Some say value investing is both an art and a science. It is an art because successful investing requires judgement honed from experience, an understanding of history to recognize patterns and the emotional fortitude to shield against psychological biases. Investing is also a science because cold hard analytics can be applied. However, when investors focus too narrowly on any single metric, there is a temptation to rush to judge the attractiveness of a security or portfolio.
Financial markets can certainly be characterized as wicked environments. In investing, the rules of the game are always changing: competitive forces evolve, supply and demand dynamics shift, governing bodies turn over and macroeconomic variables swing.
In assessing structures, Sionna has noticed that the decentralized business model stands out as an effective form of aligning incentives at the ground level while allowing an organization to grow efficiently. At its core, a decentralized business provides autonomy to several distinct units rather than centralizing all decisions at the top. However, while decentralization can be the start of a strong foundation, it doesn’t ensure success on its own.
Investors have historically used a variety of characteristics to measure the valuation of a stock. Price-to-book value is one such characteristic and has often been used as the line in the sand when distinguishing value investors from growth investors. As long-term value investors, we have leaned on this ratio (and others) as a measure of value for both individual stocks and the overall portfolio. More recently, however, there are suggestions that price-to-book value has evolved into a less robust metric.
Canadian investors often like to compare and contrast our markets to those of our American neighbours. And being the polite and humble group that we are, we often focus too much on our shortcomings rather than highlighting our strengths. Year to date, the performance of the Canadian equity index has trailed that of the U.S. However, as value investors, we believe that negative sentiment and underperformance can sometimes create attractive investment opportunities.
Sionna believes market pricing is as much about human excess as it is about underlying security fundamentals. One feature of human weakness is that current market trends are often erroneously interpreted as the new secular normal. In reality, these trends are likely cyclical phenomena, which are so infrequent that present decision makers are unaware of their cyclical nature.