Tim McElvaine: Investing In Nightmares; Stock Market Superstars

Tim McElvaine: Investing In Nightmares; Stock Market Superstars

Tim McElvaine: Investing In Nightmares; Stock Market Superstars by CSInvesting

Tim McElvaine: Dealing in Nightmares, Not Dreams

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Stock Market Superstars: Secrets Of Canada's Top Stock Pickers By Bob Thompson

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“I make Homer Simpson look active because there’s not that much excitement happening in my office.”

As the ex-chief investment officer for Peter Cundill’s company, Tim McElvaine is all about deep value investing. If you wondered what the definition of deep value investing is, it is buying the equity of companies that are beaten up, unwanted, and unloved. Even hearing their name will sometimes make you cringe. As Tim says, “We deal in nightmares, not dreams.” So why would you buy nightmares, you say? Well, because if you pick the right ones, you get a great bargain on the purchase price, and this is how Tim says he makes his money. With a 20 percent annualized return (16 percent net to investors) for the last ten years until December 31, 2007, “nightmares” have turned into dreamy performance for Tim’s investors.

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As a value investor who is strict in his style, he will build up the cash when he can’t find bargains. Surprisingly, he has been able to achieve these returns while holding a lot of cash over the years. In 1997, the average cash position in the fund was 59 percent, and at various times over the last decade, the fund has averaged 20 percent-plus in cash.What even makes the performance more remarkable is that there are hardly any resource stocks that have accounted for the performance. Chances are, you won’t have heard of many of the companies that Tim has owned over the years.

Buying stocks with a margin of safety can also help to reduce your downside and can result in amazing consistency. Tim McElvaine is one of only a couple of managers I can think of who have not had a down year in the last ten years. Other than a drop during 2002, and the recent drop at the beginning of 2008, the chart for the McElvaine Investment Trust has generally been a nice upward sloping line over the last ten years with very few bumps along the way. Even in 2007, in which many “value managers” were beaten up, he squeezed in a positive return by the tightest of margins. The style has been pretty easy on the nerves over the years, and it proves repeatedly that to make a lot of money over time, you just need to avoid the big drops during the bad times.

Known for his witty and self-deprecating humour, it is always fun to chat with Tim McElvaine. Putting yourself down in a fun way I think actually helps people to stay humble, which is one of the traits of the most successful investors. I actually had to convince him that he should be included in this book.When I asked him why he developed a value philosophy, he said, “I am not as bright as growth managers, so it was logical for me to do this.” When asked why he tends to hold stocks for so long, he says, “Because it takes so long for them to go up,” referring to the fact that many value managers get into stocks a bit early.

See full PDF below.

Tim McELvaine Presentation from the Ben Graham Center for Value Investing April 10, 2013

My Investment Criteria - "ABBA"


Bird in hand

Brick (cheap) house

Avoid Lola (or alignment of interests)

Criteria 1: Accident

“If you’re going to buy the best bargains, you have to buy the things that people are selling.” – Sir John Templeton

  • Look to buy when people are selling for reasons other than price
  • Examples:
    • Sectors, industries or regions that people are avoiding
    • Bad news (i.e. dividend cuts, unexpected poor results)
    • Special situations ( spin off, emergence from bankruptcy, rights issue)

Criteria 2: Bird in hand

“Protect the downside. Worry about the margin of safety.” – Peter Cundill

  • Want margin of safety based on purchase price
  • Also consider what the stock may be worth in 3 years (bird in the bush)
  • Examples of things considered when valuing a company:
    • Replacement value
    • Liquidation value
    • Private market value
    • Sum of the parts value

See full Presentation below.


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