Book review: There’s always something to do: the Peter Cundill Investment Approach

 The book shared some of Peter Cundill’s interesting investments, which expose some of his investment strategies and thinking processes. The book does leave a deep impression on me. As such, let me share some of the things I learn.

Net-Net FTW (for the win)

Interestingly enough, the book doesn’t provide a special formula. Not some secret techniques to generate a lot of returns. Peter’s approach to investment was very simple in fact, just using Net-Net.

The Net-Net approach is very simple. Just buy companies that are cheaper than their working capital.

However, it isn’t easy to implement. As I found companies that are satisfied strictly on Net-Net, I often found myself uncomfortable with the companies. For example: worried that the company is unable to grow in the future or the company is losing business due to the other forces like retail gaming shops losing out to online gaming distributors.

Peter naturally learned this from Benjamin Graham and was convinced that net-net was an extremely reliable method of investing. As net-net uses information based on the balance sheet, and if the net-net requirement is satisfied, the company is considered cheap compared to what the management already paid for.

Discount Cash Flow and Projection into the Future

Peter was aware of Discount Cash Flow. Peter was well aware that the analysts and financial community devote a lot of time to finding out what may happen in the future.

He did not use these methodologies because he found them unreliable. He felt that it is more productive to find companies that are already cheap in terms of Balance Sheet. Assets that the company already owns.

This displays his conservative investment approach. While many, including me, invest and hope the investments grow in the future, Peter finds investments that are already cheaper than what is already paid for, with disregard of the future prospect.

Which leads to…

His Margin of Safety

Reading his book makes me wonder, do everyone have a different meaning of margin of safety?

His definition of Margin of Safety: “The difference between the price we pay for a stock and its liquidation value gives us a margin of safety. This kind of investing is one of the most effective ways of achieving good long-term results.”

While I have been using Discount Cash Flow to determine the company’s intrinsic value, my Margin of safety is the very last variable in the calculation and will reduce that value.

However, in his approach, he determined the company's intrinsic value as the liquidation value. The difference he pays for the investment and the investment liquidation value is his margin of safety.

In my opinion, his approach is very much more conservative compared to mine.

His Quirks

I noticed Peter was a curious person. Thanks to his curiosity, he tended to dig farther, researched more, and understands the situation better.

In my opinion, because of his curiosity, he gained an edge. This edge allows him to reduce the risk of his investment by increasing his knowledge. In another word, he increased his circle of competency.

In the course of his investment journey, he learned a lot from his friends and mentors, most notably Benjamin Graham and Sir John Templeton. He was likable and humorous, which allows his friends and mentors willing to share their thoughts and information without reserves, which also helps in expanding his circle of competency.

He also kept an open mind in investing. He was willing to invest in anything and in anywhere as long as there is a margin of safety for it.

Most interesting Case Study: Panamanian Sovereign Debt

The most interesting case I read in this book is that he invested in Panamanian Sovereign Debt.

Before I carry on, Graham and Dodd's framework analyze from balance sheets, which means the information is readily available and has a team of experts to ensure the information is accurate and a set of laws to follow.

Unlike listed companies, Sovereign nations do not have such available information. Despite so, Nations do have assets, like a workforce, a manufacturing capacity, farms, mineral mines, and most important of all, the ability to levy taxes.

Conventional investors may not like to invest in such bonds. There are several factors, for example, information isn’t available, Political in another country may differ from investors’ home country. As such, Sovereign bonds' credit rating may not be that accurate. As the credit rating influence the bonds’ yield, this may not reflect as accurately too.

Now, on the Panamanian debt case study, throughout the 1970s and at the very beginning of the 1980s, was regarded by the USA as a favored nation with whom it was prepared to do business as well as an ally in the region.

In 1985, General Manuel Noriega, who was the leader of Panama then, was implicated in political murder and drug trafficking had alienated the United States’ administration. This caused the USA’s aid to be withdrawn. As the aid withdrawal, adding to the political turmoil in the nation had a weakened Panama’s economy and impaired the country’s ability to service its outstanding debt.

As the situation worsens result in an attack on US Embassy in Panama City, some American lives were lost. President Reagan then froze all Panamanian assets in US banks and suspended payments on the use of the canal. The Panamanian debts default shortly. The situation turns so bad the US troops took control of the Panama Canal.

Then on 1990’s Christmas Eve, the USA invaded Panama, ousted Noriega, and restored order to the city.

Peter took great interest in these developments. He took months to research and he found something mouth-watering.

The frozen cash assets belonging to Panama in US Banks were almost enough to satisfy the outstanding defaulted obligations! Once the country was able to work on their economy and thrive, the new Panama government will receive control of the Panama Canal from the USA which took control thanks to the political turmoil.

In Peter’s quote:

Markets can be overvalued and still keep on getting more expensive for quite a while, or they can be undervalued and keep getting cheaper, which is why investing is an art form, not an exact science.

Even when the Republic of Panama dollar-denominated debt trading at just over 50 cents by early 1992, which he believed had a very considerable and solid margin of safety, he did not buy it straight then. By 1992 December, the dollar-denominated debt had fallen to below 35 cents and Peter stepped in and accumulated an average price of 39 cents.

He sold them in May 1995 with a gain of 121%.

In short, he used Graham and Dodd's framework on Sovereign Debt. I am sure he can use the framework on other assets classes (not sure about cryptocurrency though) as long as he has the information and can determine the Margin of Safety.

Summary

It is interesting to read this book. I believe that Peter’s approach is simple, Net-Net for-the-win. But just following the net-net formula may not be enough. He leveraged on his quirks: his curiosity, his humour, and his discipline on having Margin of Safety (you can call it stubbornness too), to his advantage in his investment journey.

Although he was disciplined on having a Margin of Safety in all investments he made. He was flexible to use the Net-Net philosophy or framework and apply it to other assets that were hard to research on.

As the book is derived from Peter’s 200 hand-written journals, the book is mainly focusing on his thought process and viewpoints.

My viewpoints

I am inspired by this book. The way he approached Distressed Sovereign Debt is a work of art.

Although it may be hard to find a group of companies that satisfy the Net-Net requirements. But I was strongly reminded that as an investor, you can give yourself a certain edge if you improve yourself.
Improve yourself to be healthy.
Improve yourself to be a better person.
Discipline yourself in a certain principle, for Peter’s case is the Margin of Safety.
Be flexible in thinking.

As the market always changes, so we must adapt and be able to profit from it.