Two roads diverged in a wood
…and I took the one less travelled by,
…and that has made all the difference.
Robert Frost |
When we are asked to
describe our ABC Funds investment style I firstly highlight
our Ten Commandments of deep-value investing. I outline such
factors as low price/earnings and cash flow ratios, discount
to book and net asset value, quality of management, hidden
assets, etc. I, then, go on to explain an equally important
investment element and that is “contrary opinion.”
But what is contrary
opinion investing? The answer relates primarily to the
definition of contrary. The dictionary defines contrary as
opposite in nature, opposite in direction or doing the
opposite of what is expected or advised. By going against
expected convention or undertaking a contrary investment
stance, the probing investor has the opportunity to
significantly outperform the investment horde.
The fact is that most
investors prefer to travel in packs. This gives the
individual confidence and an inflated sense of bravado.
Unfortunately, this can often lead to spontaneous, foolhardy
decisions or the taking of unnecessary risks. For instance,
in the midst of cocktail party chatter, giddy investors full
of cocky braggadocio will frequently exaggerate stock market
wins, minimize losses and make foolish common share
prognostications. It is our view that this herd mentality
does not often lead to investment success. In reality,
buying what is hot or the latest flavour of the month
frequently leads to disappointment since much of the
euphoria or capital appreciation potential is already priced
in the stock.
Our ABC Funds philosophy
is to hunt for stocks which are out of favour, are trading
at significant discounts to their fundamental worth, are not
followed by investment analysts or are viewed by investors
with considerable distaste. In most of these situations we
take the less travelled road and are able to purchase common
shares at meaningful reductions to their true value.
Admittedly, this contrary strategy is not an easy road to
take since we are often early and are frequently
second-guessed by anxious clients. Furthermore, this
investment plan necessitates considerable portfolio manager
stamina, courage of one’s convictions and substantial
investor staying power.
Our portfolio management
style is based upon tedious deep-value research and
analysis. It is time-consuming, painstaking and requires
much investment and emotional discipline. Many of our
portfolio holdings include less well-known, unconventional,
and significantly undervalued common stocks. Once fully
analysed and purchased we must stick with our investment
principles and patiently await our expected outcome.
Unfortunately, favourable results are neither straightline
nor do they occur expeditiously. Nonetheless, successful
examples of this strategy have included: E-L Financial
Corp., Laurentian Bank, Morguard Corp., Canam Group, Piper
Jaffray Companies and Foodarama Supermarkets. In retrospect,
we believe that the demanding wait is well worth the final
result.
