Value Library

The following is an excerpt from the ABC Perspective - July 2010 - Pg. 16

Attitude

In all candour, the present securities market is arguably the most difficult, confusing and volatile investment environment that I have faced in over 35 years in the business. Today, for instance, we are confronted with innumerable economic, investment and political issues which appear to be clouding the financial horizon. They include: burgeoning European debt problems, BP/Gulf of Mexico oil spill, pending new U.S. financial/banking regulations, a slowing economic recovery precipitating fears of a double dip economic recession, etc.

Clearly, the present U.S. economic expansion is neither showing linear growth nor a more traditional v-shaped recovery. This fact appears to be bothering investors. Moreover, it appears that any business or consumer rebound has become particularly tenuous with regard to both personal spending and employment growth. Additionally, the catastrophic Gulf of Mexico news and the closely-watched on-goings of BP PLC, continue to garner front page newspaper headlines and media attention. Putting this altogether, it is little wonder that the general investment climate has become exceedingly volatile, disorderly and pessimistic.

While investment managers are facing an incredibly chaotic and stressful investment environment it is our view that this financial confusion will eventually pass. In the meantime, the present period offers unusual opportunity. The fact is this is a stock picker’s market whereby judicious short-term selectivity can and will provide for remarkable longer-term investment performance. The key, in our opinion, is attitude. Given the growing investor pessimism and fear of an impending double-dip economic recession it is becoming the investment norm to refrain from any equity commitments.

But, putting aside the prevalent negativity and remaining mentally alert for excellent opportunistic purchases, portfolio managers can acquire fundamentally undervalued stocks at bargain prices. True, the purchaser might appear temporarily foolish and somewhat reckless, however, deeply discounted securities in a risk adverse environment can be extraordinarily rewarding when investor psychology turns upward due to some unexpected positive catalyst.

It is our belief that today’s stock picking and disciplined investment principles (e.g., below book/net asset value, low price earnings and low cash flow multiples, etc.) will produce, as in the past financial cycles, superior long-term results. Granted, by presently committing funds to individual investment bargains, this will test our patience, resolve and probably precipitate client second guessing. Nevertheless, it is our view that the short-term distress will be well worth the longer term rewards.

Accordingly, we continue to adhere to our positive attitude and investment disciplines. We remain patiently committed to our research convictions and expect superior long-term market outperformance from a number of our most-favoured holdings including: Canam Group, Daylight Energy, Equitable Group, Flint Energy Services, Fortress Paper, Genworth MI Canada and the Westaim Corporation.

Irwin A. Michael, CFA