Saturday, December 6, 2014

There's Always Something To Do (On Peter Cundill)

The title of this post comes from a book of the same name on the Canadian value investor Peter Cundill. Frustrated by the lack of opportunities in a rich market, Cundill complained to his friend and mentor, Irving Kahn, who responded, "There is always something to do. You just need to look harder, be creative and a little flexible." This advice seems to have worked wonders for Cundill. His investment vehicle, the Cundill Value Funds, returned 15.2% per annum compounded over 33 years.

I enjoyed learning about Cundill's career and life, though I suspect this may be a bit of a niche read. Reading about a value investor is obviously not everyone's idea of a fun weekend, even though this is a very easy and entertaining little volume. Serious investors may complain that there isn't enough meat or technical detail to keep them engaged. I concede that the book doesn't really delve into the weeds of specific investments, but there are enough stories of investment successes - and even the occasional failure - to keep the reader captivated. The book is based on the personal diaries Cundill kept for over 30 years, and this intimate glimpse into his thinking really separates this book from most descriptions of famous investors. One entry admits, "I am tense because of the lack of performance, insecure and off form, which tends to make me aggressive and adopt a tone that jars." Rather than just reading a paean to a departed genius (Cundill died in 2011), we get to see the challenges of portfolio management, both as a craft and as a business.

Like the best investors and asset allocators, Cundill was fixated with parsing the personal characteristics that laid the foundation for investment success. His list included (1) Insatiable curiosity; (2) Patience; (3) Concentration; (4) Attention to detail; (5) Calculated risk-taking; (6) Independence of mind; (7) Humility; (8) Routines; (9) Physical activity; (10) Skepticism, and (11) Personal responsibility.

I'm surprised that the author didn't include "Flexibility" as one of the characteristics (though perhaps it's subsumed under "Curiosity"). The book's title is, after all, a tribute to the creativity and flexibility investors must sometimes show. An epigram Cundill enjoyed was, "Always change a winning game". Cundill was rigorous in demanding a margin of safety in his investments, usually backed by tangible assets, yet flexible in the application of this philosophy. While primarily an equities investor, he invested in distressed debt as well, including sovereign debt. Cundill was also willing to short markets (most successfully in Japan), though not individual securities. He was also geographically flexible, travelling widely to educate himself on different markets where value had become apparent.

One trait that is certainly mentioned is patience. "The most important attribute for success in value investing", Cundill declares, "is patience, patience, and more patience. The majority of investors do not possess this characteristic." I spent some time in a recent post emphasizing the important of serenity to investors, so this was naturally music to my ears. Patience takes various forms:

1) Doing the homework. "Very few people really do their homework properly, so now I always check for myself."
2) Patience in entering a trade. To use the language of my earlier post, insight is understanding the nature of cycles. Cundill quotes Horace, via Ben Graham: "Many shall be restored that now are fallen, and many shall fall that are now held in honour." Similarly, as Oscar Wilde says, "Saints always have a past and sinner always have a future." Yet insight must be allied with serenity, i.e. the patience to act. Cundill advises, "The trick is to wait through the crisis stage and into the boredom stage. Things will have settled down by then and values will be very cheap again." At the portfolio level, this may often necessitate large cash holdings. This is painful when markets are moving up, but also helps to reduce the likely volatility of the portfolio. I've written about the importance of cash in an earlier post.
3) Patience in evaluating new information, particularly in an era of instantaneous information transfer: "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... Spur of the moment reactions to partially digested information are, more often than not, disastrous."
4) Patience in selling once you're starting to see the price move up. The temptation is to sell quickly, being so relieved that the trade has finally panned out.

The focus on "Routines" can probably be thought of more broadly as "Good Investing Habits". The most obvious of these Cundill practiced was keeping a journal, which allowed him to both reflect upon and document his thoughts. The writer Joan Didion believed that the benefit of keeping a journal is not to document objective reality but to remember how events felt to the individual. It goes without saying that I'm a big supporter of this idea, which drives me to maintain this blog. Another good investing habit was Cundill's practice of visiting the country that had the worst performing stock market in the previous eleven months. This forced him to seek investments outside North America, and extended his natural curiosity. Finally, as a serious marathon runner, Cundill believed that athletic stamina and mental resilience go hand in hand. This runs parallel (no pun intended) to an idea that has piqued my interest, namely Alex Soojung-Kim Pang's concept of "deliberate rest"

Developing these characteristics is hard,but obviously not impossible. Some may be tempted to conclude that nurturing these personal traits, along with the difficulty of understanding financial statements and business models, makes value investing too hard for most people. This is precisely the wrong conclusion. While it is "easy" to follow fatuous investment fads, it is devilishly difficult to make money that way. Cundill's example shows a well-trodden path that requires dedication, but is ultimately a boon to the investor's financial and psychological well-being.

At some points in the book, I found myself questioning if the Peter Cundill way could still be followed. First, many of his investment successes came from recognizing hidden assets in companies. These instances are harder to find today when corporates and activist investors are far more focused on "unlocking shareholder value". Furthermore, previously hidden assets, such as real estate, can now be revalued under IFRS to bring them into the light. The prevalence of such assets in the past made it easier to be a generalist if one could rely on them for value and obtain the underlying business for cheap (or sometimes even for free). Today's investors are generally more likely to have to spend more time on the decidedly less sturdy ground of assessing the durability of economic moats.

All the same, such criticisms do a disservice to the Peter Cundill way. After all, Cundill prided himself on adapting to different markets and investing regimes, rather than repeating the same trick over and over. As he and Irving Kahn would say, there's always something to do.

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