Category Archives: Investing Gurus

Yes, There are Good Stockpickers (VIC)

Ted Talks

Evidence suggests the professional investors in my sample have significant stock-picking skills. Interestingly, these skilled investors share their profitable ideas with their competition. I test various private information exchange theories in the context of my data and determine that the investors in my sample share ideas to receive constructive feedback, gain access to a broader set of profitable ideas, and attract additional arbitragers to their asset market. The proprietary data I study are from a confidential website where a select group of fundamentals-based hedge fund managers privately share investment ideas. The investors I analyze are not easily defined: they exploit traditional tangible asset valuation discrepancies, such as buying high book-to-market stocks, but spend more time analyzing intrinsic value and special situation investments.

Can Investors Pick Stocks on VIC 01272010-Wesley Gray

VIC

Toby Carlisle (of DEEP VALUE FAME) Live at NYSSA Aug. 22nd

http://www.nyssa.org/authorseries/ctl/viewdetail/mid/4196/itemid/2691/d/20160822.aspx

YSSA’s Value Investing Thought Leadership Group presents

NYSSA Author Series™:
Tobias Carlisle

Monday August 22, 2016 6:00 PM through 8:00 PM
NYSSA Conference Center
Available as: Live Session
Categories: Market Integrity, NYSSA Author Series™, Programs for Members, Seminar, Value Investing



Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations” is a must-read exploration of the deep value investment strategy, describing the evolution of the theories of valuation and shareholder activism from Graham to Icahn and beyond. The book combines engaging anecdotes with industry research to illustrate the principles and methods of this complex strategy and explains the reasoning behind seemingly incomprehensible activist maneuvers. Written by an active value investor, Deep Value provides an insider’s perspective on shareholder activist strategies in a format accessible to both professional investors and laypeople.

The Deep Value investment philosophy described by Graham is rarely available in the modern market, forcing activists to adapt. Current activists exploit a much wider range of tools to achieve their goals. Deep Value enumerates and expands upon the strategies available to value investors today and describes how the economic climate is allowing value investing to re-emerge.

This event will cover:

  • Strategies and tactics of effective activism
  • Unseating management and fomenting change
  • Target identification
  • Determining advantageous strategies
  • Eyeing conditions for the next M&A boom

Who should attend?

Portfolio Managers and Analysts

Speaker

Tobias Carlisle is the founder and managing director of Carbon Beach Asset Management LLC. He is best known as the author of the well regarded website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Prior to founding Eyquem in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

NYSSA expects all attendees to comply with NYSSA’s Code of Conduct while attending NYSSA events or meetings. NYSSA expressly reserves the right, in its sole discretion, to grant or deny access to any individual, or to expel any individual from any NYSSA event or meeting.

Program Details
Date
Monday, August 22, 2016

Time
6:00 p.m.-8:00 p.m.

Format:
6:00 – 7:30 p.m. Presentation
7:30 – 8:00 p.m. Networking

Location
NYSSA Conference Center
1540 Broadway, Suite 1010, (entrance on 45th Street)
New York, NY 10036

Fees
Member $25
Non-member $50
$10 surcharge for walk-ins.


Registration Deadline

Wednesday, August 19, 2016

Chair
Elliot Trexler

CFA Institute CEs
Credits= 1.5

Speaker
Tobias Carlisle

Consider Becoming a Member 
Contact membership@nyssa.org

Additional Information
If you are unable to register for this event online, please call (212) 541-4530 for assistance.

Register via Mail/Fax
Policies and Procedures

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read: http://ericcinnamond.com/parachute-pants/   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.

AG

I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true. 

HAVE A GREAT WEEKEND AND STAY COOL ON THE US EAST COAST.

CASE STUDY Activist Action on Coke 2014 Proxy

KO IMGAGE

We are taking up from the last post http://csinvesting.org/2016/07/25/major-analyst-exam-reading-a-proxy-then-assessing-management-and-directors/

This case study teaches us about reading a proxy, management compensation, board governance, and the struggles of activism.

Mr. David Winters of wintergreen_fund_annual_report_2015_1231 has struggled since inception. From inception on 10/17/2005, Wintergreen has returned 68.73% vs. 113.22% for the S&P 500.   Another fund started in 12/30/2011 returned 15.95% vs. 77% for the S%P 500.   Nevertheless, he has done a service for the investment community by pointing out egregious compensation plans in Wintergreen-TheTerrible10-2-web.  Then note the passiveness of the big index funds in terms of protecting their own shareholders, 20150430-Wintergreen-Advisers-BigIndex.

