Manager’s Quarterly Commentary – Felix Narhi – Q2 2013
It has been said that investing is simple, but not easy. Simple because, in theory, the idea that one should “buy low and sell high” is just common sense. But not easy because in practice many investors find that their actual performance results suggest they “buy high and sell low”.
As value investors, we search for discrepancies between the underlying value of a business and the price of that business in the market. The larger the “discount” between market price and intrinsic value, the greater the “margin of safety” and potential upside when the stock price reverts back to its intrinsic value. Properly practiced, value investing has been a time proven strategy. Contrary to the common view that higher returns can only be achieved by taking greater risks, value investing is based upon the notion that increased returns are associated with a greater “margin of safety”, or lower risk. It is important to distinguish between risk and volatility. Risk is the likelihood of permanent loss of capital. Volatility however, is a value investor’s best friend.
There is a big difference between the notion that the stock market is always efficient and mostly efficient. As such, we believe a key to investing is to be both patient and opportunistic in order to take advantage of periodic inefficiencies. We often get asked “Is now a good time to take money off the table or put money to work?” This may be the right question to ask if you are investing in the entire market through an index or you are attempting to time the markets. We are attempting neither.
At most, we will hold 25 individual stocks in the Fund, but it is likely to be less than 20 most of the time. The more individual stocks an investor owns, the closer one’s results will reflect an index’s performance and likely produce mediocre investment results. A concentrated and focused portfolio provides a sensible starting point to potential outperformance. We will invest in businesses of any size, as long as sufficient liquidity exists relative to the Fund size.
We are not big believers in timing the market. As American financier Bernard Baruch sagely observed, “Don’t try to buy at the bottom and sell at the top. This can’t be done, except by liars.” That said, we believe that individual securities can be “priced” and bought when they appear cheap, relative to their underlying intrinsic value. Opportunities tend to arise when Wall Street does not understand or ignores a company. Periodic bouts of panic selling also represent a great time to look for undervalued opportunities.
Many investors do not appreciate that the big money is often not so much generated by buying and selling, but by the waiting. Patience is important. Our research suggests winning stocks often have “predictive attributes” which helps to drive their performance. For example, we find that companies led by vested owner-operators tend to outperform over time. Collectively, stocks that have numerous such predictive attributes should tilt the odds in an investor’s favour. Our aim is to have done our research on a business and its estimated intrinsic value, to buy opportunistically, then to remain patient until the market recognizes that the actual value is greater and thus the stock moves higher.
July 2, 2013
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