There’s Always Something to Do tells the story of Peter Cundill’s life and career. A chance reading of SuperMoney led him to Ben Graham’s deep value approach, which he adapted for global stock markets.
The Notes
- Peter Cundill turned to value investing after reading SuperMoney in 1973, chapter 3 on Ben Graham, Warren Buffett, and margin of safety.
- Cundill’s grandfather was a business tycoon for a moment before the business fell into bankruptcy in 1927.
- His father became a trader for Kingstone Mackenzie Securities, survived the 1929 crash, then bought a seat on the Montreal Stock Exchange in 1937.
- Peter was born in 1938.
- Cundill got his start at Greenshields, which turned into a job at Yorkshire Trust Company after a successful takeover, with a focus on fixed income, mortgages, and real estate before moving toward equities.
- He brought a strong accounting background.
- He initially looked for good companies with fallen share prices in unfashionable industries.
- His first big investment success for his clients was Bethlehem Copper. He unknowingly found a net-net. He bought it at a cost of $4.50 and sold it 6 months later for $13.00.
- He left Yorkshire in 1971 to open an AGF Management Limited office as an investment counselor.
- He was an avid runner. Ran his first marathon in 1976 at age 38 and completed 22 more marathons over the years.
- While he had yet to come up with his own investment philosophy he came to some early conclusions:
- Management’s ability to predict earnings is universally poor.
- It is the strategic modelling behind a portfolio that matters most.
- One needs to develop a sense of spaced maturities in a common stock portfolio in a way that is comparable to a bond portfolio.
- In a macro sense it may be more useful to spend time analysing industries instead of national or international economies.
- It must be essential to develop and specify a precise investment policy that investors can understand and rely on the portfolio manager to implement.
- Reading Institutional Investing by Charles Ellis, led Cundill to study past companies he had success investing in to look for common characteristics that could help him duplicate those results. He looked for the most important metrics and gave a weighting to each:
- Book value
- Dividend growth
- EPS growth
- Frequency of senior management changes/philosophy
- Favorable/unfavorable industry environment
- Degree of recognition by public
- General economic environment
- Available float
- Flow of funds
- Level of interest rates
- Equivalent money instruments
- Time horizon
- Feel of the company
- Value investing tends to work opposite of market trends and naturally reinforces the axiom of not losing money. When markets are excessively priced, fewer bargains exist, and stocks selling below liquidation value are scarce. It naturally drives value investors to sell stocks and hoard cash, thus reducing risk.
- The downside of value investing is the possibility of selling more positions than expected, and holding more cash, in an excessively high market. Complacency, compromising on your sell discipline, and losing patience are always tempting options. Discipline is key.
- “Many shall be restored that now are fallen, and many shall fall that are now held in honor.” — Horace, Ars Poetica (Graham used this)
- The difference between patience and stubbornness in investing is the ability to examine your assumptions.
- Mississippi is the only U.S. state unable to access London financial markets because it refused to repay $7 million in debt issued in 1838. The debt was used to fund two banks that went bankrupt after poor investments and corruption. The state stopped payment in 1841.
- He kept a daily journal for 45 years.
- Cundill was officially diagnosed with a rare degenerative neurological disorder in 2006. There were earlier signs around 1998. Succession planning began in 2006. He stepped down in 2009.
- “Magic Sixes” is a screen created by Norman Weiner of Oppenheimer that looks for stocks trading at 60% of book value, 6x earnings or less, and 6% dividend yield or more.
- Cundill Value Fund
- In 1974 Cundill bought the management contract for the All Canadian Venture Fund. The name was changed to the Cundill Value Fund.
- By then, he had read SuperMoney and Graham’s Security Analysis and had found his direction. He shared the new investment policy of the fund with shareholders in a letter:
- “Based on my studies and experience, investments for the Venture Fund should only be made if most of the following criteria are met:
- The share price must be less than book value. Preferably it will be less than net working capital less long-term debt.
- The price must be less than one-half of the former high and preferably at or near its all-time low.
- The price earning multiple must be less than ten or the inverse of the long-term corporate bond rate, whichever is the less.
- The company must be profitable. Preferably it will have increased its earnings for the past five years and there will have been no deficits over that period.
- The company must be paying dividends. Preferably the dividend will have been increasing and have been paid for some time.
- Long-term debt and bank debt (including off-balance-sheet financing) must be judiciously employed. There must be room to expand the debt position if required.
