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.
Publications that can be found on Tim McElvaine's website.
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