The Peter Cundill Investment Approach

I’ve chosen the strapline of this book, rather than the title, to headline this review because on its own the title doesn’t mean much. It’s

There’s Always Something To Do

But judging by his diaries, the source of this investment biography written by Christopher Risso-Gill, Peter Cundill, a Canadian value manager who died earlier this year, was a busy man.

While many analysts try and figure out the value of a business by predicting its future cash flows, Cundill was a modern-day old-school investor in the mould of Benjamin Graham. Maybe because of his family’s rags to riches to rags again history he adopted the strictest investment criteria, preferring to buy shares in companies at prices below their liquidation value, earning him a reputation as a ‘vulture’ investor.

We often hear share prices don’t fall to such levels these days. Well they did in 2008/2009. And Cundill found them throughout his career because he cast his net widely, building up a network of local contacts and clocking up over a hundred thousand miles a year in his search for international bargains. In 1969 he made his first trip to Japan and wrote in his diary:

I now see Canada as really tiny, although affluent. If these mainland Asian countries, and especially China were ever to get their act together economically like Japan they could rival the whole of North America and the rest of the developed world without even blinking.  There have to be investment opportunities both in Japan and in mainland China – perhaps through Hong Kong.

The book describes how Cundill split with his cavalier boss in the early 1970’s and took over an investment fund renaming it the Cundill Value Fund. The boss ended up in prison, while his more risk-averse understudy recorded average annual returns of 15.2% compounded over 33 years. It tells of Cundill’s attempt to construct a formula, which had so many variables it was too complex to be of any practical use (we’ve all been there) and his epiphany, when he discovered Benjamin Graham.

The portfolio rules he subsequently relayed to investors will be familiar to any value investor, summarised here:

• The share price must be less than book value, preferably 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 earnings multiple must be less than ten or the inverse of the long-term corporate bond rate, whichever is lower.
• The company must be profitable. Preferably, it will have increased earnings for the past five years with no deficits.
• The company must be paying dividends. Preferably it will have paid them for some time, and the level will be increasing.
• Debt and off-balance sheet financing must be judiciously employed. There must be room to expand the debt position if required.

One of the fund’s first investments was J. Walter Thompson, a well known advertising agency. Its price had fallen from over $20 a share to $4 in the crash of 1973/1974 yet it was profitable, paid a dividend, and had a book value of $18 a share that did not include property in Tokyo, Paris and London. Cundill sold his stake the following year for well over $20 a share. Tiffany’s was another early bargain, whose assets included a massive diamond valued in the books at $1. He bought shares in Volvo for less than the value of its net working capital. There are more examples, described in just enough detail, as he struggled with the increasing size of his fund, and diversified into holding companies, distressed debt, . German blue-chips, and African oil companies.

When the market was very strong and the value discipline meant his fund could not keep up, his diary entries belie a brittler personality than Risso-Gill’s chiselled-jawed portrait generally conveys:

We are making money in absolute terms, which is fine, but in relative terms it’s awful… I am tense because of the lack of performance, insecure and off form, which tens to make me aggressive and adopt a tone that jars.

He kept his nerve though, writing in March 1987:

As I see it, with money being recklessly printed, higher inflation and higher interest rates must be just around the corner and so must the likelihood of a real and possibly violent stock market collapse. I have an unpleasant feeling that a tidal wave is preparing to overwhelm the financial system, so in the midst of the euphoria around I’m just planning for survival.

When the crash culminating in Black Monday came in October, thanks to Cundill’s value discipline over 40% of the fund was in money market instruments.

One of his biggest mistakes was buying Westar, formerly a Canadian glamour stock, at $6 and selling at 50c. He sold at the worst possible moment under pressure from the president of the fund, because the association with Westar was deterring new investors. Within months Westar had rebounded to $2.00. His biggest mistake, though, was Cable & Wireless (briefly described at the end of this post).

Fragments of his personal life as a traveller and marathon runner, are quietly inspiring and sometimes revealing:

When I had dinner at Asher’s house we had chicken and champagne all perfectly served and all the guests were so disciplined, just tasting and sipping. They maintain that having a hangover is a waste of a day. I agree, bit it’s fun getting there and I wanted to party – maybe it’s a skill I need to acquire, Asher’s three-year record is actually better than mine.

This relatively slim and well paced book, which includes a glossary of terms with aphorisms taken from Cundill’s 200 hand-written journals, and his net-net (bargain) worksheet, contains many lessons for investors,among them:

• Do Your Own Research. It gives you the confidence to go against the crowd, “something to hang your hat on”.
• Sell half a holding when its price doubles, effectively writing the cost of the remainder down to zero.
• Always change a winning game. Strategies and disciplines should be tempered by intelligence and intuition.
• Exploit the antithesis of value i.e. short overpriced markets. He shorted Japan very successfully.
• When you can’t find bargains, hoard cash

The chapter on ‘What makes a great investor’ extracted from Cundill’s “huge corpus” of writings, rings so true I’m tempted to say something cheesy like its worth the price of the book alone.

It was only under ‘T’ in the glossary, three pages from the end of the book that I discovered why Risso-Gill had given it such a non-descript title. Irving Kahn, ‘possibly the oldest analyst on Wall Street’, advised a young Cundill complaining he’d nothing to do because he’d been priced out of the market:

There is always something to do. You just need to look harder, be creative, and a little flexible.

The perfect title for a book about Cundill’s investment approach, obviously.

There’s Always Something to Do, The Peter Cundill Investment Approach by Christopher Risso-Gill is available from the Interactive Investor bookshop.