Value Library

The following is an excerpt from the ABC Perspective - April 2003 - Pg. 4-5

I originally wrote this investment piece in the October 1995 ABC Perspective. Then about 2 1/2 years later, I updated the data and ran it again in the April 1998 Perspective. The point I tried to emphasize in both issues was that investor patience and a long-term outlook were key to successful investing.

In all candour I have always been quite inspired by this investment vignette and so I recently decided again to update the market values. I was astonished at the results. An original $150,000 investment in the ABC Fundamental-Value Fund on July 1, 1990 had grown to almost $1,040,000 by March 31, 2003 - a period of 13 years and 9 months. Of further interest is that we are measuring the present ending value at a market low point and not at a market top. Moreover, this performance was accomplished through a simplistic, patient buy and hold strategy with an assist from the power of compounding. No investment market timing, aggressive trading or shenanigans were employed. Rather this was all accomplished with a simple, fundamental deep-value investment style. Upon further reflection, I decided to republish this article for a third time.

I am proud to say that I am the largest individual unitholder of the ABC Funds. I have often related to fellow unitholders and prospective clients that I must sample my own pudding. I have a vested interest in the ABC Funds' success. I have continuously bought and held onto my ABC Fund units; I don't trade the Funds. As a unitholder, I have always been less concerned about short-term fluctuations. Instead I have concentrated on the long-term investment. I believe that A Tale of Two Investors and the July 1, 1990 to March 31, 2003 market values clearly prove my original point.

I have a story to tell. And while I've changed a few of the actual circumstances to protect client confidentiality, the thrust of the story is factual.

The tale is about two married couples who invested in the ABC Fundamental-Value Fund. I met them both in mid 1990. Each couple invested the $150,000 minimum in the ABC Fundamental-Value Fund on July 1, 1990.

The first couple were rather reserved people. Let's call them Mr. and Mrs. Tortoise. They were very polite, mild mannered and listened quite intently to my every word. I described the ABC investment philosophy, what we were attempting to achieve and my personal and professional commitment to the ABC Funds. At the end of my explanation they simply proclaimed: "We have faith in you and we are in for the long haul. Here is our cheque for $150,000".

I met the second couple a few days later. Let's call the second family Mr. and Mrs. Hare. The Hares were charming, self-made, well-educated, extremely demanding and later, to my chagrin, very impatient. I went through the same description of the ABC Funds. The only difference was that the Hares asked a multitude of questions. I answered them to the best of my ability. Toward the end of our meeting I sensed that the Hares, due to their very probing manner, had decided against an ABC Funds investment. But to my utter surprise Mr. and Mrs. Hare concluded the discussion with, "we are interested and we will courier a cheque for July 1".

And so both the Tortoises and the Hares became ABC Fundamental-Value unitholders on July 1, 1990. A chart outlining their $150,000 investment over the ensuing 13 3/4 years follows:

But the second half of 1990 was not an easy time for investing. The TSE 300 Index declined from a mid year peak of 3,600 to a late 1990 low of 3,000. Unfortunately by December 1, the Tortoises and Hares' $150,000, some five months later, was worth only $139,500. I received a phone call from each family. I explained to the Tortoises and Hares that the ABC Funds were value-oriented and that the previous five months had been a brutal period. I stated we were confident that over the longer term the ABC Funds would perform better. The Tortoises seemed satisfied. They reiterated that they understood our fundamental investment style and reminded me that they had invested for the "long haul". I respected the Tortoises' valued patience.

On the other hand the Hares' conversation did not go too well. The Hares were very upset. They did not want to hear about the ABC fundamental style of book values, dividend yields or price earnings ratios. All they repeated was, "we are down over $10,000… and we could have made more money in Canada Treasury Bills". They abruptly terminated our conversation saying that they wished to withdraw all their money rather than lose any more. And so on December 1, 1990, the Hares angrily withdrew the remaining $139,500 of their original $150,000 investment.

To make a very long story short, the ABC Fundamental-Value Fund started to make a nice comeback in 1991. By July 1991 the original $150,000 had recouped all its losses and, in fact, appreciated to $190,660. A brief conversation with the Tortoises indicated that they were pleased. Over the next 12 months the Fund grew to a flattish $192,475. I called the Tortoises and described the difficult economic and investment environment. Apparently they were satisfied and reminded me once more about originally "investing for the long haul". Over the following 24 months, the Tortoises' patience was well rewarded. The original $150,000 grew to $442,965 on July 1, 1994 and $463,960 on July 1, 1995. Since then, their original investment grew to $539,110 on July 1, 1996, $714,075 on July 1, 1997 and after ten years $808,665. The latest value of their holdings at March 31, 2003 was almost $1,040,000. I recently spoke to the Tortoises and they were obviously pleased. Once again they reminded me that they were invested for the long haul.

After reflecting on the Tortoises' comments, I believe that there are a number of notable investing observations from this "Tale of Two Investors". I will leave out the obvious ones. I do, however, want to make two major points, which are very relevant to our present 2003 investment scene:

1. Forget about the short-term. Timing is everything, Grit your teeth and be patient. Trading an investment is usually futile to the average investor since one rarely gets back into the investment. Investors with patience tend to make superior returns if they take a longer time horizon.
2. After undertaking considerable investigation to pick a competent investment manager, give him a chance. Five or six months is not enough time to enable an investment manager to prove him or herself. If after three or four years the manager doesn't perform then consider moving on.

Irwin A. Michael, CFA