- In addition, studies should be made of past and expected future rates of profitability, the ability of the management, and the various underlying factors and hypotheses that govern sales volume, costs, and profit after taxes. Of course, one should never become an absolute slave to the above criteria, but they have proved to my satisfaction to be a vital starting point.”
- “Based on my studies and experience, investments for the Venture Fund should only be made if most of the following criteria are met:
- Returns in the first three years of running the fund were 32%, 32%, and 21% respectively.
- Annual returns after 5 years exceeded 30%.
- Selling Rules
- Not knowing when to sell became an issue, especially after Tiffany’s was bought out at $50 (after he sold the position at $19 from $8). The fund’s board came to a compromise.
- The fund would automatically sell half the position after it doubled, with the sale of the other half left to the fund manager’s discretion.
- Cundill had no issue concentrating the fund in a few stocks or in a single country if the opportunities were better than in other markets.
- He made it a habit to travel internationally each year to look for bargains in the country that had the worst-performing stock market over the prior 11 months. He could better understand the culture, politics, and business environment by experiencing it firsthand.
- Networking with other local value investors became a vital source of potential investment ideas.
- Basic Strategies Used:
- Stocks trading below liquidation value(net-nets)
- Stocks trading below book value
- Distressed debt (could be as much as 20% of the fund)
- Got into distressed debt after an intro at Drexel Burnham
- Have to determine if the reorganization or liquidation of business is worth more than the price of the debt, then see where, if at all, a margin of safety exists in the debt structure and the time it takes to reach a settlement. Settlement negotiations can be complex and drawn out.
- Changes in credit rating can lead to forced selling by institutions with a mandate to hold only highly-rated bonds. The selling leads to deep opportunities.
- Interest rates are about the only external factor that influences distressed debt prices, it’s uncorrelated to stock and bond markets. Prices are almost entirely determined by the company’s condition.
- Once the bad news is out, the downside risk is minimal, assuming value exists.
- The primary factor is time. Returns are based on how long you hold them. In other words, the longer it takes to reach a settlement, the higher the return needs to be.
- Sovereign debt — Cundill bought some sovereign debt via Brady Bonds at discount prices.
- The main focus was always on the value of net assets.
- He looked for “hidden assets” — assets or goodwill carried on the books at much less than the actual value.
- Ex: Tiffany’s, in 1974, marked the Tiffany Diamond at $1.00 on the books, had Fifth Ave. real estate marked at $1 million since 1940, and had no goodwill on the books valuing the brand at $0. Shares traded below book value (Cundill believed below liquidation value).
- Ex: Cleveland Cliffs owned a power plant in Michigan on the books at a negligible value. Book value was $22, Cundill started buying at $15 down to $6 ($100 average price), sold some at $19, bought it back at $10 again, and sold later for a 30% compound return.
- The 10-year anniversary of the Cundill Value Fund (1984) showed a 26% annual return. He shared this in the annual letter:
- “We have learned much during the past 10 years:
- The value method of investing will tend at least to give compound rates of return in the high teens over longer periods of time.
- There will be losing years; but if the art of making money is not to lose it, then there should not be substantial losses.
- The fund will tend to do better in slightly down to indifferent markets and not to do as well as our growth-orientated colleagues in good markets.
- It is ever more challenging to perform well with a larger fund. With increased size the diversification means that no individual investment, whether a gain or a loss, will have a dramatic effect on the unit price.
- We have developed a global approach to investing. As a result, we have a far broader range of securities to choose from than any purely domestic or North American fund.
- We have developed a network of contacts around the world who are like-minded in value orientation.
- We have gradually modified our approach from a straight formula valuation basis to one where we try to buy securities selling below liquidation value, taking into consideration off-balance sheet items.
- THE MOST IMPORTANT ATTRIBUTE FOR SUCCESS IN VALUE INVESTING IS PATIENCE, PATIENCE, AND MORE PATIENCE. THE MAjORITy OF INVESTORS DO NOT POSSESS THIS CHARACTERISTIC.
- For all my emphasis on the virtues of patience in value investment it has to go hand in hand with minute attention to the detail, with conviction and determination, otherwise patience is just futile endurance.”
- “We have learned much during the past 10 years:
- Cundill ran a full analysis of his fund’s performance and each position at the end of every year. He was looking for mistakes so he could improve his research process and reduce errors.
- 1987 Crash
- Black Monday:
- Hong Kong: down 400 points, over 20% drop — trading was suspended for 3 days
- Nikkei: down 600 points, over 20% drop
- Dow: down 508 points, 22.6% drop
- October Market Returns:
- Dow down 23%
- Toronto down 25%
- Hong Kong down 45%
- Cundill finished the year up 13%!
