Unlike the hordes of sellers who seemingly wanted out at any price, two of the country’s best-known value investment managers – Prem Watsa from Fairfax Financial Holdings Ltd. and Kim Shannon from Sionna Investment Managers Inc. – were spectators to the dramatic turn in global stock markets on Monday.
Recently, I was asked to participate in a mystery stock presentation for a group of investment professionals where I would slowly reveal the name of one of my favorite investments by providing more and more information as we went along. After struggling to choose a unique and exotic name to present I realized that my best choice was right in front of me the whole time.
Traditionally, value investors are perceived as focusing on companies that trade at low price-to-earnings (PE) and price-to-book (PB) multiples. At Sionna, we believe these traditional methods are best married with extensive fundamental analysis and a healthy dose of skepticism since multiples can be misleading in some cases.
With the Canadian capital market under siege again, we decided to brush off our 2006 essay, “Who is Afraid of the Canadian Stock Market”, and update it to address the current publicity. We find it interesting that Canadian investors are willing to consider severe criticism – that our market is sub-par and exposure to it should be minimized for our best interests – with very little backlash.
For the second time in the past few years, Kim Shannon, a relative value manager who formed Sionna Investment Managers a dozen years back, has revisited an old essay whose central thesis is there’s no point in being afraid of the local stock market.
In addition to giving rise to profit potential, buying when price is below value is a key element in limiting risk. Neither paying up for high growth nor participating in a “hot” momentum market can do the same.”
- Howard Marks
As value investors, we often have to make the challenging decision to buy and hold a business that is out-of-favour. When faced with the opportunity to buy shares in an unloved company, the easiest option can be to avoid it altogether – along with the criticism, stress and fear that can come with deploying capital into the investment.
How do you know if you should invest in a company or if it’s overpriced?
Pricing power—the ability to increase prices at least above cost, in real terms—is critical in determining a company’s value, said Marlena Zabielska, an associate portfolio manager with Sionna Investment Managers, at the firm’s spring market review.
Oil prices have tumbled recently—a drop of this magnitude hasn’t been seen since 2008/09. Headlines point to both supply and demand concerns, including increases in non-OPEC (Organization of the Petroleum Exporting Countries) supply; Saudi Arabia’s decision to keep producing despite lower prices; and lower short-term demand due to economic weakness in China and Europe.
Growth stocks are very volatile and tend to lose a lot of value in downturns. This gives them a large speculative component because while large amounts of money can be made by buying and selling at the right time, this is hard to do. Holding on too long will result in poor returns."
- Benjamin Graham