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. 

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.

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.

Guru Speak: Lessons from Bruce Berkowitz

Here is a list (highlights are from me) from Bruce Berkowitz, a very prominent value investor and owner of Fairholme Capital and judged as the best fund manager of the decade in 2010 by Morningstar.

• You always have to have cash, especially when no one else has it. 
• No free lunch- it’s not free, or it’s not lunch.
• You can’t change people! You can change yourself, but not others.
• You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress.
• Volatility is not risk!
• Always assume you will have bad luck.
• Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.
• If you have to use more than 6th grade math, you’re in trouble.

Dark clouds on the economic horizon

Let me make a confession. The last few years I have not read a single pre-budget article nor watched any pre-budget shows on TV. I have shied away from these as I have seen that the budget has been hyped up by the TRP/ratings hungry media into something which it is not. So, inevitably the budget disappoints and after a couple of days people forget about it completely.

This time looking at the macro economic scenario after the budget, I see two dark clouds on the horizon. The first is the huge market borrowing planned by the central government to the tune of 5.8 lakh crore. The second is the rupee depreciation.

The net impact of the huge government borrowing would mean that the interest rate is unlikely to come down in the near term. Even if it does, it will not be more than 0.5% to maximum of 1.0%. It will also make corporate borrowing more difficult and may push more and more companies towards ECB (external commercial borrowing). Both of this is likely to be a major dampener for corporate earnings growth.

FII net inflows into India in 2012 has been $7.16 billion as per SEBI. To put that in perspective, the FII net outflow in 2011 was $358 million. However, in the euphoria of such large doses of FII liquidity, an important point is being missed. The fact is that even with this huge inflow, the rupee has not appreciated at all. In fact, it continues to hover around the Rs 50 mark with respect to the US dollar. This means if the FII inflows weaken, the rupee can take another dive towards the 55-57 to the dollar mark.

Macro economic forecasting is a fool's endeavour and I engage only to amuse myself :-) Sometimes, though it can give some insights into the headwinds and tailwinds of the economy. At this time, I am a little bit more skeptical than six months back on the immediate economic future. I think I will have to relook at those stocks which have high FCCB/ECB borrowings and maybe shed some weight there. Good buying opportunities may be there in export oriented companies.

Portfolio Query: What to do with my portfolio?

A reader sent a query on an older post "My Rules for Investing":

Great Post!!.

A generic query. Even after repeated warnings a lot of us have bought a few stocks based on TV channel/CNBC/Guru's tips etc..which results in
a) Too many stocks in portfolio around 35
b) Some are down around 25% & unfortunately i have no investment thesis & hence no plan on what to do with them.

What can be plan of action here, should i sell them at a loss, build a thesis and then accordingly hold or sell the stock or finally keep them in cold storage and hope that after 3 years they have appreciated :) 

Here is my response. I am putting it up here so that others who may have a similar predicament, can benefit and if anyone has a better idea, can share it with me :-)

---

Firstly, stop listening to all "gurus" on TV for your financial health :-) If they knew which stock would do well, they would reverse mortgage their houses and buy those stocks :-)

For your current holdings, the only option you have is to build conviction. Here is a quick and dirty process that you can follow:-

1. Take one or two stocks a day and go through their financial numbers and basic business (what it does)
2. Check on debt levels
3. Check if company pays regular dividends
4. Check if sales and profits are either constant or growing over the last 5 years (atleast) - the growth need not be every year but on a average 3 out of 5 years there should be reasonable growth.
5. Check the RoE & ROCE. Take a real hard look if they are below 15%
6. Check if there is +ve operational cash flow for atleast last 3 out of 5 years

If you do this, it wont take more than 30-60 mins each and you will get a much better idea of each company. Do this for every company in your portfolio. If you find ones which you do not understand or the numbers don't look good at all, just go ahead and sell. Those where you are not sure, dig a bit deeper.
Also, remember once you have a set of companies that you like and understand, it may be a better bet to keep buying into those than always looking for stocks not in your portfolio.

"I measure any new purchase against what I like least in portfolio now and unless it meets the  test, I'll just buy more of something in the portfolio." -- Warren Buffet

Guru Speak: Warren Buffet's 3 hour talk on CNBC

CNBC Transcript Ask Warren Buffett February 27 2012