Notes – There’s Always Something To Do

There’s Always Something To Do: The Peter Cundill Investment Approach

by Christopher Risso-Gill, Peter Cundill, published 2011

The Peter Cundill approach to value investing

The following note outline was rescued from my personal document archive. The outline consists of a summary of Christopher Risso-Gills’ recent biographical investment profile of Canadian value investor Peter Cundill, There’s Always Something To Do. The notes are in summary form of the most critical aspects to Cundill’s value investment perspective and analytical process.

There’s Always Something to Do: The Peter Cundill Investment Approach

• “I think that intelligent forecasting 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.”
• He made a habit of visiting whichever country had the worst performing stock market in the past 11 months.
• “In a macro sense, it may be more useful to spend time analyzing 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.”
• A few investment principles:
  • never use inside information, “All you get from inside information is a whiff of bad breath.”
  • economic facts and company values always win out in the end
  • don’t try to be too clever about the purchase price
  • isolate what the real assets are
  • never forget to examine the franchise to do business
• Insider buying is not always well-informed– Peter once scooped up shares of J. Walter Thompson (JWT) at a perceived discount and faced a hostile and confused president who was selling stock from the companies pension fund and couldn’t figure out why Cundill was buying (pg. 29), which demonstrates that there are informational disadvantages and ambiguities that keen analysts can take advantage of, even over company insiders; insider buy/sell ratios and actions should be considered thoughtfully and fully “discounted”, not taken as authoritative proof of anything by themselves
• “Very few people really do their homework properly, so now I always check for myself.”
• Look for hidden gems on the balance sheet
• Investing globally:
  • if you find one foreign stock that is trading at a significant discount, snoop around because there may be other bargains in the foreign industry or market
  • There was nothing “ad hoc” about the way Peter addressed the process of international value investment. In every instance it had to be firmly based on a clear understanding of local accounting practices and how those might differ from accepted standards in North America. The fact that it was different, less transparent, or deliberately opaque was never a reason for ignoring or excluding a market or security. Peter’s attitude was “vive la difference”; if a balance sheet was hard to penetrate it was not just a challenge but an opportunity because the difficulties actually represented a “barrier to entry” even for the experienced professional investor and undoubtedly excluded all but the most sophisticated private investors.
  • The other aspect, which Peter considered to be a vital component of a successful international strategy, was building carefully constructed networks of locally based professionals who had a thorough understanding of value investment principles and would instinctively recognize a security that would potentially fit the Cundill Value Fund’s investment criteria.
• “THE MOST IMPORTANT ATTRIBUTE FOR SUCCESS IN VALUE INVESTING IS PATIENCE, PATIENCE AND MORE PATIENCE. THE MAJORITY OF VALUE INVESTORS DO NOT POSSESS THIS CHARACTERISTIC.”
• “It is also dangerous to rely on a single strategy in a doctrinaire fashion. Strategies and disciplines ought always to be tempered by intelligence and intuition.”
• Personal margin note: Peter did not succeed in isolation but cultivated and utilized networks of knowledgeable and influential people (investors, political activists and politicians, business people); he also had several mentors
• Peter was impressed by a group of corporate socialites he had dinner with, “They maintain that having a hangover is a waste of a day.”; personal margin note: respect the value of time, the ultimate scarce resource, always
• Peter organized a prestigious investment conference, the Cundill Conference, where he both talked and exchanged ideas on investing with other friends and gurus, as well as heard from invited guest expert speakers who spoke on a range of topics totally unrelated to investing, to promote cross-disciplinary rigor and creative spark
• “The boards of charitable foundations are convenient meeting places for influential people. Their ostensible purpose is intimately bound up with the social and commercial ones.”
• Peter relocated to London from Toronto to better pursue his global value investment approach, seeing London as the center of capital and the business crossroads of the world at the time; personal margin note: where is today’s London, or tomorrow’s?
• On flying across the Atlantic routinely on the Concorde:
  • “It is a remarkable sounding board, especially in my world of matters financial.”