Mr. Winters began his battle with Coke in 2014. KO_VL Jan 2015. Coke has a fine franchise with high returns on capital, but its cost structure (including management’s compensation) may be far too high considering the competitive pressures that incombents are facing.   Coke has had to make pricey acquisitions to diversify out of brown sugary fizz drinks. Also, all incumbents are facing new pressures like DollarShaveClub.com breaching of Gillette’s (P&G) moat–see below

Dollar Shave Club Hurting Gillette

Video:

Analysis of Dollar Shave Adshttps://www.youtube.com/watch?v=cW8S-QBKcq4


As a review: Mr. Winter’s on Wealth Track: https://youtu.be/x6I1B3MaTms

Ok, back to Coke’s Proxy and Wintergreen’s battle to have Coke’s Board rescind the 2014 incentive compensation plan.   See the progression of the battle along with the slide presentations: Wintergreen Faults Coca Cola Management (KEY DOCUMENT TO READ!)

Then view Wintergreen’s presentations along with the articles in the link above:

What do you make of Mr. Winter’s struggle?  How can you explain Mr. Buffett’s actions? I was DISAPPOINTED but not surprised.  What did you learn that would be of help to your investing–the key to anything you spend time on?   Note Mr. Winter’s designation of corporate buybacks as another shareholder expense.   I believe shareholder buybacks are a use of corporate resources (a shrinking of the equity capital) that may either be a waste or a good use of resources depending upon whether the purchase price of the shares is below intrinsic value. Mr. Winters stresses that buybacks simply use corporate funds to mop up shareholder dilution. Regardless, Mr. Winter points out the huge shifting of shareholder property to a management that hasn’t performed exceptionally well.  Coke’s Board had granted exceptional awards for middling performance–now that is a travesty.

When I think of Coke, a great franchise that is not currently super cheap, I think of other “stable” franchise stocks like Campbell Soup or Kellogg’s.  The market has bid these up so your future returns will be low.  Do not misunderstand me, these companies are massive, slow-growth franchises, but if you pay too much, then you may have lower future returns for many years.

CMP Soup

CMP Soup

38630396-An-Open-Letter-to-Warren-Buffett-Kellogg-Company

—-

Lie with statistics http://tsi-blog.com/2016/07/you-can-make-statistics-say-whatever-you-want/

HAVE A GREAT WEEKEND and KEEP DANCING

MAJOR ANALYST EXAM: Reading a Proxy then Assessing Management and Directors

KO IMGAGE

KO ten

You always read the proxies and the notes to the financials. Today you read Coke 2014 Proxy.   

What is your assessment of management and the Board of Directors? What do you notice? Please justify your reply.

If you are struggling, then here is a hint:

You react: https://youtu.be/_YQR36fQ_Xc?t=43s  Why?

Another hint: KO_VL Jan 2015 for context.

Take a few days if necessary.   This is a critical case study that should be taught at every business school!

Lesson: READ WITH A PURPOSE.   Why do you read a proxy?  Unless it is a merger proxy, you focus on who the management and Board of Directors are and how they are compensated.   Go to the heart of the matter, don’t read all 100 pages.


Update: Between Euphoria and Despair.

If you invest in cyclical companies, then you should listen to http://ir.scorpiobulkers.com/Events and SALT-Earnings-Presentation-Q2-2016-Supplemental-Information and SALT 2Q 2016 Q Report

Richard Oldfield: Simple But Not Easy–A Deep Value Investor Speaks

Richard

Simple But Not Easy

“Value investors are born not made.” Richard Oldfield

I am an investor similar to Walter Schloss and Peter Cundhill.

