January 2019 Update

In bear markets, stocks return to their rightful owners. – JP Morgan

In strategy it is important to see distant things as if they were close and to take a distanced view of close things. – Miyamoto Musashi

There were heaps of these magic sixes. The magic sixes were companies that had 6% dividend yield, 6 times earnings and 60% of book value. – Peter Cundill


December created one of the largest opportunities for deep value investors in a decade. Some of you have inquired about adding capital to your portfolios to take advantage of low prices, and I applaud your rationality and conviction. Most stock prices are now down over 25% from their peaks, so the months ahead will see strategic buying of companies well below fair value. The long term growth and value characteristics of our portfolios have never been better.

Our largest positions in precious metals and bonds performed well, moving higher over the month. We took advantage of increasing momentum in precious metals companies to add new positions. Our utilities and consumer stocks held in better than average, while our natural gas companies declined to trade at an average of 2x cashflow, offering an astonishing 50% cashflow yield. One company even trades at 1x cashflow, a 100% cashflow yield. Such cheap valuations are simply irrational, and portend significant gains ahead.

Together, our companies are trading on average at 4x cashflow, delivering a 25% cashflow yield on purchase to investors. To put it another way, for every $100,000 invested today, our companies together will earn about $25,000 annually in cashflow. Four years from now, there will have been enough cashflow earned by the companies to cover totally the initial investment amount. Any growth in earnings over the next four years (which I believe is highly likely), plus even a small positive shift in sentiment, is a baseball-sized cherry on top. For comparison, the average stock trades at about 16x cashflow, almost four times more expensive (ie riskier) than our portfolios.

The balance of evidence suggests indices and popular stocks remain overvalued relative to cashflow and asset value fundamentals. I continue to believe we are in a bear market, characterized by swift rallies within the context of an overall downward trend for most stocks. While most investors will be focused on the largest popular stocks and indices, unquestionably, the best opportunities today are found amongst the most unpopular and unloved corners of the market – the areas we specialize in.

We will remain patient through inevitable periods of volatility so that we can reap the long term rewards of our strategy. Please be in touch if you wish to add capital.

Recommended reading

A secret pathway to find what no one in your sport or industry has ever found https://www.kapilguptamd.com/2018/10/28/a-secret-pathway-to-find-what-no-one-in-your-sport-or-industry-has-ever-found/


Ben W. Kizemchuk
Portfolio Manager & Investment Advisor
Wellington-Altus Private Wealth