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

by Christopher Risso-Gill

Not very well known in the investment community these days but Peter Cundhill was a great Canadian value investor. He was a follower of Ben Graham and practiced a lot of his investment principles such as valuing the assets on the balance sheet and comparing them to market cap. He was known for his investment fund, The Cundhill Value Fund. Peter kept a journal which the author cites a lot from in this book. The author, Christopher Risso-Gill, is the senior consultant to the Peter Cundhill Foundation and does a good job displaying to readers Peter's successful investment approach by citing a lot from his speeches, journal, and other writing. 

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There’s always something to do:

  • The share price must be less than book value.  Preferably it will be less than net working capital less long term debt.

  • The price must be less than one half of the former high and preferably at or near its all time low.

  • The price earning multiple must be less than ten or the inverse of the long term corporate bond rate, whichever is the less.

  • The company must be profitable.  Preferably it will have increased its earnings for the past 5 years and there will have no deficits over that period.

  • The company must be paying dividends.  Preferably the dividend will have been 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.

If you are going to live in the public eye, you will have to accept what’s said about you without taking it too seriously, whether good or bad.

 

Although book value is decreasing, the company can still qualify as a good value investment, IF IT’S A BEN GRAHAM NET NET.

 

Peter asks other investors for help even before buying a security. “By the second half of the 1980’s Peter was in the habit of calling on the group of like-minded “net=nette’s” that he had so carefully cultivated to back up his research independently.

 

Peter had a rule for selling where every time a stock doubles he will sell 50% or cut his position in half.

Journal entry from Peter:  “None of the great investments come easily. There is almost always a major blip for whatever reason and we have learnt to expect it and not to panic.

 

In purely practical terms, when the stock market is at or near a peak, there are likely to be very few, if any, bargains to be had and securities actually selling below liquidation value will be even scarcer.

 

Journal entry from Peter:  “The “value method of investing” will tend to give better results in slightly down to indifferent markets and less relatively sparkling results in a raging bull market. What matters, however, is that the method will provide a consistent compound return in the middle teens over very long periods of time.

 

Many shall be restored that now are fallen, and many shall fall that are now held in honour.

 

Journal entry from Peter in response to the 1987 crash:  We are relatively well positioned at this juncture.I do not anticipate a total melt-down of the financial system. There appears to be an organized and well-structured international approach emerging to cope with the crisis and to inject liquidity rapidly. The Keynesian lessons of the 1930s have been well learnt. But one, nevertheless, does better to keep a low profile, especially when talking to the former optimists. There is too much pain around for there to be any temptation to gloat. But, somehow, the word is out on the street that we have been prescient, both in thought and action, prior to the event ad are ready to exploit it to advantage. I suppose that this in itself contributes in a small way to a stabilizing effect, especially in these sorts of markets where buyers are scarce and volumes are thin.

 

I took calls which were slightly panicky from Deltec and Novelly, I think seeking reassurance as much as anything else and, for the moment, we are perceived as being a safe haven. How long this view will last is a matter for conjecture.Will we begin to see a wave of buying of the Value Fund, or will redemptions, to support margin calls elsewhere, counter-balance this?Only time will tell.

 

Journal entry from Peter:  As I have watched events unfold I have come to the conclusion that 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, and this applies in rising markets as well as falling ones. Spur of the moment reactions to partially digested information are, more often than not disastrous.

 

Part of a transcribe from a speech by Peter:  On the subject of the “fallen angels” of stock markets that occupy so much of our detective work as value investors, I try to keep in mind Oscar Wilde’s comment that “saints always have a past and sinners always have a future,” so no investment should be ruled out simply on the basis of past history. We focus on liquidation analysis and liquidation analysis alone.

 

The Japanese value politeness, persistence, dedication, and memory more the inventiveness. But in any case we hold a couple of Japanese stocks because Japan’s just too big to ignore and we want to be polite.

 

To a Canadian like me almost all stocks in the world are by definition foreign and, given the dearth of bargains in North America today, it pays to search for them everywhere. For years, every November, when it would get rainy in Vancouver, I would up sticks and go visit the worst stock market over the first eleven months of the year. For my sins that first year I ended up in Sweden, where in late November it’s even darker and bleaker than Vancouver. But the practice served me well on that occasion and has continued to do so.