Simple But Not Easy Quotes
“One should invest in equities, which are volatile, only with a long-term perspective, and in the most volatile of equities with an especially long-term perspective – 5 years or more – and only with money which one can be sure of not needing in the next few years.”
“Different meanings of safety to different investors. For someone needing a lump of money in a year’s time, the only safe investment is a cash deposit or a short-term government bond. For someone with no imminent need of the money and a desire to accumulate capital and increase purchasing power in the long-term, it may be safer to invest in equities – volatile but with the historic and likely future characteristic of a high return after inflation – than to put money on deposit with the risk that over the years the real value of the investment will be eroded by inflation.”
“A share looks cheap; you buy it; it goes down and looks cheaper; you buy more; it goes down and down, getting cheaper and cheaper, until it reaches what practitioners call euphemistically the ultimate cheapness – zero. This is what is generally called the value trap.”
“A long-term temperament as well as long-term circumstances A Japanese man went into a bank to change some Japanese notes into sterling. He was surprised at how little he got. “Please explain,” he said to the cashier. “Yesterday I was changing same yen for sterling and I received many more sterling. Why is this?” The cashier shrugged his shoulders. “Fluctuations,” he explained. The Japanese man was aghast. “And fluck you bloody Europeans too,” he responded, grabbed the notes, and walked out. Fluctuations matter if the money could be needed soon. Money invested in equities must not be money which will be wanted in a year or two, or might be urgently wanted at any time, because there is a fair chance that the moment when it is needed will be a bad one for the stock market and the investor will therefore be selling at low prices. If investors think they might need the money soon, the message is clearly stay away: the chance of a minus return is just too great. Even if investors are in a position to allocate a fair amount to equities, they should not necessarily do so. It is not enough that the circumstances are right. Investors need to be temperamentally inclined to the sort of long-term investment which equities are. Long-termness must be subjective as well as objective. The fact that the circumstances of a particular investor might objectively lead to a certain viewpoint does not mean that he or she necessarily has that viewpoint. A baby is in an objective position to take a long-term view, but will not actually look beyond the next feeding-time.”
“The great advantage of the property-centred policy was that in a panic property was very difficult to sell. The British kept their property because they could not do otherwise, and prices always recovered. They were prevented by the illiquidity of property from selling at the bottom.”
Richard Oldfield, Deep Value Investor from the UK VIDEO Worth the view and to be seen with this presentation:
2016_Oldfield  Presentation on March 2, 2016

A Reader’s Question on Modelling (Munger and Buffett’s View)

politics

A READER’S QUESTION

Just wanted to shoot you a quick email applauding you for putting together the “Ultimate Investor Checklist.”  investment_principles_and_checklists_ordway This may be the most valuable word document I have on my computer.

munger

Quick question, I’m a huge fan of Charlie Munger (currently am reading Poor Charlies Almanack)- In the checklist when he describes being a business owner Charlie says:

      • Ignores modeling forecasts for the next quarter, next year, or next ten years.
      • Ignores forecasting completely.

http://www.mymentalmodels.info/charlie-munger-reading-list/ (Search through this link on Munger’s Mental Models.

If Charlie Ignores modeling and forecasting, how does he go about estimating Intrinsic Value? I know Charlie has said in the past that he has never seen Warren Buffett use DCF, so how do they go about estimating Intrinsic Value?

John Chew: A good question.  First, a model is not reality but a metaphysical description of reality.   You probably should build a simple spread-sheet of sales, capex, taxes, etc. to understand the economic model of the business you are looking at–we are not all geniuses like Buffett or Munger.

But rather than have me say what I think Buffett would say, read the source. Note his analysis of Coke and Sees Candies:

Buffett_Lecture_Fla_Univ_Sch_of_Business_1998  Hope that helps!

Arbitrage by Buffett_Research  (just for Buffaholics)

Course on Buffett-Style Investing from NYU

revealed-why-you-will-never-be-able-to-invest-like-warren-buffett

Hi John,

New York University’s School of Professional Studies is offering an online class focused on the time-honored techniques of value investing, as practiced by the world’s most legendary investor, Warren Buffett. We thought you might be interested in knowing more about this class, and perhaps in sharing this information with your readers.

By examining case studies of Buffett’s acquisitions, students will explore the real-world principles that Buffett uses to pick companies. The class starts April 2nd and is open to the public for registration.

For more information, please see the attached press release.

Thanks so much,

Details: Fundamentals of Buffett-Style Investing_PR2016 (3)
Email with questions: jgb4@nyu.edu


Alisa Koyrakh
Assistant to James Berman

JBGlobal LLC
212.388.9873
41 East 11th Street, Fl 11
New York, NY 10003

 

Berkshire Letter_2015   The Recent Buffett Letter

John Chew (Editor, csinvesting.org) I am not endorsing this class per se because I don’t know the professor or the details of the course material, but for those of you who seek a more structured learning experience then perhaps this class is for you.  Let me know if you take the class, so I can share your experience with others.  Also, remember that if you use the search box at csinvesting.org, you can find dozens of Buffett case studies for FREE.

Just remember that trying to copy Buffett will NOT work, but applying the Buffett principles of investing to YOUR OWN methodology will help you.   Be the BEST YOU can be not a second-rate copy of another. 

http://www.businessinsider.com/warren-buffetts-investing-strategy-2013-12

More reading of interest:

 

Peter Cundill, Deep Value Investor

Your main job as a net/net buyer is to elminate the possibility of bankruptcy.–Peter Cundill

Peter Cundill’s Reading List

Peter Cundill: Background & bio

Peter-Cundill

The Canadian born investor, Peter Cundill, plunged into the world of financial markets while he was still at McGill University, which he  graduated from in 1960 with a degree in Commerce.Cundill earned the designation of Chartered Accountant and then Chartered Financial Analyst before moving from Montreal to Vancouver  to become the President of AGF Investment management; he worked at the company for four years from 1972 till 1975.

