Through most of his career as a value investor, Cundill was known for his ability to distinguish between being stubborn and being patient.
He was of the view that having faith in the invested company’s future based on extensive research could be termed as patience, but holding on to a company despite unfavourable analysis and outcomes could be regarded as being stubborn.
Cundill, who is believed to have had the instincts of a pirate and skills of a forensic accountant, used to take carefully calculated risks and was known for being very patient while taking key investment decisions.
He was also an avid sportsperson, marathon runner, extensive traveller, committed philanthropist and investing genius, which pointed to a truly multi-dimensional personality.
He paid close attention to debt levels of a company before investing in it. He was famous for spotting great earnings potential in companies that ran heavy debt but possessed strong balance sheets.
Cundill graduated in 1960 from McGill University with a degree in commerce before entering the financial markets.
He became chartered accountant and chartered financial analyst before moving from Montreal to Vancouver to become the President of AGF Investment Management, where he worked for four years from 1972 till 1975.
In 1977, he established his own firm, Peter Cundill & Associates, and renamed the All-Canadian Venture Fund as Cundill Value, when it became the flagship of his newly-established firm.
Peter Cundill also won the Analysts’ Choice Career Achievement Award for the best mutual fund manager of all time in 2001. At the award ceremony which recognised his contribution of 35-plus years as a fund manager and value investor, he was referred to as the ‘Indiana Jones of the Canadian Money Managers’.
Legendary investor Warren Buffett is also a great admirer of Cundill’s expertise and felt the Canadian value investor possessed all the traits and credentials that an ideal successful value investor should have.
Cundill’s fund did extremely well from the beginning and returned 26% compounded returns annually in the first 10 years. He was known to outperform the market without having many bad years and for doing extremely well when the market underwhelmed.
Cundill passed away in 2011 from a neurological disorder, leaving behind an investing and philanthropic legacy, and priceless tips which are still relevant for deep value investors.
Let’s take a look at some of the learnings he shared and left behind for fellow investors.
Not all cheap stocks offer ‘value’
Cundill used to say in the hunt for value, one should not be blinded solely by cheaper price. Investors should instead put some effort to study a company’s profit-and-loss statements and balance sheets and hunt for hidden assets and look to buy companies below their liquidation values.
Cundill said investors should use the ‘margin of safety’ rule to pick stocks, as it provides a solid theoretical back-up for selecting investments based on the principle of realisable underlying value.
“A share is cheap not because it has a low price-to-earnings multiple, a juicy dividend yield, or a very high growth rate, all of which may often be desirable. But as analysis of the balance sheet may reveal the stock price is below its liquidation value, which is its intrinsic worth as a business. This, above all, is what constitutes ‘the margin of safety,” Christopher Risso Gill quoted him as saying in the book, There’s always something to do: The Peter Cundill Investment Approach”
Do your homework thoroughly
Cundill felt very few investors make investment decisions based on proper research and analysis.
“Investors tend to follow trends and fashion rather than taking the trouble of finding value. This leads to short-term mispricing of securities,” he said.
If an investor does his homework properly, then he would have the advantage over others, and that would give them the confidence to grab opportunities without waiting for someone else to take the first plunge.
He said prediction of the economy’s future and consequent behaviour of the stock market using different sets of statistical variables does no good.
“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 thus assist managements to tailor events and bend them in the desired direction. Forecasting should be used as a device to put both problems and opportunities into perspective. It is a management tool, but can never be used as a substitute to strategy, nor should it ever be used as the primary basis to make portfolio investment decisions,” he said.
Investment criteria to buy stocks
Cundill believed investors should set an investment criteria which they should follow before making an investment decision.
“Buy into undervalued, unrecognised, neglected, out of fashion, or misunderstood situations where the inherent value, a margin of safety and the possibility of sharply changing conditions can create new and favourable investment opportunities,” he said.
Cundill suggested some of his quantitative value criteria for stocks that investors can use before making an investment decision.
- The stock should be trading below intrinsic value, that is, if the price is below what an investor is ready to pay for the security, if it were not listed on a public stock exchange.
- The stock should be trading below book value, which is the net working capital less long-term debt.
- The company must be profitable. The earnings of the company should have increased over the past five years
- The company should be dividend paying. And that should, ideally, increase regularly.
- The price of the stock should be less than half its former high, and preferably near its all-time low.
- The P/E should be less than 10.
Follow your passion with conviction
Cundill believed if investors have to do well, they must show full passion and dedication towards their work. This conviction and passion can lead them to the path of success.
Follow a value-oriented investment approach
Cundill believed if investors operated from a value-oriented framework, they were sure to make money.
“This is a time-tested approach that has proven to make big money slowly, but surely. The track records of many great investors attest to this fact. The value method of investing will tend at least to give compounding rate of return in the high teens over longer periods of time. There will be losing years, but the art of making money is not to have substantial losses,” he said.
Broaden your search horizons
Cundill said if investors searched for value stocks all over the globe, there is a greater chance for them to find something worthwhile. He himself became a global investor and searched attractive global markets looking for deep value.
Cundill thought it was important for investors to stay up to date with all the latest information of the financial world, as information is the lifeblood of sound investment decisions. He said one should read broadly, develop their networks and focus on their tasks.
Also, they should ensure that they understand a situation thoroughly before committing precious capital.
Cundill believed the most important quality that a successful investor possessed was patience, as sometimes it might take years — if not months — for an investment bet to pay off.
“The most important attribute for success in value investing is patience, patience and more patience. The majority of investors do not possess this characteristic,” he said.
Keep a journal
Cundill said it was important for investors to keep a detailed investing journal throughout their career, so that they could write down the stories of their successes and failures. This journal might help them avoid previous mistakes committed earlier.
“The process of writing can clarify thoughts and allow investors to look back and grow from those experiences and mistakes,” he said.
Do a yearly analysis of portfolio
Cundill said each year one should conduct a critical analysis of their decisions and performance of the previous year. One should conduct this analysis with honesty and humility in an effort to continue to raise the level of their game.
Never seek inside information
The investing veteran was of the view that investors should never seek insider information about stocks that they were planning to invest in, as this would only lead to temporary gains. That information might move the stock for a brief period, but at the end of the day, it’s the value and the economic scenario that only matter and affect stock price.
“Stock manipulations have only a limited and temporary effect. At the end, it is the economic facts and value which are more important,” he said.
Cundill said investors should keep their investment plans flexible and never rely on just a single strategy to deal with the ups and downs of the market.
He said one should not blindly follow an investment strategy and should use intelligence and intuition while making an investment decision. “Don’t believe in institutions or a mere formulae. Do not rely on a single strategy in a doctrinaire fashion. Strategies and disciplines ought to be always tempered by intelligence and intuition,” he said.
Great investments don’t come easy
Cundill said it is not easy to spot great investments and investors may suffer temporary setbacks while hunting for the right opportunity. “When you buy value, you have to average it. None of the great investments came easily. There is almost always a major blip for whatever reason, and we have learnt to expect it, and not panic. There is always something to do. You just need to look harder, be creative and a little flexible,” he said.
Cundill advised investors to think long term, remain patient and wait for big rewards accrued with compounded annual rates of return. “Sooner or later (which could be years), the market will do what it has to do to prove the majority wrong. But you will win only if you have the supreme confidence to stay calm,” he said.
(Disclaimer: This article is based on the book “There’s always something to do: The Peter Cundill Investment Approach” by Christopher Risso Gill.)