We believe there will always be individual securities in any cycle
of the market that will be either unloved, underfollowed, or misunderstood, and therefore
potentially mispriced. To find compelling ideas or continue to hold onto
existing positions, we believe you need either an analytical or behavioural
investment edge. Sometimes you need both. In normal times, when
the markets are relatively tranquil, we spend most of our time trying to
find idiosyncratic “needle in the haystack” opportunities in the market,
primarily leveraging our analytical edge.
When investors get spooked and stampede for the exits en masse,
the broad opportunity set widens. But it sure doesn’t feel like an
opportunity. This is the time for “the tide goes out” investing. Suddenly
the “haystack” is full of “needles” in plain sight, but very few are
willing to take advantage of these opportunities.
These are the times when many companies that are both well followed and well understood become unloved
. These are the times when the “spreadsheets, reasoning, formulas, or
metrics” that backed up an investor’s conviction in tranquil times seem
like a quaint mirage from a bygone era. These are the times where
analytical rigor provides little comfort, but where a behavioural edge
makes all the difference. This is what Buffett was referring to when he
“Once you have ordinary intelligence, what you need is the temperament
to control the urges that get other people into trouble in investing.”
In a bear market, if you want to benefit from the part ownership of a
profitable enterprise over time, behave like a landlord. You don’t have to
sell a great asset for money you don’t need, just because you receive a
string of idiotic offers. On the other hand, you should consider buying
when you find sellers who are willing to accept low-ball offers for great
assets. This is the buy low part of the maddeningly obvious “buy
low, sell high” strategy.
Unfortunately, the wisdom of this strategy seems to be least obvious, or
foolhardy advice, during the gloomy part of the market cycle when you need
it most. Periodic corrections provide opportunities for investors to either
upgrade their portfolios or put money to work in better valued long-term
opportunities. As in 2016, we are once again deploying cash as a strategic
asset class into securities as prices fall into our buy zones.
Indiscriminate selling during corrections often takes down both great and
mediocre companies alike. This provides a good opportunity to upgrade a
portfolio. When valuations converge, we are happy to sell our mediocre, but
still very cheap companies, to accumulate positions in long-term
wealth-creating businesses, when they are also attractively priced. For
example, “compounders,” as a percentage of the
Pender Value Fund, are near an all-time high.
In some cases, we are buying back into the very same names we sold in the
past year or two, but at a big discount. This is one of our favourite
sources for “new” ideas. We find recycling previous ideas can be a
relatively low risk, but lucrative strategy for us over time. After all, we
have already done our homework on those companies, so we know the issues
and key drivers much better than some new stock that just popped up on our
In some cases, investors don’t need to do anything to still get a potential
boost from savvy market cycle transactions, thanks to the actions of the
management teams of their holdings. Consider the Liberty Group of
companies, which represent the investment vehicles of one of the best
modern-day investors, John Malone.
Over time, he has played the stock market cycle like a maestro. His
companies habitually buy back their own shares when the cycle goes south
and the stock gets cheap (buy low). Then they occasionally issue back some
of that stock when the market gets enthusiastic again (sell high). Patient
shareholders have been the big winners over time. According to a recentBarron’s article, John Malone’s Liberty Media Corp. (NASDAQ: LMCK) returned 24% annually
from May 2006, when it took its current form, through to Nov. 8, 2018,
whereas the S&P 500 had gained 8.5%, including dividends. It is hard to
calculate exactly how much Liberty’s 24% annualized return is driven by the
management’s capital markets activity, but it’s safe to say that it’s
The accompanying graph shows
CNN’s Fear & Greed Index
over the last three years. The index is a composite of seven indicators for
gauging the stock market’s emotions. At the time of writing, we are at a
“13,” near to the very extreme end of the fear range and one of the lowest
levels historically. We have overlaid our market cycle view onto this
index. From our vantage point, the tide is clearly out. Markets do
not usually stay in a state of extreme fear for long, but emotional
decisions during such times often sabotages the long-term plans made many
investors in calmer times.
Felix Narhi, CFA, is Chief Investment Officer and Portfolio Manager at PenderFund Capital Management.
He works alongside David Barr, Pender’s President, in setting the
direction of Pender’s overall investment strategy. This article first
appeared in the
blog. Used with permission.
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