Why on earth would you buy that?

At a recent presentation by one of the Mackenzie Cundill fund managers, he described how he had been attracted to the US banking sector in recent months.  He described it as “a bad industry in a bad country at a bad time”.  At least, that’s what the headlines read and what many commentators think.  His thesis was that the market had priced in so much bad news that several prominent companies represented compelling investment value.

The manager described the typical client reaction to a Cundill stock purchase as follows:

1. “Why on earth would you buy that?”

2. As the thesis starts to play out, they often hear “Oh, you know what, maybe things weren’t as bad as we thought with that company.”

3. As the stock works out and the manager may start selling it, they often hear  “Now we understand why you bought it back when you did.”

Great investment decisions require managers to go against the herd of speculators who are rushing away from low prices.  Deep value managers like the Cundill team dive into areas of low prices to try and find cases where the price is so excessively low that there is a big margin of safety if the company shares are bought at current prices.  Thus, they are by definition investing when many others are urgently selling. 

In a fund like  the Mackenzie Cundill Value Fund, the managers can invest anywhere in the world, and so there are usually some bargains to be found.  If they can’t find bargains, they will hold onto cash and wait for bargains to emerge.   That is why they likely manage some of your money.