- “We are relatively well-positioned at this juncture. I do not anticipate a total melt-down of the financial system… There is too much pain around for there to be any temptation to gloat. But, somehow, the word is out on the street that we have been prescient, both in thought and action, prior to the event and are ready to exploit it to advantage. I suppose that this in itself contributes in a small way to a stabilizing effect, especially in these sorts of markets where buyers are scarce and volumes are thin.” — Cundill
- ” As I have watched events unfold I have come to the conclusion that computers actually don’t do much more than make it quicker for investors to react to information. The problem is that having the information in its raw state on a second-by-second basis is not at all the same thing as interpreting and understanding its implications, and this applies in rising markets as well as falling ones. Spur of the moment reactions to partially digested information are, more often than not, disastrous.” — Cundill
- Black Monday:
- 1990 was the first losing year for the fund — down 9%.
- 1998 was the second losing year — also down 9%.
- Worst Investment — Cable & Wireless
- It was a $59 million loss on a $100 million investment.
- It had a ton of cash, with a telephone business in the Caribbean and a fiber optics business.
- Cundill assumed the fiber optics business was worth nothing. It was worth less than nothing — burning through cash during the Dot-com craze to keep up with the competition by placing as much fiber as possible.
- The loss drove him to assign someone to play Devil’s Advocate on the team in case there was unanimous agreement on a stock.
- “I think that the worst one that we have had was Cable & Wireless… We were able to recover a little bit but it was a bad investment. And that is why you diversify, even when you believe in the merits of concentration.” — Cundill
- Cundill’s Insights
- “I think that intelligent forecasting (company revenues, earnings, etc.) should not seek to predict what will in fact happen in the future. Its purpose ought to be to illuminate the road, to point out obstacles and potential pitfalls and so assist management to tailor events and to bend them in a desired direction. Forecasting should be used as a device to put both problems and opportunities into perspective. It is a management tool, but it can never be a substitute for strategy, nor should it ever be used as the primary basis for portfolio investment decisions.”
- “Once the analysis is complete and you have reached the firm conviction that an investment is right you should not try to be too clever about the purchase price. If you have to take a loss do it decisively – don’t dither. Learn the lessons and then forget about it.”
- “In every analysis you need to isolate what the real assets are and you must not forget to examine the franchise to do business, to review the character and competence of the management and to estimate the outcome if the whole business had to be turned into cash. “
- “As I proceed with this specialization into buying cheap securities I have reached two conclusions. Firstly, very few people really do their homework properly, so now I always check for myself. Secondly, if you have confidence in your own work, you have to take the initiative without waiting around for someone else to take the first plunge.”
- “The timing difficulty in selling does not lie in not knowing when the trading discount to intrinsic value has been eliminated, but in judging by how much it is likely to be surpassed.”
- “The ultimate skill in this business is in knowing when to make the judgment call to let profits run. While it is true that 99% of investment effort is routine, unspectacular enquiry, checking and double-checking, laboriously building up a web of information with single threads until it constitutes a complete tableau, just occasionally a flash of inspiration may be necessary. Once we have begun to build a position it has to be recognized that our intentions may change in the course of its construction.”
- “One becomes even more keenly aware that there is never just one factor determining events, there are many of them interwoven and acting simultaneously. Indeed, from my own professional standpoint, I always need to discipline myself to be aware of the world generally, rather than trying to be specific. I only need to be specific about the numbers.”
- “None of the great investments come easily. There is almost always a major blip for whatever reason and we have learnt to expect it and not to panic.”
- “The “value method of investing” will tend to give better results in slightly down to indifferent markets and less relatively sparkling results in a raging bull market. What matters, however, is that the method will provide a consistent compound return in the middle teens over very long periods of time.”
- “Sooner or later the market will do what it has to do to prove the majority wrong.”
- “My best advice to individual investors can readily be summed up in two closely linked precepts. Be patient and don’t be greedy.”
- “On the subject of the “fallen angels” of stock markets that occupy so much of our detective work as value investors, I try to keep in mind Oscar Wilde’s comment that “saints always have a past and sinners always have a future,” so no investment should be ruled out on the basis of past history.”
- “Synchronicity begins where pure chance ends, with one event leading to another, like a chain reaction, but all brought about by the initial event which cannot be predicted or explained. In other words — don’t waste your time. Just have patience and make sure you’re confident about the margin of safety in each investment.”
