Value Library

The following is an excerpt from the ABC Perspective - January 2002 - Pg. 12

I would like to reflect over the past 24 months. People often ask me how was it being a value investor during the 1999-early 2000 high tech craze. Well, in all candour it wasn't easy. Like many other value managers who stubbornly clung to their value disciplines I was severely criticized for being "out of touch" and not investing in the new economy. I wasn't alone. The esteemed value investor, Warren Buffett came under intense pressure too.

We remained disciplined, nonetheless, and explained our Ten Commandments of Value Investing to everyone who asked. But few wanted to listen. In fact, it was at this time that we started our Value Investigator web site to promote the concept of value investing. In the meantime high technology stocks ran up to giddy heights. Some clients lost patience in our value story and took their business elsewhere. This was their prerogative. Nevertheless, we stuck to our disciplines, put our head down and continued to value invest.

Strangely enough with the price downfall of new economy stocks came the resurgence in value securities. Stocks that we had purchased as virtual pariahs in 1999-2000 suddenly became investment darlings in 2001. What happened? I sense that over the period of late 2000 to early 2001 there was a subtle shift back to the fundamental analysis of balance sheets, cash flow, earnings, book value, etc.

The ABC Funds investment winners of 2001 such as Premdor Inc. (now Masonite International Corp.), Canada Bread and Gulf Canada (taken out at $12+) were the very stocks we had been purchasing during the high tech euphoria of 1999. The only thing that changed from 1999 to the value investing success of 2001 was investor perceptions and their eventual shift back to this sector.

There was no magic to our 2001 performance. We simply stuck to our discipline of value investing. We bought stocks which were out of favour, trading at low price and cash flow multiples and selling at a discount to book or net asset values. But more importantly we stuck to these stocks while they were out of sync with the market and amidst significant client grumbling with regard to our lack of relative TSE 300 performance.

For those investors who loyally stuck with ABC Funds during this difficult period and had the courage of their convictions to do so, we thank you. You also showed meaningful discipline. Rest assured we will continue to be disciplined and will abide by our advertised investment style which you came to expect when you signed your original ABC Funds offering memorandum.

Again, thank you.

Irwin A. Michael, CFA