 

I’ve thought a lot over the years about the everlasting obsession with trying to predict where markets will go at any particular juncture, not least since last year’s crash when it was our value disciplines that kept us out of trouble, holding oodles of cash. We believed that a correction of some magnitude was highly probably but we had no idea when it would happen. So, for what it’s worth, here is my present thought on the subject – maybe not my final thought, who knows? Synchronicity begins where pure chance ends, with one event leading to another, like a chain reaction, but all brought about by the initial event which cannot be predicted or explained. In other words – don’t waste your time. Just have patience and make sure you’re confident about the margin of safety in each investment.

 

In regards to distressed corporate securities, Will the company be in a position to pay a sufficient redemption price in a negotiated settlement with the bondholders to make the investment worthwhile.

 

LTV didn’t work out so good because of the lack of time.

 

Peter’s analysis of the balance sheet [of LTV] showed, perfectly correctly, that LTV was sitting on some very valuable real estate that, on its own, was sufficient to assure the company’s survival and provide for a handsome return on the debt if and when it emerged from bankruptcy. However what peter failed to appreciate were the complexities that would be involved in the negotiations which were complicated by the labor unions and the question of the pension fund shortfall. The experience was anything but the joyride anticipated. Months dragged into years and it was no until the middle of 1993 that LTV finally came out of bankruptcy protection after one of the longest and most complicated bankruptcy cases in American corporate history.

 

Markets can be overvalued and still keep on getting more expensive for quite a while, or they can be undervalued and keep getting cheaper, which is why investing is an art form, not an exact science.

 

One of the common characteristics of the greatest investors seems to be boundless curiosity.

 

From Peter’s perspective, the uncertainties in the political world held the promise of opportunity, rather than spelling disaster.

 

Just as many smart people fail in the investment business as stupid ones.Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.  What were last year’s mistakes – Southmark, Crazy Eddie, Japanese Warrants, Westar, and BC Capital? Why – BCC I broke my own rules in terms of debt.  I was so fascinated by the cash flow that I overlooked the high debt. Listening to poor advise and acting on it?  How does one reduce the margin of error while recognizing that investments do, of course, go down as well as up?  The answers are not absolutely clear cut but they certainly include refusing to compromise by subtly changing a question so that it shapes the answer one is looking for, and continually reappraising the research approach, constantly revisiting and rechecking the detail. 

 

The Japanese economy looked weak and unstable, but the stock market, though volatile and massively overvalued by every sound statistical measure, was not showing much sign of cracking and the Nikkei put options in the value fund which had been being rolled over continually at a loss since March 1987, were proving to be expensive drag on the performance.The reader finds out later that these put options didn’t return a profit until the first quarter of 1990 or 1991.

Last night I was anticipating the outcome of the Japanese stock market. I dreamt that the Nikkei fell by a thousand points. In fact it was up 1,450 – the second best day in its history. You must stop this short term anticipation stuff. If you’ve done the numbers and are satisfied with them and the principle is right, you just have to grit your teeth and be patient.

 

Tokyo was down a thousand points today – maybe particularly significant as this was the last trading day of the year.I’m going through a period of shocks professionally, particularly in real estate stocks, but having these Nikkei puts and Westar as well is worrying, even though I am convinced that all three are right. But you have always to remember that you constantly need to challenge other people’s assumptions. Being out on a limb, alone and appearing to be wrong is just part of the territory of value investment.

 

I almost stopped selling Japan short in the last quarter of 1989 because I couldn’t stand it anymore.  But intellectually I was convinced that I was right and so I carried on and then in the first quarter of 1990 the Japanese market fell by 25% in eight weeks and I made back everything I’d given away since 1987 plus a good deal more.  But I tell you statistical overvaluation is a funny thing – it can go on for a very long time, far beyond the limits of rationality, and it is a problem for the value investor in two ways: it can tempt one to compromise standards on the buy side and it may lure one into selling things far too early.  I have less of a problem with the selling temptation because I have always loved cash – if you’ve got lots of it you will never have to pass up a great opportunity.

 

As markets continued to decline Peter was, most unusually, torn by indecision: “I find myself thinking about buying things with $250 million of cash reserves and a good many net nets about, although world events, plus the economic uncertainties could in reality spell “crash”. I am alert both to the danger and the opportunity and I can’t decide which it is. I need to put my mind in park and think intuitively. I need to be receptive to new ideas and not just to dismiss them out of hand. Keep looking for the spark. Think about how you communicate – how to set about sparking off other people and how to make it easier for them to spark off you.

 

I think I should be optimistic.There are plenty of statistical bargains available in the world. Everyone else is now depressed and highly pessimistic. Sometimes a flippant remark allows the spikes of reason to penetrate the brain. I should be reading plenty of poetry, if for no other reason than that it applies directly to the intuitive side of the brain.”

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