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Thursday 26 April 2012

There's Always Something To Do - (Peter Cundill) written by Christopher Risso-Gill: Part II

In Part I, I covered some of the excerpts from the life and investment approach of Peter Cundill. Here are some more.

Typical starting point for investigating stocks for investing in Cundill Value Fund:-

  • Share price less than book value. Preferably, it will be less than net working capital less long term debt.
  • The price must be less than half of the former high and preferably at or near its all time low.
  • PE must be less than 10 or inverse of the long term bond rate, whichever is less.
  • Company must be profitable. Preferably it would have increased its earnings for the past 5 years and there would be no losses in that period.
  • Company must be paying dividends. Preferably, the dividends should be 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.

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 - don't dither. Learn the lessons and then forget about it..

Firstly, very few people really do their homework properly, so now I check for myself. Secondly, if you have the 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.

Selling "formula" used in the initial years of the Cundill Value Fund:-
the fund would automatically sell half of any given position when it has doubled, in effect thereby down the cost of the remainder to zero with the fund manager then left with the discretion as to when to sell the balance.

The most important attribute for success in value investing is patience, patience and more patience. The majority of investors do not possess this characteristic. 

Monday 23 April 2012

There's Always Something To Do - (Peter Cundill) written by Christopher Risso-Gill: Part I

I am currently reading There's Always Something To Do written by Christopher Risso-Gill. It is written on the life and value investment approach of the famous Peter Cundill, the founder of the Cundill Value Fund. Peter Cundill derived his approach from Graham & Dodd and included learnings from his informal mentor, Sir John Templeton and was one of the few extremely successful international investors.

What I am really loving about this book is that its taken from the copious journals maintained by Peter Cundill, so provides a first hand account of the thought process that an investor goes through. Typically, all other books by fund managers are written post-facto and are guilty, to some extent atleast, of hindsight bias. Here, the I could feel the dilemma that Cundill goes through at various points in his investing journey which I can related to very closely.

Here are some excerpts from the book:-

What I am beginning to perceive is that investors tend to follow trends and fashion rather than taking the trouble to look for value. This must offer opportunity for the professional investment manager, as a result of the short term mispricing of securities.
I think intelligent forecasting (company revenues, earnings, etc.) should not seek to predict what will 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. 
I believe that there is probably one opportunity in every man's life which demands his knowledge, his guts, his self-esteem and his judgment. If he seizes it with both hands and it is successful, he joins the first rank, if not he remains a mortal with feet of clay.
Some insights near the beginning of his career:
  • Management's ability to predict earnings is universally poor
  • It is the strategic modelling behind the 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.
I will follow up on more excerpts as I continue reading. So, stay tuned.

Friday 6 April 2012

Guru Speak: Tenets for Value Investing by James Montier

I am just beginning to read James Montier's extremely acclaimed book Value Investing: Tools and Techniques for Intelligent Investment, so thought would share some of his thoughts that I had read in 2010. Important to note that how he has adapted his views on investing after 2008.

Tenet I : Value, Value, Value - Value investing is the only safety first approach I have come across.By puttig the margin of safety concept at the heart of the process, the value approach minimizes the risk of overpaying for the hope of growth.

Tenet II : Be Contrarion - Sir John Templeton once said that "It is impossible to produce superior performance unless you do something different from the majority".

Tenet III : Be Patient - Patience is integral to value approach on many levels, for waiting for the fat pitch, to dealing with the value manager's curse of being too early.

Tenet IV : Be Unconstrained - While pigeon-holing and labelling are fashionable, I am far from convinced that they aid investment. Surely, I should be free to exploit value opportunities wherever they may occur.

Tenet V : Don't Forecast - We have to find a better way of investing than relying upon our seriously flawed ability to soothsay.

Tenet VI : Cycles Matter - As Howard Marks puts it, we can't predict but we can prepare. An awareness of the economic, credit and sentiment cycles can help with investment.

Tenet VII : History Matters - The four most dangerous words in investing are "This time its different". A knowledge of history and context can help avoid blunders of the past.

Tenet VIII : Be Skeptical - One of my heroes said "Blind faith in anything will get you killed". Learning to question what you are told and developing critical thinking skills are vital to long-term success and survival.

Tenet IX : Be top-down and bottom-up - One of the key lessons from the last year (2008) is that both top-down and bottom-up viewpoints matter. Neither has a monopoly on insight.