Jonathan Norwood and Richard Wong, Portfolio Managers of the Mackenzie Cundill Team, explain the philosophy of value investing and their management process.
JONATHAN NORWOOD: At the heart of the Cundill philosophy is the margin of safety concept that, you know, Ben Graham made famous back in the 1970s and Peter Cundill expounded on and executed on, you know, flawlessly for many decades. And so, you know, we believe that the premise that if you can buy a dollar worth of assets for 50 cents, you can considerably reduce your downside and that just makes so much intuitive sense to us.
We also believe that value investing is as much about having a sound mental approach as it is a better evaluation toolkit. You really have to be willing and prepared emotionally to set your judgment against the masses. You have to be willing to take a non-consensus view and not see that view necessarily be validated in the short-term. You have to be willing to be isolated and alone, at times. And, you really have to surround yourself with people that are likeminded so that you have the fortitude to be able to see that through.
I think also along the lines of margin of safety, this business is not just about buying cheap stocks. It's about, in many respects, dealing with great businesses, but it's also about understanding what has to change to take that 50 cent dollar back to a dollar. You know, what catalysts are there that are out there on the market? And really, you know, Richard and I believe that that's one of the areas that a lot of value investors sort of fall down on and ultimately it leads them down the path of value traps. So, you know, we've developed or enhanced the existing Cundill process with a framework that allows us to really gage and monitor those catalysts as we move up from what we pay for this stock toward intrinsic value.
RICHARD WONG: At Cundill, our process, you know, a process we ask ourselves three simple but very important questions. The first question is, what's the investment worth? That is, what's the intrinsic value of this investment? You know, we do a lot of work in calculating what intrinsic value is.
The second question we ask ourselves is, what are we willing to pay for this investment? You know, it might be worth a dollar, but we're bargain hunters. We want to pay much less than the dollar. So, depending on the risks and fundamentals of the business, we establish what a discount is required before we invest.
And, the third step in our process, is we ask ourselves, what's going to change to take this undervalue security to its full intrinsic value? You know, what's the investment thesis? What are the drivers? That will take the 50 cent to a dollar within the investment horizon. So, that is in a nutshell is our process at Cundill.
Philosophy & Process
The Mackenzie Cundill Team adheres to disciplined value investing that builds on the tradition of the late Peter Cundill, a legendary value investor and former Chairman emeritus of Mackenzie Cundill. The Team finds out-of-favour stocks that investors are avoiding, seeks a thorough understanding of potential catalysts for change, and buys them at a discount to their underlying intrinsic value. Our proprietary scoring system determines the required margin of safety for every stock in the portfolio. Each position is monitored for its progress toward realizing value. The Team is cash flow and balance sheet focused. We use a patient, bottom-up stock selection process with a global perspective. Portfolios are diversified but focused on the best value opportunities sourced from industries, sectors and countries around the world.