Chapter 1: The Eureka Moment
ONE EVENING IN DECEMBER 1973 Peter Cundill boarded a flight from Toronto to Vancouver to return home for Christmas. He was nursing a monumental hangover and plagued by a growing sense of frustration that, having reached the mature age of thirty-five and accumulated considerable business and investment experience, all his efforts to come up with a satisfactory formula that would identify undervalued shares in the stock market with a reasonable degree of safety and consistency seemed to have led him down a series of blind alleys.
By chance he happened to be clutching a copy of Super Money by George Goodman; the book had been pressed into his hand by a colleague just as he was leaving the AGF Management office in downtown Toronto and, as he settled into the flight, he began rather idly to leaf through it. Within minutes his attention was riveted and he could barely contain his excitement. That night he wrote in his journal:
“Goodman devotes chapter 3 to Benjamin Graham and Warren Buffett
and ‘the margin of safety’. It struck me like a thunderbolt – there before
me in plain terms was the method, the solid theoretical back-up to
selecting investments based on the principle of realizable underlying
value. My years of apprenticeship are over: ‘THIS IS WHAT I WANT
TO DO FOR THE REST OF MY LIFE!’”
Peter refers to this as his moment of “epiphany” and so in many ways it has turned out to be.
What was revelatory in this chapter was surprisingly simple. A share is cheap not because it has a low price earnings multiple, a juicy dividend yield, or a very high growth rate, all of which may often be desirable, but because analysis of the balance sheet reveals that its stock market price is below its liquidation value: its intrinsic worth as a business. This above all is what constitutes “the margin of safety.”
In Peter Cundill’s case there were some distinctly unusual features. The family originally hailed from Yorkshire in the north of England, where they had lived for many generations as prosperous tenant farmers until they became impoverished by the long decline in agricultural prices that followed the end of the Napoleonic wars in 1815 and the gradual landlord encroachment that was a feature of the industrial revolution in England.The result was that Peter’s great-grandfather arrived in Montreal in the early 1860s with little more than a sound education and good commercial instincts, but determined to escape the poverty trap that had engulfed his family in the “old world.”
He succeeded remarkably quickly, building up a very successful business importing goods from Britain to supply the needs of the fast-growing Canadian economy and the tastes of the increasingly well-to-do citizens of Montreal and beyond. He married well and was very soon adopted into the Anglo-Montreal establishment. His eldest son, Peter’s grandfather, was initially even more successful, becoming a real “tycoon”, who was known in New York City, to which he moved, as the “King of Camphor.” By the time Peter’s father was born in 1902, the family boasted all the trappings of substantial wealth: a large house in a fashionable part of Manhattan, a mansion on Staten Island looking across to the newly built Statue of Liberty, a seaside home in Connecticut staffed by numerous servants, and governesses and tutors for the children.
As a result Peter’s father, Frank, was brought up as a young gentleman of wealth and privilege who could expect to choose the career that he would pursue without much regard for earning his bread. He chose the Navy, but by the time he had completed his cadet training his father’s business was beginning to feel the effects of the discovery of synthetic camphor and he abandoned the idea of a career as a naval officer to help his father. Grandfather Cundill, however, was not familiar with the adage “always change a winning game” and he persisted as the business went into terminal decline, exhausting his capital and credit until in 1927 he was forced into bankruptcy.
It would, however, be wrong to think that at this point Peter was in any sense an investment debutant; he rightly came to regard the entire period that preceded the epiphany moment – when the penny, so to speak, dropped – as a learning curve involving a great deal of hard labour acquiring the skills which make it possible to read a balance sheet with real understanding and a forensic attention to detail. These, of course, are the tools of the profession, but what seems to be common to nearly all the great investors is an attitude of mind that in some measure derives from family background and circumstance.
Peter's father Frank Cundill