Thursday, 3 May 2012

Book Review - There's Always Something to Do: The Peter Cundill Investment Approach, by Christopher Risso-Gill

In 2011, Christopher Risso-Gill published There's Always Something to Do: The Peter Cundill Investment Approach, the first and only book about one of finest Canadian investors in history.  Risso-Gill observed Cundill from a front-row seat, serving for a decade as a director of the Cundill Value Fund, which returned a hair above 15% annually for 33 years.  The author's personal and professional proximity to his subject allows for a detailed look at an excellent career.  Risso-Gill draws on the vast paper trail that Cundill left behind, giving readers a first-hand look at Cundill's thinking. 
In crystal-clear, economic prose, Risso-Gill brings Cundill to life, with the help of many long, direct quotes from Cundill's journal, excerpts from letters and speeches, and scraps from notes and memos.  Risso-Gill outlines the trajectory of his career, from his early days managing a tiny fund, to his time as renowned all-star; discusses the people Cundill forged business, political and social connections with; and includes interesting anecdotes along the way.  Cundill had a razor-sharp mind and a wide-ranging curiosity.  Indeed, he gleaned wisdom from a range of sources including Inuit folk sayings, Korean potters, and the hard-to-fathom facts of astrophysics.  An avid runner and athlete, he also augmented mental fitness with physical health.
Most importantly, the author illuminates Cundill's investing tenets and philosophy, and gives examples to show the interaction between theory and practice.  His revelation came when he learned of Ben Graham, Warren Buffett and the concept of the "margin of safety."  The margin of safety is a simple idea: buy a business for less than its true value.  It reduces risk, Graham noted, by allowing for miscalculation or bad luck.  After all, the cheaper a stock is the less room it has to fall.  Cundill liked businesses that had "escape hatches": inventory that could be monetized, spare real estate, rainy-day investments etc.  Buying cheap not only reduces downside, it increases upside: eventually a stock will reach its true value, and the steeper the climb, the higher the profit. 
The book features many examples of Cundill's investments: Grahamian net-nets, including an operating copper mine, debt-free and trading at a discount to working capital; stocks selling at a discount to the sum-of-the-parts; shares oversold on short-term negative news, such as luxury-seller Tiffany's in the depressed 1970s; companies with hidden or misunderstood assets; multi-layered holding companies, with assets hidden within assets; distressed debt, especially during the Savings and Loan crisis; companies reorganizing through the bankruptcy process; sovereign debt, including that of several struggling Latin American countries in the early 1990s, and so on. 
Most of these investments had one thing in common: a healthy balance sheet.  However, Cundill was not a passive investor familiar only with the ink-on-paper details of the balance sheet: he also became intimately familiar with factories, real estate and other hard assets represented by the official filings.  In addition, he considered a company's profitability, its price-to-earnings ratio, and whether it paid a dividend.  To a lesser extent, he studied management and tried to get a feel for a business's culture.  But he never lost sight of assets and financial position of a company.
Investors learn from failure just as they do from success.  Fortunately, Risso-Gill discusses Cundill's mistakes, such as when he underestimated the time and trouble it would take to move LTV Corporation, a large steelmaker, through bankruptcy.  As all investors do, Cundill suffered through a soft patch in the early 1990s, which affected his mood, confidence, even his decision making.  In a testament to just how rattled he'd become, Cundill meditated upon one of Nietzsche’s darkest warnings, "Gaze not too long into the abyss, lest the abyss gaze back at you."  He wisely remained faithful to his proven approach, and in 1993 his fund jumped 43%.
Investors must decide not only what a company's worth today, but what it'll be worth tomorrow.  Cundill watched for companies that "burned" cash, since money wasted reduces intrinsic value.  Liquidation value is an appraisal of what a company's worth dead, not alive, but companies in mortal danger will rage against the dying of the light, rather than quickly and quietly going under.  Straightforward analysis, then, must be complemented by meta-analysis: how safe is the margin of safety?  Cundill's biggest failure involved a cable company that looked sound upon investment, but later destroyed value by making foolish acquisitions.  The mistake was largely responsible for the fund's 11% loss in 2002.  In response, Cundill encouraged more dissenting voices when debating the merits of an investment.
Understanding that value investing applies across geographies, Cundill became a globe-trotting international investor.  In addition to investing in North America and the UK, he was particularly active in Japan, where he first invested in 1985, later shorted the Nikkei when it became wildly overvalued, and finally reversed himself again and went long after it crashed; in Sweden, he toured Volvo's factory and test-drove one of its cars before buying the company's shares; he invested in Latin America in the early 1990s; he put capital in riot-stricken France in the mid-1990s; he even put some money into the oilfields of sub-Saharan Africa.  In short, Cundill found value in far-off lands, where most investors fear to tread.
Warren Buffett, Ben Graham's only A-plus student, far surpassed his teacher, partly by expanding the definition of "intrinsic value" from a narrow focus on the balance sheet, to the earnings power of business.  But two of Warren Buffett's investment requirements - a return on equity of 15% or more, and the presence of a durable competitive advantage - are scarcely even mentioned by Cundill.  That a modern investor could ignore them and succeed affirms the timeless power of the margin of safety, the idea that made Cundill's career.
Book reviewers are supposed to find something, anything, to quibble about.  But this book is a triumph.  Risso-Gill breathes life into Cundill the man, covers his entire career, places it in its social, political and business context, and outlines his philosophy.  The book is more than a biography of ideas, though: it's also of practical value to investors.  Risso-Gill manages a delicate balance: he discusses Cundill's investments in enough detail to be useful to investors, but avoids offering a dry, lifeless series of case studies.  As well, following the main body of the text are a grab-bag of terms, a glossary, and appendices that include a net-net work sheet to assist investors.  Most impressive is that Risso-Gill is a first time author.  Often, first books are as much about the author's potential as the work itself.  However, this fine book is not about promise, but fulfillment.

Source: Risso-Gill, Christopher.  There's Always Something to Do: The Peter Cundill Investment Approach.  McGill-Queens University Press, 2011.

Disclaimer: The host of this blog shall not be held responsible or liable for, and indeed expressly disclaims any responsibility or liability for any losses, financial or otherwise, or damages of any nature whatsoever, that may result from or relate to the use of this blog. This disclaimer applies to all material that is posted or published anywhere on this blog.

No comments:

Post a Comment