Value Library

The following is an excerpt from the ABC Perspective - July 2001 - Pg. 1

Trust

The word "trust" is the cornerstone of the investment business; it is the base of the whole industry. Without trust we have nothing.

I remember trying years ago to describe what I did for a living to an elderly uncle. "I pick stocks", I stated, "and then I buy them for clients." "But", my uncle asked, "what do you receive in return for your hard-earned money?" I replied, "a stock certificate." "A piece of paper?" he exclaimed. I then tried to explain that I interviewed management, reviewed auditor statements, examined annual reports, did value investigative research etc. " Ultimately," I concluded, " it comes down to one word, trust…. one must trust management, the auditors and various corporate documents." But my uncle could never quite understand this concept of trust. He had grown up in the 1930's Depression, in a dog-eat-dog world and his street-smart senses made him very skeptical. Unfortunately I never won him over and he walked away muttering that I was too naïve, too foolish and too trusting.

Fast forward to year 2000. Bay Street and Wall Street, in spite of the odd black mark, are both solidly grounded on trust. By and large the world- wide investment community has survived the twentieth century on this principal and will continue to do so in the future. The fact is that if we mistrusted everyone and everything we would never buy any common stocks. To invest we must have a sense of trust. While we might occasionally stumble over a dishonest individual we must have trust or else we cannot function in this business.

But trust also affects portfolio management. For instance over the past two years we have had a number of clients who redeemed their ABC Funds. In some cases they despaired of value investing or else the skyrocketing high tech stocks such as Nortel seduced them. During this tumultuous time disciplined value managers, such as myself, were defenseless. I remember being called every name in the book by irate, anxious clients. I was accused of not investing with the times, being stubborn or "having lost your touch." It was not an easy period, just ask my wife and kids, they will tell you! But we stuck to our fundamental value disciplines just as we had promised our clients when they initially entrusted us to oversee their money.

The rest is history. The Nortel juggernaut and the high tech mania gradually came to an end during the latter part of year 2000. This occurred just as value investing and the ABC Funds, like the proverbial phoenix, came back to life. In all candor, we happen to take our portfolio management responsibility very seriously. We offered no excuses a year ago when value investing was in the dumps. At that time we reviewed our investment disciplines and premises and concluded that we must stick to our mandate.

What made it easier for us to function as investment managers was that the majority of our clients had the patience, understanding and trust to hang in. But this trust relationship is a two-way street. Trust must be earned, continuously cultivated and never taken for granted. In the end, trust does, in fact, have its rewards. Our recently improved investment performance is clearly a reflection of this.

Irwin A. Michael, CFA