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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. 

1 comment:

  1. Hi Abhishek,

    You have very nicely summarized Peter Cundill's investment philosophy. For me, decision to sell is far more difficult to make than decision to buy. Mr.Pabrai gave a very interesting view point in his book that Investing is like entering a Chakravyuha. Buying a good business is only half the battle won, but if you don't have exit plan (selling), you may be trapped in chakravyuha.

    Keep sharing your thoughts.

    Best Regards
    Dhwanil Desai