Peter Cundill was a Canadian value investor in the most traditional sense. Yet, he found Ben Graham almost by chance. A friend handed him a copy of SuperMoney just before he got on a flight home for Christmas. The chapter on Graham solidified his philosophy on investing.
One way Graham found value was to study assets on the balance sheet to find stocks trading below liquidation value. Cundill followed the same approach.
He often described his approach as buying dollars for forty cents. Over the 33 years he ran the Cundill Value Fund, he outperformed the market earning a 15.2% average return for shareholders.
Two things stand out from Cundill’s career. He had an insatiable curiosity and a willingness to adapt. Markets change. Those changes can render a strategy ineffective. Cundill learned that a strict Graham approach wouldn’t cut it in changing markets. He needed to adapt his strategy to the changes.
One of the first things he did was to look beyond North America. His curiosity dragged him to new countries to experience firsthand its culture and business environment. He became an early adopter of a global approach.
He adjusted his initial screening criteria from liquation value to book value and more before diving into the financial statements of the company. He searched for “extra assets” — another evolution. Undiscovered value existed in assets on the books for much less than their true worth. If a large enough margin of safety existed, Cundill only needed the patience to wait for the market to recognize it. He also dove into the realm of distressed corporate and sovereign debt too.
In 1975, Cundill took control of the All-Canadian Venture Fund, renamed it the Cundill Value Fund, and was off and running. His timing was perfect. Coming off the ’74 historic lows, he exceeded a 30% annual return over the first five years. That type of performance draws the attention of investors and the media, which allowed Cundill to share more about his process throughout his career.
On Patience
The mantra is patience, patience, and more patience. Think long-term and remember that the big rewards accrue with compound annual rates of return.
On Forecasting
We don’t do a lot of forecasting per se about where markets are going to. I have been burned often enough trying to.
On His Value Strategy
Not necessarily in order of importance: Buy lows, not highs. Look at the balance sheet for guidance in the first place and see what the book values are. Another one is to see if there are extra assets. We do a fair amount of SOP, or “sum-of-parts,” analysis, which is, if you were going to liquidate the business, what would you get for various divisions and things like that, and do you have a margin of safety? Be wary of intangible assets on the balance sheet… Look for dividend yield and a low price-to-earnings ratio. And don’t pay much for growth. Try to get initial strength in the balance sheet. You still have to do some work trying to figure out where the business is because there’s nothing worse than buying a balance sheet that’s pristine and the operating results begin to go bad on you, because then your margin of safety quickly gets taken way and what you thought was a value situation becomes a value trap. Believe me, we’ve had those over the years.
***
You use the net-net formula as a screening mechanism. But then you have to go one step further, though everyone has a different step. In my case, I look for extra assets. I love extra assets.
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We nearly always have something close to 20% cash and have never been below 10%. The idea is to keep cash in case there are market turbulence in our favor, so that we can go in and make a commitment and not feel squeezed.
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If I can really see the bargains I’ll buy them. I have not made an incredibly conscious attempt to say, well, I am going to wait until the stock market goes down to buy things. I will address the target of opportunity, if you will, at any stage.
***
The problem often for a value investor is not only when the markets are overvalued, but also when they are, shall we say, merely optimistic.
On Shorting
I don’t short individual securities… But there are times when our search for value turns up situations where groups of stocks and sometimes entire markets are seriously overvalued and ripe for correction. When we find that, I do sell the relevant put options.
***
The problem of the value investor is you have to be right on the timing side. And I am not sure value investors, for the most part, are very good at that.
On the Need to Always Improve
You never say you’ve got a system that’s going to last forever. You always want to learn how to get it better, it’s always shifting.
***
The rules are changing. In my case, it started when Mike Price, who used to be a pure net-net investor, started talking about something called, “extra asset syndrome,” or at least that’s what I call it. It’s taking, you might say, net-net one step farther, to look at all of a company’s assets, figure the true value.
On Selling
The old Graham methodology was that you sold a stock when it went up 50%, or you sold it after two years if nothing happened. But I no longer play by those rules. I would probably sell half my holding if a stock doubled or, if it didn’t move, I would take a long hard look at why it hadn’t. But not sell it automatically.
On Mistakes
The first investment I ever made was while I was still at McGill in 1959. I was doing a vacation job as an office boy at Wood Gundy, and I bought $500 worth of a speculative mining stock and in less than 48 hours I had lost the lot. It was an experience I never forgot.
***
Cable and Wireless would have to be the investment where I had my head handed to me… Market sentiment was against this company in particular, as well as the telecoms sector in general, so I started to get interested. My history has always been in buying securities when they’re unpopular. However, Cable and Wireless is an illustration of the fact that despite careful analysis and a strict adherence to Benjamin Graham’s value principles — a low share price, no debt, a huge amount of cash and profitable established networks — things can still go wrong, spectacularly so.
Sources:
An Interview with Peter Cundill, Globe & Mail
How to Find Value Globally, Canadian Business
Back in Style, Barron’s
Endangered Species?, Barron’s
The Drunks Did Him In, The Province
Related Reading:
Notes: There’s Always Something to Do
Last Call
- On Bullshit in Investing – Noahpinion
- Good Luck – Young Money
- It’s Time to Rediscover the Importance of Interest – E. Chancellor
- The Bond Market Selloff in Historical Perspective – Liberty Street
- Country Risk: A 2022 Mid-year Update! – Musings on Markets
- A Conversation with Michael Mauboussin – Compound
- Don’t Read History for Lessons – Commonplace
- Dazzling First Images from James Webb Space Telescope – Nova
- The 2022 Audubon Photography Awards: The Top 100 – Audobon
