Your Essential Guide to Peter Cundill Investing
This article was written by Net Net Hunter member Tyen Redmond (A.K.A. "The Hairy Contrarian") and may or may not reflect the thoughts of anybody else at Net Net Hunter.
Peter Cundill should be on the Mount Rushmore of deep value investing.
Cundill was an amazing Canadian value investor whose fund returned 26% compounded annually over its first 10 years. He was known to outperform the market without many down years, doing extremely well when the market underwhelmed.
He passed away in 2011 from a rare neurological disorder, leaving behind an investing and philanthropic legacy, and a wealth of tips for us deep value investors.
He was described in The Globe and Mail as having “the instincts of a pirate and the skills of a forensic accountant” and in his biography, There’s Always Something to Do, as being an individual who took “very carefully calculated risks”. That’s quite the characterization. But, as you’re about to see, Cundill was an exceptional man.
Peter Cundill - Extreme Investing Done Right
Cundill liked pushing things to extremes. He enjoyed adventure sports and couldn’t help but place a bet when given the opportunity. He was also an avid runner, known to run 10 kilometres everyday before work and to have run 22 marathons in his lifetime. He used his morning runs as a chance to reflect on his research and to clear his thoughts, a practice I strongly advocate, as well.
Cundill pushed investing to an extreme as well but did so in terms or reduction and simplicity. His investment strategies were simple in terms of how he found opportunities, looking primarily at liquidation value and classic value metrics. Despite the simplicity of his approach, his strategies required a great deal of patience and conviction. According to The Globe and Mail, Cundill said that "being out on a limb, alone and appearing to be wrong is just part of being a value investor."
As is investing against the crowd. Cundill looked for bargains in the unpopular parts of the market, places other investors feared to tread. These could be depressed industries, unpopular stocks or markets that had been under-performing. This underperformance was fertile hunting ground for deeply discounted stocks, especially net nets. A discounted market inevitably meant that more extremely depressed stocks were available to look at.
Peter Cundill's Deep Value Epiphany
But, despite Cundill's strong contrarian streak, he came to net net investing the hard way, stung in his earlier years by a devastating mining investment. In what ironically turned out to be his final interview with The Globe and Mail, he explained that when he was working a vacation job while studying at McGill University he bought $500 worth of a speculative mining stock. He lost it all in less than 48 hours, describing this as an experience that he would never forget.
This initial loss shaped his investment approach. He became a strong advocate of the margin of safety as a central tenet of his investment style - searching for opportunities to buy a dollar for 40 cents. Once he stumbled onto something promising, he’d then worry about the particulars of the business.
Cundill was not of the view that you had to be particularly bright to be a successful investor. In fact, he thought this could be detrimental in some cases. According to There’s Always Something to Do, he said that “intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental truths”. Thankfully, this means there is hope for us all. In our experience at Net Net Hunter, these simpler truths produce powerful returns.
While arm-chair investors and those with degrees in finance mock “back of the envelope” investing, Cundill was adamant that you don’t need much to follow his approach. He explained in The Globe and Mail that all he really needed was “a company’s published reports and records; that, plus a sharp pencil, a pocket calculator and patience.” We are lucky that we can accomplish most of what Cundill needed on a whim with our smartphones.
Our modern world also provides mountains of information and investors assume that proper investing requires a thorough look through all of it. For Cundill, however, the focus was always on how cheap a stock was - not market, peer, product, or industry analysis. This may come as a shock to most investors but Cundill’s outstanding record shows how powerful simple approaches are. Tieing together this ultra simple approach, Cundill famously said: “if it is cheap enough, we don’t care what it is”.
Essentials of Peter Cundill Investing
But he did care a lot about his investment approach and was not afraid to describe it. After taking over the management contract for the All Canadian Venture Fund (later renamed to the Cundill Value Fund), he outlined his investment criteria in a letter to investors as follows:
- The share price must be less than book value. Preferably it will be less than net working capital less long-term debt.
- The price must be less than one half of the former high and preferably at or near its all-time low.
- The price earnings multiple must be less than ten or the inverse of the long-term corporate bond rate, whichever is less.
- The company must be profitable. Preferably, it will have increased its earnings for the past five years and there will have been no deficits over that period.
- The company must be paying dividends. Preferably, the dividend will have been increasing and have been paid for some time.
- Long-term debt and bank debt (including off-balance sheet financing) must be judiciously employed. There must be room to expand the debt position if required.
As you can see, this criteria builds upon Graham’s original net-net strategy. Investments that meet these requirements were rare during Cundill’s heyday, and even more so now.
Peter Cundill's Temperament: His Secret Weapon
But the characteristics needed to invest well are also still just as rare. His approach to investing requires a particular mindset and aptitude in order to succeed.
Cundill said that patience was the most important attribute for success. This was attribute ‘1A’, even above the margin of safety. Patience is supplemented with conviction and bravery. The media often often associated Cundill with these attributes, especially as he often went against market trends.
Instead, Cundill looked at trends specific to each investment. Once Cundill was satisfied with the financials, he would look at what we would call at Net Net Hunter the Burn Rate and whether there was a catalyst. His wisdom in this regard can be summarised by this fantastic quote:
“One of the dangers about net-net investing is that you buy a net-net that begins to lose money, your net-net goes down and your opportunity to be able to make a profit becomes less secure. So the trade is not necessarily to predict what the earnings are going to be but to have a clear conviction that the company isn’t going bust and that your margin of safety will remain intact over time”.
Understandably, Cundill found it very tough to find enough high quality companies in the North America alone so, like Templeton, was a huge advocate of international investing. Cundill would set out on a ‘November pilgrimage’ each year. Encouraged by the onset of the cold Canadian winters, he would find out which country had the worst performing stock market for the year and then booked a flight there to spend a few weeks researching cheap stocks.
Like Cundill, we strongly recommend looking for great net nets internationally. While we may not all be able to afford a pilgrimage each year (at least not yet!), we can easily access information about which markets have been recent poor performers. This could be achieved by looking at a comparison of stock exchange performances or Shiller PE ratios.
Peter Cundill on When to Sell
Selling is one of the most difficult aspects of value investing and even Cundill had trouble determining the best time to sell early in his career. As he explained, “the timing difficulty in selling does not lie in not knowing when the trading discount to intrinsic value has been eliminated, but in judging how much it is likely to be surpassed.” Ultimately, the additional surge above fair value can add a tremendous amount of upside onto an investment’s performance.
Years later, Cundill seemed to have worked out a logical solution to capturing this additional upside. He said “when a stock doubles, sell half – then what you have is a free position. Then it becomes more of an art form. When you sell depends on individual circumstances.” The brilliance here should not be overlooked. If you review each position when it doubles and sell half, you are guaranteed to break even. Then you just need to exercise your best judgement as to when to sell the remainder.
An Essential Peter Cundill Read
Studying Cundill’s career can certainly help in this regard. The essential book on Cundill is There’s Always Something to Do and the title in itself is a powerful message. Read Evan's review here. We need to use the resources available to us effectively in order to find bargains.
Luckily for us members, Net Net Hunter has proven a great resource that makes investing easier through access to information that does much of the leg work. From there, it is down to us to check the bargains and be confident in our convictions when we decide to make the leap and invest in a particular stock.
Cundill’s mantra that “patience, patience and more patience” is one that all deep value investors should follow. The reasoning is obvious. According to Cundill, think “long term and remember that big rewards accrue with compound annual rates of return”. In moments of weakness or doubt, we should all have this mantra written down and read it back to ourselves. Cundill’s record speaks for itself so for that reason alone we should heed his wisdom.
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