"To finish first, you must first finish" - Juan Manuel Fangio, 5-time Formula One World Champion
This quote from the legendary race car driver perfectly sums up the approach that Mr. David Barr, the portfolio manager of PenderFund Capital Management, takes when it comes to value investing by always doing his due diligence.
The key to success: Strong Unit Economics
With over 20 years of investing experience and an impressive track record, David is a true expert in the field. He joined PenderFund in 2003 and has since been responsible for one of the best-performing Canadian small and mid-cap equity funds over the past decade. His goal with his fund is simple: long-term capital appreciation.
David believes that in order to achieve long-term capital appreciation, it's essential to have strong unit economics, a high return on invested capital (ROIC), a long runway, competitive advantages and a great management team. And when finding these companies, David looks to the less efficient part of the market: small-cap stocks.
Why Small Cap Stocks?
Small-cap stocks offer a unique opportunity for investors to gain an analytical edge. They're less researched and followed so there's a better chance of finding a company early in its compounding journey. Additionally, contrary to most academia, David views volatility as a feature rather than a risk. It allows him to buy undervalued stocks due to sentiment and other factors and sell them when the market overvalues them.
The SP 500 is currently trading at about 17.5-18x next year's earnings, while small-cap stocks are trading at 70% of large-cap stocks (12.5x earnings). This presents an excellent opportunity for investors to take advantage of the arbitrage.
The Importance of Good Management and a Long-Term Approach
David believes that finding good management is an essential component of investing in small-cap value stocks as it plays a greater role in the success of these smaller companies compared to larger ones such as Microsoft. He emphasized focusing on understanding the company's business and management before investing. This strongly correlates to a concept taught by our value investing professor, who says,
"To be a good investor, you need to be a good CEO, and to be a good CEO, you need to be a good investor" - Professor George Athanassakos
Barr looks at things from a longer-term perspective and takes advantage of the arbitrage caused by. He suggested that before investing in a company, he assumes the scenario of not selling it for 10 years, thus making him enhance his understanding of the investment.
David believes in a "trinity of risk" when investing in small-cap stocks. The first is balance sheet risk. As he puts it, "to finish first, you must first finish," and this is the most crucial and easiest to avoid. The second is business risk, such as the possibility of competitors overtaking a company. And the third is valuation risk, which is about not paying too much for a good company.
In Conclusion
As Mr. Barr wrapped up his speech, he was asked by Professor Athanassakos about the most valuable lesson he has learned throughout his over 20 years of experience. He stressed the importance of having a strong and supportive team and credited his successes to the hardworking and dedicated individuals he had the pleasure of working with. It's clear that Barr recognizes the power of a great team in achieving success. And indeed, having a good team around you can make all the difference in the world.
Read more media coverage from Mr. David Barr's Value Investing Classes Presentation
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Fahd Shahzad
Fahd is an HBA student completing his final year at Ivey Business School. He has been passionate about value investing and has read multiple books on the subject. After graduation, he is interested in pursuing entrepreneurship by working on his current entrepreneurial venture. On the side, Fahd is interested in athletics, enjoys watching MMA and basketball, while he also represents the western mustangs in varsity table tennis.
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The views expressed in these blog posts are the opinions of their authors, and do not necessarily reflect those of the Centre. The intention of this blog is to provide a platform for current, past and upcoming HBA, MBA and Executive program value investing students to discuss value investing and related topics.
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