Peter Cundill: Discount To Liquidation Value via Jason Boole, Boole Microcap Fund
This weekend I read a fascinating book, There’s Always Something to Do: The Peter Cundill Investment Approach, by Christopher Risso-Gill.
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Peter Cundill was one of the best value investors in the world. He followed a contrarian value (deep value) strategy based entirely on buying companies below their liquidation values. “We do liquidation analysis and liquidation analysis only.” This approach was inspired by several approaches proposed by Benjamin Graham, the father of value investing.
Here is a brief summary of the book.
Getting To First Base
One of Peter Cundill’s first successful investments was in Bethlehem Copper. The company’s shares were available for the cash on the balance sheet. The company had no debt and owned a profitable mine with good long-term contracts in place for the purchase of its production. Cundill built up a position at $4.50, far below liquidation value. He was able to start selling after six months when the shares hit $13.00.
Riso-Gill describes Cundill as having boundless curiosity. Cundill would not only visit the worst performing stock market in the world near the end of each year in search of bargains. But he also made a point of total immersion with respect to the local culture and politics of any country in which he might someday invest.
Launching A Value Fund
Early on, Peter Cundill had not yet developed the contrarian value approach based strictly on buying below liquidation value. He had, however, concluded that most models used in investment research were useless and that attempting to predict the general stock market was not doable with any sort of reliability. Eventually Cundill devoured Graham and Dodd’s Security Analysis, especially chapter 41, “The Asset-Value Factor in Common-Stock Valuation,” which he re-read and annotated many times.
When Peter Cundill was about to take over an investment fund, he wrote to the shareholders about his proposed contrarian value investment strategy:
“The essential concept is to buy under-valued, unrecognized, neglected, out of fashion, or misunderstood situations where inherent value, a margin of safety, and the possibility of sharply changing conditions created new and favourable investment opportunities… In essence, the fund invested in companies that, as a result of detailed fundamental analysis, were trading below their ‘intrinsic value.’ The intrinsic value was defined as the price that a private investor would be prepared to pay for the security if it were not listed on a public stock exchange. The analysis was based as much on the balance sheet as it was on the statement of profit and loss.”
Peter Cundill went on to say that he would only buy companies trading below book value, preferably below net working capital less long term debt (Graham’s net-net method). Cundill also required that the company be profitable – ideally having increased its earnings for the past five years – and dividend-paying – ideally with a regularly increasing dividend. Cundill made it clear that the criteria (which also included an evaluation of management) were not always to be followed precisely, leaving room for investment judgment, which he eventually described as an “art form.”
Value Investment In Action
Having a clearly defined set of criteria helped Peter Cundill to develop a manageable list of investment candidates in the decade of 1974 to 1984 (which tended to be a good time for value investors).
For example, the American Investment Company (AIC), one of the largest personal loan companies in the United States, saw its stock fall from over $30.00 to $3.00, despite having a tangible book value per share of $12.00. As often happens with good contrarian value candidates, the fears of the market about AIC were overblown. Eventually the retail loan market recovered, but not before Peter Cundill was able to buy 200,000 shares at $3.00. Two years later, AIC was taken over at $13.00 per share by Leucadia. Meanwhile, Cundill had served on the board of the company, which brought some valuable experience and associations.
See the full article here Boole Microcap Fund more on the book below
in the context of recent financial upheavals and ongoing uncertainty, Peter Cundill’s wise and frequently funny reflections are more important than ever. In a seamlessly assembled narrative drawn from interviews, speeches, and exclusive access to the daily journal Cundill kept for forty-five years, Christopher Risso-Gill outlines Cundill’s investment approach and provides accounts of his investments and the analytical process that led to their selection. A book for everyday investors as much as professional investors and investment gurus, There’s Always Something to Do offers a compelling perspective on global financial markets and on how we can avoid their worst pitfalls and grow our hard-earned capital.