Spring 2019
This month marks twenty years since I started my career in investment management. Upon completing my MBA in 1994 I spent a few years in corporate finance and merchant banking with some very large institutions, until I discovered a passion for value investing. I was then very fortunate to land a position in 1999 as a research analyst with a mutual fund company specializing in value investing. That was right in the thick of the technology bubble.
It was an interesting time trying to stay rational and disciplined during a time “Mr. Market” was not. (Mr. Market is a hypothetical character that was used by Benjamin Graham – the grandfather of value investing – as an analogy for the irrational behaviour of markets over the short term. Sometimes Mr. Market is overly exuberant and willing to pay overly high prices for stocks, sometimes Mr. Market is depressed and pessimistic and willing to sell you stocks at bargain prices).
If you didn’t invest in high-flying tech stocks in 1999 you were accused of being behind the times and old fashioned. If you questioned the valuations of tech stocks, you were accused of being ignorant of the “new normal”. People were calling Warren Buffet “yesterday’s man”. I used to take calls from institutional brokers pitching their tech stock ideas, just for the entertainment value of listening to them trying to convince me how companies with no earnings and questionable revenues could be considered value investments. I did not succumb.
A few years later we saw the run-up to the financial crisis. Loose interest rate policies were re-inflating the stock markets and boosting real estate prices. I changed my opinion on two companies that I used to admire, Fannie Mae and Freddie Mac, because their risk profiles began to change as they pursued more aggressive strategies in their mortgage portfolios to boost earnings. Much of the financial industry became enamored with the attempted financial alchemy of trying to turn lower-rated mortgages into highly-rated gold via securitized instruments, supported by questionable credit ratings. Again, common sense went out the window as the markets wanted to believe in something that was too good to be true. The resulting carnage of the financial crisis was widespread.
“Sometimes Mr. Market is overly exuberant and willing to pay overly high prices for stocks, sometimes Mr. Market is depressed and pessimistic and willing to sell you stocks at bargain prices.”
In the twenty years since I started as a professional investor, the expansion and improvement of the internet is a wonder that we take for granted. One would think that with the proliferation of information and data we now have at our fingertips, the markets would behave more rationally. One thing that hasn’t changed, however, is human nature and many of its foibles. I do believe that over the long term markets behave fairly efficiently, but over short term periods they can behave very irrationally. This is due to elements of market psychology whereby people’s greed, fear and short term thinking can prevail over facts, common sense and discipline. This hasn’t changed since the beginning of human commerce – examples like Tulip Mania in the seventeenth century and the South Sea Bubble in the eighteenth century are numerous – and certainly hasn’t changed in the last two decades (witness the amount of money people lost on Bitcoin last year).
The stock markets have been high for quite some time now, and as you know it’s been difficult for me to find enough of the attractive opportunities to use all of the cash in Lionridge’s equity portfolios. It seemed as if the markets were heading towards more rational levels towards the end of 2018, but they have since gone back up close to their previous highs. I’ll remain patient, and I’ll remain rational in my efforts to both grow and protect your capital. When I first got attracted to value investing many years ago, I took to heart these words of Warren Buffett; “Be fearful when others are greedy, and be greedy when others are fearful”. I haven’t forgotten those words.
At Your Service,
Hardev Bains, LLB, MBA, CFA
President and Portfolio Manager
The content of this report is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter. Every effort has been made to ensure the accuracy of the contents of this report. The opinions, estimates and projections contained in this document are those of the author as of the dates indicated and are subject to change.