Value Library

The following is an excerpt from the ABC Perspective - January 2008 - Pg. 1

Déjà Vu…..Once Again

The longer I am in the investment business the more I sense déjà vu or the feeling that I have gone through an experience several times earlier in my career.  The fact is: investing is remarkably cyclical and, strange as it may sound, many investment situations tend to repeat over the years, albeit, with some minor variations.  Let me explain.

Over the last 20-25 years, the financial world has gone through and recovered from a number of major financial crises.  They include: the 1980s financial issues of Argentina and Brazil; the collapse of the former Soviet Union; U.S. money centre bank problems in the 1980s and 1990s; the 1999-2001 high tech implosion; Enron; Worldcom; the out-of-control Canadian federal deficit and the meltdown of the Canadian dollar to 65¢ U.S.  Of particular significance in the 1980s was the failure of over 1000 American savings and loan institutions due to imprudent lending practices as well as the massive 1984 U.S. government bailout of Continental Illinois National Bank. 

In recently describing the Continental Illinois debacle of 23 years ago, Andrew Leckie of Tribune Media Services remarked:

“That once-mighty bank became insolvent because of bad loans purchased from failed Penn Square Bank of Oklahoma City.  Continental executives used poor judgment in an attempt to boost profit.  Will banks ever learn that being too speculative to gain a jump on the competition can lead to serious trouble that damages confidence and the bottom line?  Subprime loans made to less-than-creditworthy borrowers are the latest example of poor judgment.”

Today, as we are confronted with the U.S. subprime mortgage meltdown and the $33 billion Canadian asset-backed commercial paper impasse, it appears that the bitter lessons of 25 years earlier have not been learned.  While it is our belief that the worldwide monetary system will recover from the present financial turbulence via new private and public equity infusions and increasing international central bank ease, the fact is that the current investment instability has precipitated a severe global flight to liquidity and risk aversion. 

Currently, investment greed and speculation have given way to increasing investor anxiety and hesitation.  Not surprisingly, heightened investor fear has historically often led to excellent financial opportunities for those who are patient and of firm conviction.  This is particularly true with regard to the present poor performance of deep-value equities.

Interestingly, the present deep-value underperformance is akin to the 1999-2000 period when supercharged high technology stocks such as Nortel, JDS Uniphase, and 360 Networks vastly outperformed value shares.  Although that was a painful period for fundamentally undervalued equities, patience and stamina paid off handsomely over the next six years.

In summary, we believe that today’s deep-value sector’s lagging performance, a sense of déjà vu back to the 1999-2000 period will, in retrospect, present excellent investment opportunities over the next 12-24 months.  Accordingly, we remain disciplined, opportunistic, patient, and relatively optimistic for 2008.

Irwin A. Michael, CFA