During that time he was also a partner in the company called the Vanan Financial Management Ltd. which in 1975 took over the All-Canadian Venture Fund. In 1977, Cundill established his very own Vancouver-based firm named Peter Cundill & Associates Ltd. and renamed the All-Canadian Venture Fund to Cundill Value, when the fund became the flagship of his newly established firm. Peter Cundill & Associates, now named Mackenzie Cundill Value Series A after a strategic partnership of PCA with Mackenzie Financial Corporation, best epitomizes the bottom-up value investment outlook of Peter Cundill.

The Cundill Value Fund was launched in December 1974 and immediately lost money during 1975. However, after this dismal start, the star fund manager recovered quickly and reported few losing years after 1975.

From 1974 through to 1988 the fund returned 22% per annum. Over its 35 year history to 2010, the Cundill Value Fund achieved a CAGR of 13.7%, which is especially impressive when you consider the fact that the market was still recovering from the financial crisis when this figure was calculated.

Peter Cundill was awarded the Analysts’ Choice Career Achievement Award for the best mutual fund manager of all time in 2001. At the award ceremony which recognized his  35 plus years of contribution and expertise as a fund manager and value investor, he was referred to as the ‘Indiana Jones of the Canadian Money Managers’, a title which was acknowledged by Cundill with great pleasure. Cundill’s expertise even gained  recognition from Warren Buffet, who claimed Peter Cundill had the traits of a good successor and possessed the kind of credentials required that would be suitable for Berkshire Hathaway’s next chief investment officer.

Observing the multi-dimensional personality of Peter Cundill, it is evident that he enjoyed life to the fullest. By no means did he limit himself from challenges or new experiences. He had an innate child-like curiosity and explored various aspects of his interests. His love for travelling turned him to one of the best global investors, and his rapacious reading habit lead him to the writings of the great Benjamin Graham. Cundill also enjoyed and challenged himself with various sports such as handball, rugby, skiing and hiking; being a dedicated marathon runner, at the age of over 40 he was capable of completing 22 marathon races including ‘Sub 3 hour’ (running the marathon under three hours).

His contribution was not limited to the financial world, but to the world of academia and literacy. Being a philanthropist, in 2008, he founded the Cundill Prize at McGill University to recognize the non-fiction publication for authors who have a great impact on literary, social and academic fields.

Despite of his recent death on 23rd January 2011 due to a rare neurological disease, the legacy and investment philosophy of Peter Cundill is kept alive by the firm he founded in 1975 and the numerous contributions made by him in the world of finance and academia.

Peter Cundill: Investment philosophy

Like many value investors, Cundill’s style of investing can trace its roots back to Benjamin Graham; Cundill liked to buy $1 for $0.40. What’s more, Cundill liked to buy stocks that were generally ignored and rejected by the general public, giving his approach a contrarian style.

Unlike Graham, who brought as many companies as he could, as long as each company met his strict criteria, Peter Cundill only considered companies with strong balance sheets and an upcoming catalyst that could unlock value for investors. It’s often the case that deep-value investments languish for years before acatalyst unlocks value. By investing only when a catalyst was upcoming, Cundill increased his risk of success. Peter usually scrutinized each company’s balance sheet to discover off balance sheet financing and assess the company’s true debt load.

Contrarian Investing (Part II)

swimming-against-tide-one-man-figure-walking-contrary-to-group-crowd-walking-wooden-figures-people-d-rendering-white-35054169

“Bull markets are born on pessimism,” he declared, they“grow on skepticism, mature on optimism, and die on euphoria.” –John Templeton

John Templeton paid attention to the emotion of the stock market. The first half of his philosophy was “The time of maximum pessimism is the best time to buy.” When everyone else was selling, he bought low during the Depression and in 1939 at the onset of World War II . . . and he made millions.

The second half of his philosophy was “the time of maximum optimism is the best time to sell.” He sold high during the Dot.com boom when everyone else was still buying. Founded in the 1950s, his Templeton Growth Fund averaged 13.8% annual returns between 1954 and 2004, consistently beating the S&P 500.

