by Irwin Michael
One of Canada's top mutual fund managers gives his personal view of why staying the course is essential to investing success.
It isn't easy being a portfolio manager. People expect us to pick winners because we are supposedly well-educated, experienced, intelligent, and "in-the-know."
We research securities. We make assumptions and projections. Then we select common stocks to insert in our portfolios. But sometimes things don't go according to Hoyle and our stock picks don't pan out. Some stocks languish and stick out like sore thumbs. In some cases, we cling to these losers too long with the expectation that they will appreciate in price. Sometimes they do come back but in other cases they deteriorate further. Clients notice. They query the manager and start to grumble.
Upon being questioned, the portfolio manager will explain his rationale for the original stock purchases and why he continues to hold the securities. With the explanations given, some investors are satisfied and move on. Others aren't convinced and ultimately question their commitment to the portfolio manager. In some instances, they decide to liquidate and leave the funds entirely. Clearly, it is their prerogative. As an investment manager I would like to offer my comments.
Firstly, investment styles (value, growth, momentum, etc.) are very cyclical. They go in and out of investor fashion. It is during those "out of fashion" periods that all investment managers are open to severe criticism. No matter how successful a manager's past performance, investors have very short memories. Some will severely criticize the manager. They might label him a "has-been" and "completely out of touch". The criticism of Warren Buffett during the technology bubble of 1999-early 2000 comes to mind as a perfect example.
Clever managers don't suddenly become stupid. The investment business, however, is fraught with innumerable investment cycles. A manager may be successful today with his style but the same erudite manager can be abruptly amiss when investment winds change course and a new investment style becomes the rage.
Commitment is important to both the investor and the investment manager. The manager, I believe, must remain true to his advertised style. It is, after all, very difficult to be consistently successful by flip-flopping around investment styles. With investment managers under constant scrutiny, the manager must be able to withstand the temporary criticism of being out of favour. This is no different from any professional athlete who might encounter a temporary slump.
The successful investor, too, must also remain committed. He must remember why he initially invested with the manager. If circumstances haven't changed but merely the cyclical environment has temporarily shifted, why should an investor abandon a respectable manager? Strangely enough, investors establish long-term relationships with lawyers, doctors, accountants, and automobile mechanics. They rarely flip-flop and possess an extremely high level of commitment. Why should there be any difference with regard to investing?
There are many long-term benefits with investment commitment. The rewards are bountiful, I believe, for those who remain disciplined and patient.
In fact, readers of the Internet Wealth Builder newsletter, for which I write a monthly column, have been exposed to the need of exercising commitment and patience with some of our value recommendations. Most recently, MFP Financial (TSE: MFP) has tested our patience. The media has given MFP more than its share of coverage with regard to the pending litigation with a few of its city contracts. But, fundamentally, we continue to feel that its book value will remain strong despite the potential for write-offs. If investors are still having difficulty remaining committed and patient with this holding, let history tell the story. Let us look back to other instances where the committed investor has excelled.
For instance, Premdor (now Masonite International) has been on somewhat of a roller coaster ride since our original recommendation at $13.55 in June 2000. A few months later, its stock price plummeted due to the announcement of a large acquisition that made investors nervous. Panic selling drove the price down to $5.50. But as of the close of business on Feb. 1, its stock price was at $22.01. The shares trade on the TSE and NYSE under the symbol MHM.
Lonestar (NAS: STAR) is another example of a situation in which it was essential for investors to hang tough. Our original recommendation was at US$12.50 but the stock subsequently dropped to US$10 following Sept. 11. With the recent excellent quarter, Lonestar's stock price closed on Feb. 1 at US$19.08.
Evidently, it seems that commitment and patience pay off in the end. Though there may be extraneous factors in the marketplace that will drive a holding down in the short-term, in the long-term solid fundamentals (which if you recall, is the reason why we purchase a stock) will prevail.
Irwin Michael is the founder and president of the ABC mutual funds. Two of his funds, ABC Fully-Managed and ABC Fundamental-Value, were the number one performers in the Canadian Balanced and Canadian Equity categories over the decade to the end of 2001.
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