- “Markets can be overvalued and still keep on getting more expensive for quite a while, or they can be undervalued and keep getting cheaper, which is why investing is an art form, not an exact science.”
- “Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.”
- “Being out on a limb, alone and appearing to be wrong is just part of the territory of value investment.”
- “Statistical overvaluation is a funny thing — it can go on for a very long time, far beyond the limits of rationality, and it is a problem for the value investor in two ways: it can tempt one to compromise standards on the buy side and it may lure one into selling things far too early.”
- “No formula works forever. It needs to be in continuous review and development.”
- “Discounts to asset value are not enough, in the long run you need earnings to be able to sustain and nurture these corporate values.”
- Antithesis of Value: “What I mean by this is identifying a market where values are so stretched and extreme that they are clearly unsustainable. They have passed far beyond the realms of any measure of statistical common sense.”
- “This is a recurring problem for most value investors — that tendency to buy and to sell too early. The virtues of patience are severely tested and you get to thinking it’s never going to work and then finally your ship comes home and you’re so relieved that you sell before it’s time. What we ought to do is go off to Bali or some such place and sit in the sun to avoid the temptation to sell too early.”
- “I would like to leave you with two insights in finding a good investment…:
- Every company ought to have an escape valve: inventory that can readily be reduced, a division that can be sold, a marketable investment portfolio, an ability to shed staff quickly. That sort of thing. However, no escape valve will provide a cushion in the face of a collapse in investor confidence.
- The business must be getting better, not necessarily by a lot, just honestly better.”
- “We always look for the margin of safety in the balance sheet and then worry about the business.”
- “Watching the best sportsmen in action prompts the question as to why the best are so much better than everyone else. Perhaps it is because they practice “adaptive perfectionism.” This is something that is readily applicable to investment and I have tried to follow it by remaining faithful to the Ben Graham principles that I believe are the soundest route to investment success, while retaining an eye for adapting them and moving them forward to fit today’s investment world more perfectly.”
- On his personal portfolio: “I used to try to pick the best stocks in the fund portfolios, but I always picked the wrong ones. Now I take my own money and invest it with that odd guy Peter Cundill. I can be more detached when I treat myself as an ordinary client.”
- “Accounting is nothing more than a language. There are two parts to this process: making statements and interpreting them. I’ve spent most of my career interpreting them.”
- “Sir John Templeton said something to me and it stuck in my mind and I didn’t do anything about it at the time… He said something which I think is correct, and that Graham also talks about; ‘always change a winning game.’ I didn’t do it because I was on a roll then and I wasn’t flexible enough. There is no investment rule that remains immutable except the margin the safety. There are always breaks and the trick is to begin to anticipate, if you can, where the break points will be and shift. Not the disciplines and not the framework but the tactics that are involved.”
- “If you are under the impression that value investing does not include the use of derivatives, well you are wrong. Futures and option markets allow you to go short with less risk than used to be the case, so from time to time we use them as an offensive weapon to exploit what I call ‘the antithesis of value,’ where, for example, by any measure of value — not just our own value framework — a market is grotesquely out of alignment with reality… We go short on markets, not individual securities.”
- “If you base a fund’s growth or a client’s future on one or two potential skyrockets, you have to be prepared to live with the misfires.”
- “Cundill’s corollary says that when Murphy’s Law is still in play one should wait, but when things get so bad that you’re really scared, that’s the time to buy.”
- “When I stray out of my comfort zone I usually get my head handed to me on a platter.”
- “Why will someone sell you a dollar for 50 cents? Because in the short run, people are irrational on both the optimistic and pessimistic side.”
- “If there’s a bad stock market, I’ll inevitably bo back in too early. Good times last longer than we think but so do bad times.”
- “I’m agnostic on where the markets will go. I don’t have a view. Our task is to find undervalued global securities that are trading well below their intrinsic value.”
- “I would say that the problem with big businesses that have moats around them is they tend to over-expand.”
- “IPOs for the most part are drams engendered by the hope that the pro forma estimates will be met. We deal to a certain extent in nightmares that everyone knows about.”
- “We try not to lose. But we don’t want to try too hard. The losses, of course, work against you in establishing decent compound rates of return. And I hope we won’t have them. But I don’t want to be so risk-averse that we are always trying too hard not to lose.”
- “A lot of investors want excitement, not steady returns. Most people don’t see making money as grinding it out, doing it as efficiently as possible.”
