 167, 189, 236 PhoenixInvest Group, 163, 172, 189-90 PhoenixInvest Pacific Fund, 172, 190, 192 Power Corporation, 37, 39 Power, Robert, 19, 79, 80, 118 Premium Iron Ore, 39, 45 Prenor Group, 65 Reade, Bette Lou, 5–7, 57, 62, 69, 71-2, 85, 90-1, 167 Rent-A-Center Inc., 129-131 Ring Central, 145-7 Riven, Steve, 74-5 Roger Bacon Golfing Society, 16 Rook, John, 39, 40, 44-5, 64, 211 Rovinescu, Calin, 143 Royal Bank of Canada, 20-27, 30, 32, 38, 59, 85, 91 SafeHands for Mothers, 9 Sandberg, Sheryl, 150 Schnabel, Frank L., 49, 64 Scully, Robert, 33 Selwyn House School, 29, 30, 32, 44 Shaw, George Bernard, 3 Sherwin Williams, 39 Shmunis, Vlad, 145 Sinclair, James, 202-3 Sonder, 229 Soutar, Ian, 17, 42, 44, 46, 48-9, 51,

Index

57, 60, 62, 64, 66-7, 71, 73, 75, 94, 96-7, 99, 163, 167, 189, 192, 207, 216, 253-4 Soutar, James, 163, 189-92, 195 SS&C Technologies, 153-4 St Laurent, Louis, 21, 30 St Maurice Valley Chronicle, 24 Staples, Bob, 65, 82, 85-6, 90-1 Staples, Tony, 171, 198-200, 220 Stone, Bill, 153 Sun Life, 42 Taylor, Scott, 44, 62, 73, 75 Techtronic Industries, 161-2 Templeton, Sir John, 56-7, 80, 88-9, 244 Tétrault, Jacques, 29, 45, 216 Thor Industries, 139-40 Tokarsky, Tim, 229 Tonus Capital Inc., 11

283

Torstar, 23 Trinity College School, 32 Trudeau, Pierre, 44 Trump, Donald, 194 Turner William I.M., Jr, 13, 22, 37, 39, 221 Turner, John, 13, 15, 40, 44-5 Twilio, 148-9 Vit, Gregory, 229 Webster, Lorne, 38, 40, 49, 62, 646, 68 Weinstein, Marc, 219 Welsford, Hubert, 35 Wilson, Morris W., 21, 23 Wuliangye, 158-60 Zimmerman, Raymond, 100 Zuckerberg, Mark, 150