  • “One becomes even more keenly aware that there is never just one factor determining events, there are many of them interwoven and acting simultaneously.”
  • “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.”
• Selling stocks which near or surpass their intrinsic value often acts as an “inbuilt safety valve” for the value investor in markets which are in a bubble or overpriced generally
• Peter channels Horace’s Ars Poetica via Graham in a journal entry prior to the 1987 Crash: “Many shall be restored that now are fallen, and many shall fall that are now held in honor.”
• “Sooner or later the market will do what it has to do to prove the majority wrong.”
• Cundill, via Oscar Wilde, on an approach to stocks: “Saints always have a past and sinners always have a future.”
• “Being out on a limb, alone and appearing to be wrong is just part of the territory of value investment.”
• Cundill on overvalued markets: “it can tempt one to compromise standards on the buy side and it may lure one into selling things far too early.”
• Cundill’s value approach gently evolves: “Discounts to asst value are not enough, in the long run you need earnings to be able to sustain and nurture these corporate values. We now, as a matter of course, ask ourselves hard questions as to where we expect each business to be in the future and, as well, make a judgment on the quality of management.”
• Cundill defines shorting based off of his ‘antithesis of value’: “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.”
• “The great records are the product of individuals, perhaps working together, but always within a clearly defined framework.”
• “In reality outstanding records are made by dictators, hopefully benevolent, but nonetheless dictators.”
• On avoiding the temptation to sell an eventual winner: “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.”
• Cundill on his shock related to 1968 sentiment toward the shoddy accounting of the conglomeration movement: “Nobody cared; accounting is a bear market phenomenon!”
• “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.”
• “We always look for the margin of safety in the balance sheet and then worry about the business.”
• “If there’s no natural skeptic on an investment maybe it would be wise to appoint one of the team to play Devil’s Advocate.”
• More on investing overseas in developing markets: What was required was an asset-based margin of safety significantly greater than would be considered adequate in the more developed markets. It was also fairly obvious that in these less developed markets tangible fixed assets were superior to cash, which had a nasty habit of evaporating.
• Cundill on retirement: “Retirement is a death warrant.”
• Poetic Cundill: “No fortunes are made in prosperity, Ours is a marathon without end: Enjoy the passing moments.”
• Cundill’s wit and wisdom on what makes for a great investor:
  • “Curiosity is the engine of civilization”, he advises to have serious conversations with people that result in an exchange of thoughts and to keep one’s reading broad.
  • “Patience, patience and more patience.”
  • “Always read the notes to a set of accounts very carefully… seeing the patterns will develop your investment insights, your instincts — your sense of smell. Eventually it will give you the agility to stay ahead of the game, making quick, reasoned decisions, especially in crisis.”
  • “Holding on to a 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.”
  • “An ability to see the funny side of oneself as it is seen by others is a strong antidote to hubris.”
  • Routines: “They are the roadmap that guides the pursuit of excellence for its own sake.”
  • Via Peter Robertson, “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: “If you lose money it isn’t the market’s fault… it is in fact the direct result of your own decisions. This reality sets you free to learn from your mistakes.”
  • Suggested reading list:
    • Extraordinary Popular Delusions and the Madness of Crowds
    • The Crowd: A Study of the Popular Mind
    • Buffett: The Making of an American Capitalist
    • The Money Masters
    • The Templeton Touch
    • The Alchemy of Finance
  • Cundill’s Corrolary to Murphy’s Law: “When things get so bad that you’re really scared, that’s the time to buy.”
  • Global investing: “Given the dearth of bargains today, it pays to search for them everywhere.”
  • On independence, via Ross Southam, “You have to be willing to wear bellbottoms when everyone else is wearing stovepipes.”
  • “If it is cheap enough, we don’t care what it is.”
  • “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 dreams engendered by the hope that pro forma estimates will be met. We deal to a certain extent in nightmares that everyone knows about.”
• Three parts to Cundill’s investment strategy:
  • NAV
  • sum of the parts analysis
  • future NAV estimation
• “Sometimes nothing is more misleading than personal experience.”
• Investments held by Peter Cundill, managed by others, a potential place to search for ideas or gain more insight, pgs. 223 and 224