Value Library

The following is an excerpt from the ABC Perspective - April 2000 - Pg. 3

A True Confession

I have a confession to make. It isn’t easy to admit, however, that the greatest individual stock success of my investment career turned out to be an investment which I had grown to have very little patience with. Let me explain.

I purchased Electrohome Ltd., a Kitchener-Waterloo-based conglomerate comprising of electronic and video manufacturing and television stations, in the summer of 1997. I paid $7.64 for 500,000 shares or $3,820,000. The company was trading well below book and breakup value of about $10 and appeared incredibly cheap. But there were some negatives. The shares were non-voting, paid no dividends and the company was an erratic-trading, small capitalization stock.

In the summer of 1998, Electrohome, run by John Pollock was split into two: Electrohome Ltd. comprising video manufacturing and Electrohome Broadcasting which comprised Electrohome’s interest in CTV which John Pollock had astutely exchanged for Electrohome’s TV stations.

While we subsequently sold off the ABC Fundamental-Value Fund’s holding in Electrohome Ltd., we retained our 500,000 shares of Electrohome Broadcasting. These shares had an adjusted cost base of $6.11 and represented over 7.8% of that class of stock outstanding. Nonetheless, the shares remained illiquid and under-followed by Bay Street.

I must admit the stock started to thoroughly frustrate me. I endured a lot of client criticism for the ABC portfolios’ periodic illiquidity, unfamiliar holdings and continued focus on out-of-favour value stocks in a bubbling technology and telecommunications momentum market. Unfortunately even if I was prepared to sell our shares there were absolutely no buyers for the stock. Some days, in fact, they did not even trade. Electrohome Broadcasting, which closed out December 31, 1999 at $14.75, remained incredibly cheap and frustrating.

To make a very long story short, in March, Bell Canada Enterprises (BCE) made an unsolicited takeover offer for CTV and Electrohome Broadcasting, the largest shareholder of CTV. The outcome is that on April 7, ABC Fundamental-Value will receive $32.17 per share or $16,085,000 for our Electrohome Broadcasting stock. Considering our adjusted cost of $6.11 or $3,056,086, this is, admittedly, our most successful ABC Value investment ever. As frustrating as it has been for the past two years and nine months of ownership, the end result has been most gratifying and encouraging to us as value investors.

In retrospect, I believe there are several notable conclusions worthy of consideration:

1. Successful long-term value investing involves considerable courage of one’s convictions. If you believe in something, stick to your guns.

2. Value investing literally involves the patience of Job. We endured two years and eight months of utter frustration and suddenly in the space of one month, our out-of-favour, illiquid holding of Electrohome Broadcasting evolved from an ugly duckling into a beautiful swan.

3. In the long run, value investing, I believe, pays off. The rewards, while not immediately obvious, do make a painfully long waiting period truly worth it.

Irwin A. Michael, CFA