52 / Rotman Management Spring 2017
Kim Shannon:From my perspective, I was certain
that if Trump won, the markets would plunge, be-
cause it would create high levels of uncertainty —
and we all know that the market hates uncertainty.
So, it’s a really good thing that I’m a value manager, because we
don’t bet on things like that. We are ‘bottom-up’ stock pickers.
While we couldn’t have forecast what happened [when Trump
was elected], we certainly didn’t make any changes to our port-
folio because of it.
In terms of the impact Trump will have on markets, it’s re-
ally hard to tell, because we don’t know how much of his cam-
paign platform will be implemented. For me, the main question
is, What will he do with interest rates? They have been falling
since 1981-82, and we’ve been waiting for a big paradigm pric-
ing shift. Was July 2016 the bottom — and are we starting the
march up? I’m a big proponent of ‘sideways market theory’: If
that was the bottom in rates, then we are now in a neutral phase
for equities; but I’m not at all certain that is true. I’d like to be
able to make that judgment in a year or so.
The fact is, in terms of making money as a value manager,
the economy and politics really don’t matter: Recent research
from Montreal-based Bank Credit Analyst (BCA), using 112
years of data, found that only 17 per cent of stock market behav-
iour is influenced by the economy.
EK: Let’s move on to the theory of value investing.
Some people believe that if a stock is trading at
$30, that means it is worth $30. Is that true?CB:You’re referring to Efficient Market Theory,
and as a practitioner over the last 47 years, I can
say that it is total and complete bunk. Over that pe-
riod of time, I have seen market prices of compa-
nies fluctuate a heck of lot more than the actual basic intrinsic
value of the company and the industry itself. That’s just a plain
old simple observation.
EK: The emerging field of Behavioural Finance
shows that people make investment decisions
based on pervasive psychological biases. What
are some of the key biases you see?CB:Many of these biases are built into us due to our
evolution, because early on, it was really important
for humans to think short term — or we would not
have survived to see the next day. The problem is, as
far as investing goes, that is the wrong way to think.
Another bias I often see is a very strong herding instinct:
We like to be grouped together and aligned with everybody
else. But if you want to be an outstanding investor, you can’t do
what everybody else is doing. I also see a lot of extrapolation:
Right now, everyone sees the U.S. market doing quite well, so
they extrapolate that it will continue to do well. That could be
a big mistake.EK: How can we avoid some of these biases?KS:One of the advantages of being a value man-
ager is that it automatically puts you in a contrar-
ian mindset. It causes you to go against the crowd,
and as Charles indicates, it’s much easier for people
to go along with what everyone else is doing. Academic studies
continually show that value investing works, so you would ex-
pect more investors to be involved in it — but in actual fact, there
are very few disciplined value managers out there — in part be-
cause of the herding instinct.
For example, look at the ownership of Valeant in Canada in
the last year and a half: If you were willing to really look at the
financial statements and dig below the surface, you could see a lot
of troubling elements in this firm — and yet it got as high as 6.2 per
cent of the TSX. For a period of time, our clients were okay with
us saying, ‘Valeant is clearly not a value stock’, and we could move
on; but by last summer, we were getting lots of questions: ‘Explain
to us, in gory detail, why you don’t own Valeant — because we
think it’s hurting our returns’. It finally collapsed in the fall of 2015.
This type of client input is par for the course for us. Recently,
we’ve been getting grief over our renewed love for Empire Com-
pany (Sobey’s) and last year, Charles, you were talking with
great enthusiasm about Russia — when no one wanted to hear
about it. To succeed in this field, you really have to be comfort-
able being a contrarian.Investing is as much about being an emotional human being interacting
with the world as it is about underlying fundamentals.