Monday, 28 January 2013

Profile - Tim McElvaine

In the 11-year period from 1997 to 2007, Victoria, B.C.-based investor Tim McElvaine returned 21% per year before fees (16% net to investors), compared to 11% for the S&P/TSX index.  Moreover, he didn't suffer a single down year, while the index fell three times.  This impressive result was achieved despite holding large amounts of cash: in fact, on average he was only 82% invested over the period.  In theory, had he been fully invested, McElvaine's gross returns would have exceeded 25% per annum.

But - and with a cutoff year of 2007 you knew there was a "But" coming - in 2008 his fund fell by almost half.  McElvaine was hardly alone in this, of course; unlike many investors, however, he has yet to rebound sharply since the end of the Great Recession.  Indeed, even after a net return in 2012 of 18.3%, McElvaine remains about 30% off his former peak.  In absolute dollars, his fund has shrunk even more dramatically, forcing him to lay off most of his already small group of staff.  Will Tim McElvaine return to his past stellar performance, or was he permanently diminished by the recent turmoil?

An 11-year run of substantial outperformance is likely long enough to rule out pure fluke.  However, in order to determine with confidence if his pre-2008 success was a streak of long-lasting good luck, or the product of skill and experience, it's necessary to look beyond just the numbers and assess the "How" and "Why" of his performance.  

McElvaine's philosophical influences include John Templeton, Ben Graham and Warren Buffett.  Peter Cundill, though, was not only an intellectual influence, he hired the young and persistent McElvaine, and mentored him first-hand.  One of the qualities that Cundill instilled in McElvaine was patience.  This helps explain why McElvaine has steadfastly - and correctly, in this writer's opinion - held on to Glacier Media.  For many years Glacier has been his largest position, but the stock has underperformed lately, and is partly responsible for his restrained post-2008 performance (in fairness, he originally paid around $0.70 for GVC, so the fact that it hasn't done anything for him lately doesn't mean it hasn't done anything for him at all).  In addition, Cundill's interest in Japan wore off on McElvaine.  Most notable North American investors must think the fallen country's nickname is Land of the Setting Sun, if they think of it at all, but McElvaine had 17% of his portfolio committed to Japan at the end of 2011.

In the manner of Graham and Buffett, McElvaine has a disciplined, multi-faceted approach to estimating a company's value, and is sure to only buy at a discount, leaving him a "margin of safety."  His own personal twist is that he likes to buy when sellers are so determined to unload their position that they "don't care about price" (p.36).  Arguably, buyers of Glacier Media have been purchasing from sellers that blindly lump the company together with the newspaper industry in general, without regard for its genuine differences.  Other cases where sellers want out regardless of price may include a stock that has been delisted from an index or distressed securities that funds are not permitted to hold.

In addition to the margin of safety, McElvaine's investing approach is similar to Buffett's in several ways: like the Oracle of Omaha, McElvaine runs a concentrated portfolio, where single positions can constitute 10% or more of his portfolio; when a stock falls, he tends to add to his position, on the reasoning that the upside is higher and the margin of safety larger; when he assesses management and directors, he ensures that they behave in the shareholders' interest, not their own, and occasionally takes a seat on the board to make sure executives don't confuse the two; and he focuses on return on capital and cash flow.

Some of McElvaine's habits and values resemble Buffett's, as well.  In describing a typical day at the office, he cites a poster that reads, "Sometimes I sit and think, and sometimes I just sit," which would delight Buffett, who firmly believes that activity is the enemy of investors.  McElvaine, like the Berkshire Hathaway CEO, has the bulk of his family's money invested in his fund, as they both like to "eat their own cooking."  And McElvaine's letters to partners, while not appointment reading for most of the investing world, are unfailingly candid and humorous.

One important area where McElvaine strays from Buffett, however, is in his willingness to own "duds" (p.45).  As he explains, "What I ideally like is a mediocre business, so to speak, that each year will be worth a little bit more primarily because of cash flow" (p.47).  Buffett, on the other hand, refuses to invest in companies without a sustainable competitive advantage.

There's a good chance that McElvaine will return to form in the future.  His success in the past was not an accident, and he has wisely remained loyal to the key ideas that have served him, and many other excellent investors, so well.  To be sure, he has tweaked a few things, such as investing less money in small caps to provide more liquidity, and diversifying into a somewhat larger number of holdings.  To his credit, however, he hasn't abandoned a formula that is likely to work over time.  And a greater commitment to buying only companies with a wide and formidable "moat" would further increase the odds that Tim McElvaine returns to his past glory.

Sources: Thompson, Bob.  Stock Market Superstars: Secrets of Canada'sTop Stock Pickers. Toronto: Insomniac Press, 2008.

Publications that can be found on Tim McElvaine's website

Other Profiles include investor Tom Stanley, and New Yorker writer James Surowieki.

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