It’s a Lovely Day in the Neighbourhood

It’s a Lovely Day in the Neighbourhood

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50 percent a year on $1 million. No, I know I could. I guarantee that.
The universe I can’t play in has become more attractive than the universe I can play in. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.”

Warren Buffett, discussing the advantages of small-cap stocks

“A baseball player never really gets paid, no matter how many homeruns he hits or what his batting average is, unless he gets to the big leagues. Then he’s guaranteed to make a lot of money. But in the fund business you can find a minor league where you can hit for a better average, because that’s what you’re paid on.
 I remember one of our guys taking us into Korea in the early 1990s, and the market was so inefficient that it was a gold mine if you knew what you were doing. One of our Tiger funds today focuses on gold – a league that is inhabited by some of the crazier investors out there – and it just has a phenomenal record. They know more about gold than anyone else in the world and they just kill all the rest. 
My point is that to be successful in this business, you don’t have to be better than everybody everywhere, just better than everybody in the league in which you play, it’s maybe today more difficult to find those inefficient areas, but it’s not impossible.”

Julian Robertson, Tiger Management


So where is this neighbourhood? It’s the non-resource small to mid cap sector in the Canadian markets. That’s the market I like to hang out in. With the gathering momentum of interest in passive investing along with the explosion of specialized ETF’s, a rift is developing as companies not deemed liquid or big enough to be to put into an ETF are becoming mispriced. This is creating a market inefficiency in the fore-mentioned sector of the Canadian stock market.

Two fund managers I follow have already talked about this. David Barr of PenderFund Capital Management who sometimes is a guest on BNN (a Canadian Business News Network) and Stephen Takacsy of Lester Asset Management who often appears on that network’s phone in talk show. Both fund mangers are value-orientated buy and hold investors but insist on manageable growth as well. They like to focus on the non-resource small and mid cap markets in Canada. They concentrate on the company’s business model with an emphasis on evaluating the senior management of those companies. In other words, they are bottom-up investors. Mr. Barr who has a private equity background likes to concentrate on the tech sector while Mr. Takacsy focuses more on traditional businesses but who will invest in tech when he sees the opportunity. Both seem to gravitate to catalysts (a change in the circumstances of the company creating an opportunity for a mis-pricing). 

I usually pay attention to what they have to say on BNN and on their fund’s websites. It beats the hell out of listening to the financial media drone on about the day to day noise of the markets.

It's lovely day in the neighbourhood

Resources

https://www.bnnbloomberg.ca/

https://www.lesterasset.com/Home

https://www.penderfund.com/