I think there are a few ways to make many times (10x to 100x +) your money over a long period of time.   The first would be to own emerging growth companies that have owner-operators who are both excellent operators and capital allocators who grow the company profitably at a high rate over decades.   The business generates high returns on capital while being able to deploy capital into further growth. Think of owning Wal-Mart in the early 1970s or Amazon after its IPO or 2001.   There will be a post on 100 to 1 baggers soon. I prefer this approach.

Wal-Mart 50 Year Chart_SRC

The second way would be to buy distressed assets and then improve those assets or create efficiencies by creating economies of scale. Carlos Slim, Mexican Billionaire, would be an example of this type of investor. Think activist investing. Note that Carlos Slim has operated at times as a monopolist in a government protected market.  Most of us do not have his options.

The third way would be to buy deeply-distressed, out of favor, cyclical assets and then resell upon the top of the next cycle. Gold mining is a difficult, boom/bust business, for example–see Barrons Gold Mining Index below. All businesses are somewhat cyclical, but commodity producers are hugely cyclical with long multi-year cycles due to the nature of mining-it takes years and high expense to reopen a mine and even if I gave you $2 billion and several years, you and your expert team may not be able to find an economic deposit. Note the five-to-ten year cycles below.

gold mining bgmi

We are focusing on the third way, but in no way do I suggest that this is for you. You need to be your own judge.  There is a big catch in this approach, you need to choose quality assets and/or companies with managements that do not over-leverage their firms during good times or overpay for acquisitions during the booms (or you could choose leveraged firms but be aware of the added risk and size accordingly becasue when a turn occurs, the leveraged firms rise the most). You also need to seek out a period of MAXIMUM pessimism which is difficult to do. How do you know that the market has FULLY discounted the bad news?  Finally, YOU must be prepared to invest with a five-to-ten year horizon while expecting declines of over 50%. That concept alone will make you unique.   Probably most will turn away from such requirements.

We pick up from http://csinvesting.org/2015/12/14/contrarian-dream-or-nightmare/.  Before we delve into the technical aspects of valuing cyclical companies, think about what it FEELS like to have the CONVICTION.  Here is an example:

We last studied Dave Iben, a global contrarian investor, in this post: http://csinvesting.org/tag/david-iben/.   You should read, Its Still Rock and Roll To Me at http://kopernikglobal.com/content/news-views and listen to the last few conference calls at the right side of the web-page.   Note Mr. Iben’s philosophy, approach, and Holdings. His portfolio is vastly different than most money managers or indexers. But being an contrarian takes fortitude and patience. Kopernik Global performance since inception:

koper spy

Next preview the readings below.

First you need to understand Austrian Business Cycle Theory to grasp how massive mal-investment occurs. Why does China have newly built ghost cities? Distortion of interest rates causes mal-investment (the boom) then the inevitable correction because the boom was not financed out of real savings.

Why is the bust so severe for mining/commodity producers?   Read Skousen’s book on the structure of production.  Think of a swing fifty feet off the ground and 200 feet long.   If you are sitting near the center of the swing’s fulcrum (nearest the consumer), then the ups and downs are much less than being on the end of the swing furthest from the consumer (the miners and commodity producers).

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Damodaran Valuing Cyclical Commodity Companies.pdf
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Sorry: here is the Hooke book (chapter 19 on resource companies)

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Even if you are an expert in valuation, investing in a cyclical company can be lethal: Vale: Go Where it is darkest (Damodaran)

ValeBig Vale

Then Throwing in the towel on Vale. I am not picking on Prof. Damordaran because we all make mistakes, and he graciously has provided a case study for us.  Study the posts and the comments.

Can you think of several research errors he made (BEFORE) he invested?

Remember in the prior post, the long-term chart of the CRB index showing commodities at 41-year lows since the CRB Index is below 175 or back to 1975 prices?  Then why, if gold is a commodity,  doesn’t gold trade at $200 or at least down to $500 to $700 as the gold chart from that time shows?monthly_dollar

Why, if gold is money, doesn’t gold trade in US Dollars at $15,000 or the estimated price to back US Dollars by 100% in gold?  You can change the amount to $10,000 or $20,000, but you get the idea.gold monetary base

 

Gold during the boom of 1980 rel. to Financial Assets in 1980 the price of gold at $800 per ounce allowed for the US gold holdings to back each US dollar then outstanding.

Try thinking through those questions.  Can we use what we learned from gold to value oil?

I will continue with Part III once readers have had several days to digest the readings and at least three readers try to answer at least one question.  Until then……………………….be a contrarian not contrary.

Update on 21/Dec. 2015 http://fortune.com/2015/12/21/oil-prices-low/