- “Irving Kahn gave me some advice many years ago when I was bemoaning the fact that according to my criteria there was nothing to do. He said, ‘There is always something to do. You just need to look harder, be creative and a little flexible.'”
- “In some ways value investing is borking and most investors don’t want a boring life — they want some action: win, lose, or draw.”
- “I pay much more attention to the balance sheet than the profit and loss statement and am always looking for hidden assets on the books.”
- “We customarily do three tests: one of them asset-based — the NAV, using the company’s balance sheet. The second is the sum of the parts, which I think is probably the most important part that goes into the balance sheet I’m creating. And then a future NAV, which is making a stab (which I am always suspicious about) at what you think the business might be doing in three years from now.”
- “I bought stuff at 3.5 cents once and I thought it can’t go down to zero. It can.”
- “John Templeton said something to me a couple of years ago — he said if you are right 60% of the time and wrong 40% you will be a hero and if you are right 40% and wrong 60% you will be a bum. But I am sure he used more gracious language than that.”
- What Makes a Great Investor?
- Curiosity: “Curiosity is the engine of civilization. If I were to elaborate it would be to say read, read, read, and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond just professional. This helps to develop one’s sense of perspective in all matters.”
- Patience: “Patience, patience, and more patience. Ben Graham said it, but it is true of all investment disciplines, not only value investing, although it is indispensable to that.”
- Concentration: “You must have the ability to focus and block out distractions. I am talking about not getting carried away by events or outside influences — you can take them into account but you must stick to your framework.”
- Attention to Detail: “Never make the mistake of not reading the small print, no matter how rushed you are. Always read the notes to a set of accounts very carefully — they are your barometer. You need sound simple arithmetic skills, not differential calculus… Seeing the patterns will develop your investment insights, your instincts — your sense of smell.”
- Calculated Risk: ” Be prepared to take risks but never gambles. Value investors are often perceived as taking the safe investment route and that is true. But the time scales required for a value investors can be contradictory. Holding on to heavily discounted stock that the market dislikes for a period of five or ten years is not risk free. As each year passes the required end reward to justify the investment becomes higher, irrespective of the original margin of safety.”
- Independent Mind: “I think it is very useful to develop a contrarian cast of mind combined with a keen sense of what I would call “the natural order of things.” If you can cultivate these two attributes you are unlikely to become infected by dogma and you will begin to have a predisposition towards lateral thinking — making important connections intuitively.”
- Humility: “I have no doubt that a strong sense of self belief is important — even a sense of mission — and this is fine as long as it is tempered by a sense of humor, especially the ability to laugh at oneself. One of the greatest dangers that confront those who have been through a period of successful investment is hubris — the conviction that one can never be wrong again. An ability to see the funny side of oneself as it is seen by others is a strong antidote to hubris.”
- Routines: “Routines and discipline go hand in hand. They are the roadmap that guides the pursuit of excellence for its own sake.”
- Mens Sana in Corpore Sano (A Sound Mind in a Sound Body): “I have found that my exercise routines have contributed immensely towards giving me the mental resilience to get through the tough times — and there always are tough times. I also believe that engaging in competitive sport has taught me to temper my competitive instincts with common sense and only to attempt what I sincerely think is possible — that works professionally too. About fifty percent of my time is spent reading and running is useful for digesting it all.”
- Skepticism: “Skepticism is good, but be a skeptic, not an iconoclast. Have rigor and flexibility, which might be considered an oxymoron but is exactly what I meant when I quoted Peter Robertson’s dictum “always change a winning game.” An investment framework ought to include a liberal dose of skepticism both in terms of markets and of company accounts.”
- Personal Responsibility: “The ability to shoulder personal responsibility for one’s investment results is pretty fundamental. This means that if you lose money it isn’t the market’s fault, it isn’t some broker’s fault, and it isn’t the fault of your research department or anyone else. It is in fact the direct result of your own decisions. Coming to terms with this reality sets you free to learn from your mistakes.”
- Reading Again: “There are few books — really not that many — which I believe are indispensable reading for every serious investor in whatever facet of investment practice they may favor:
- Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay (only the first two chapters — the title is worth the price of admission!)
- The Crowd: A Study of the Popular Mind by Gustave Le Bon
- Buffett: The Making of an American Capitalist by Roger Lowenstein
- The Money Masters by John Train
- The Intelligent Investor: A Book of Practical Counsel by Benjamin Graham
- The Templeton Touch by William Proctor
- The Alchemy of Finance by George Soros”