MR. MARKET THE NATURE OF A STOCK MARKET AND WHAT IT MEANS FOR OUR INVESTMENTS

Transcription

1 MR. MARKET THE NATURE OF A STOCK MARKET AND WHAT IT MEANS FOR OUR INVESTMENTS AUGUST 31, 2015

2 AUGUST 31, 2015 MR. MARKET In 1949, Benjamin Graham introduced a revolutionary way to view the stock market known as Mr. Market. To this day, Graham s Mr. Market analogy is often used to explain the market s tendencies to fluctuate. WHO IS MR. MARKET? Imagine Mr. Market is your business partner. Your partner is manic-depressive who frequently offers to sell his share of the business or to buy your share. His estimate of the business s value fluctuates from very pessimistic to wildly optimistic. You are free to decline or accept his offer knowing that he will soon be back with a different one. A rational person would buy shares in a business if the price is low and sell if the price is high. Furthermore, the decision to buy or sell requires that the person know the value of the business they own. He or she would not buy a business just because the price went down and conversely would not sell simply because the price went up. Understanding the value of that business allows the person to recognize a good offer from Mr. Market and avoid a bad one. Certain types of businesses lend themselves nicely to the valuation process. These businesses are understandable and durable by nature. They are difficult to live without, difficult to replicate and difficult to compete with. The businesses that are more challenging to value are those where the future earnings are less predictable or could be permanently impaired. Some might say that investing in these types of unpredictable and unstable businesses is not investing at all; rather it is a form of speculation. Let s take a look at an example of what happened to a very durable business during the financial crisis... 2 VALUE PARTNERS INVESTMENTS

3 THE ROYAL BANK OF CANADA Leading up to the crisis, the Royal Bank of Canada s (RBC) share price reached a peak of $60 per share. This is a very reasonable price (14x earnings) for a world class business. When the crisis hit, the stock price took a nose dive to $26. Earnings per share dropped to $2.44 making it an even more attractive opportunity for buyers. RBC S EARNINGS AND STOCK PRICE FROM JULY 31, 2005 TO JANUARY 31, 2009 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $1, $1, $1, $ $ $ $ $ $0.00 SOURCE: S&P CAPITAL IQ QUARTERLY EARNINGS STOCK PRICE As of July 31st 2015, Royal Bank s shares were valued at $76 dollars earning $6.56 per share. RBC S EARNINGS AND STOCK PRICE FROM JULY 31, 2005 TO JULY 31, 2015 $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- $3, $2, $2, $1, $1, $ $- $(500.00) QUARTERLY EARNINGS STOCK PRICE SOURCE: S&P CAPITAL IQ VALUE PARTNERS INVESTMENTS 3

4 AUGUST 31, 2015 KEY POINTS Own durable businesses - if you are not confident about a business durability then sell it. Know the value of what you own. Buying RBC at $26 while earning $6.56 today is a 25.17% earnings yield (also known as a homerun!) If you own durable assets and you know their value, you can take advantage of Mr. Market, otherwise Mr. Market will most certainly take advantage of you. PORTFOLIO MANAGER ACTIVITY Managers have been adding to existing positions and adding new companies. HIGHLIGHTS VPI INCOME POOL: An initial weighting in Qualcomm of 2% has been taken with the hope of averaging down in the future (PCM recently invested a portion of its corporate capital in the VPI Income Pool). VPI CANADIAN BALANCED: Addition to the position in Home Capital Group. VPI VALUE POOL: An initial 5% weight in Canadian Natural Resources and a 2% weight in Qualcomm have been taken with the hope of averaging down in the future. VPI CANADIAN EQUITY: Additions have been made to BMO and TD. VPI FOREIGN EQUITY POOL: Shares in Devon Energy were increased. The VPI team is expecting more purchasing activity in the event that Mr. Market becomes more depressed. There are several purchases in the works which cannot be discussed at this time. 4 VALUE PARTNERS INVESTMENTS

5 DISCLAIMER Information about specific issuers of securities has been made available by Value Partners Investments Inc. (Value Partners) for the sole purpose of providing additional background information on the holdings in the Value Partners Pools (the Pools) and is not intended to be investment advice about the merits of investing directly in these issuers. The complete holdings of the Pool are disclosed in its Statement of Investment Portfolio semiannually. On a quarterly basis, the Pools disclose the top 25 holdings in the Summary of Investment Portfolio. Both these documents are available on our website at The information provided does not constitute individual, legal, investment, or tax advice about the Pool or the issuers discussed therein. Please consult your own legal, investment, and/or tax advisor prior to making a decision to invest in the Pools. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the fund facts document and the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. VALUE PARTNERS INVESTMENTS 5