We continue to maintain a defensive position across our portfolios. We are holding a larger than usual amount of cash, government bonds, and commodity producers, with a reduced exposure to equities.
Incoming data suggests the Canadian and US economies will grow, but at a slower pace than consensus estimates. With market valuations now stretched to levels beyond historic comparison, slower than anticipated growth poses a significant risk to the popular rosy outlook for stocks. Although stock prices may continue higher, I believe the short-term reward of chasing such gains is not worth risking capital. My focus remains on protecting capital by reducing the risk of permanent loss, and secondly on maintaining upside potential through holding undervalued securities.
Over the past year we recorded a 25% gain in the American Growth Portfolio, while the Canadian Growth Portfolio was flat. On the topic of relative performance, one client asked me a good question that illuminates an important aspect of our value investing strategy: how could two exactly similar strategies (apart from a Canadian versus US focus) deliver such different results in a year?
In the short term, any investment outcome is the product of many factors that we cannot control. In other words, luck plays a big part in which stocks move up or down in a year. In fact, most often when we establish a new position in an out-of-favour stock, it moves down before it moves up. However if we measure over longer periods of time, we know that various short term factors lose influence, and a stock’s price reflects the long term growth earned by the business. In our strategy, I focus only on the factors that I can control, such as only buying businesses with steadily growing profits, or businesses with valuable assets, or businesses mispriced by emotional investors. By concentrating on factors under our control, our view is necessarily on the long term, which allows us to earn above average long term returns.
While most investors form a judgement about a stock or fund based on what it did over the last 365 days, I believe the growth prospects of a company have nothing to do with arbitrary astrological timing, and everything to do with that company’s intrinsic value. Sometimes that value is realized within one year, sometimes longer. In any case, we can rest assured that the availability of one year performance numbers has no bearing on a sound investment process.
This means that our Canadian and American Portfolios will produce yearly variations in performance (as demonstrated in 2017). Over longer periods these variations will average out to the long term growth rates of the businesses we own. If we do a good job in our business valuation, and buy our businesses for less than they’re worth, we have a good idea of what the long term results are likely to be -- only we don’t know when those results will be delivered. We know the destination, but not how fast we’ll get there.
If all of our businesses reached their estimated fair value tomorrow, the Canadian Growth Portfolio, American Growth, and Small Cap Value would each be up healthy double digits. Therefore, what’s more important than measuring the ebbs and flows of short term performance, is to condition and accept that we must be patient for the process to work in its own time. This is what Warren Buffett’s partner, Charlie Munger, refers to when he talks about “sit on your a** investing”. Do good valuation work, buy the company at a discount to what its worth, and then wait.
“Expected value” will change your life: https://www.fs.blog/2018/01/expected-value/
Management insights from Jeff Bezos: https://www.youtube.com/watch?v=fpDUiDQigO8
More from the incomparable Charlie Munger: https://youtu.be/BLctqhNClqY?t=19m5s
Ben W. Kizemchuk
55 Yonge Street, Suite 1100
All opinions and estimates contained in this report constitute the judgement of Ben W Kizemchuk of Wellington-Altus Private Wealth as of the date of this report and are subject to change without notice. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.