
Investment Letters \| Articles

Investment Letters

The following are quarterly investment letters sent to all clients, highlighting our macro outlook, investment strategies, and security holdings.

Value Trumps Fear	October 21, 2008
SUMMARY: We think the market is bottoming or has likely bottomed because the mood was so pessimistic, because the fear was so acute, because there’s a record amount of cash waiting on the sidelines. But most important the market is bottoming because stocks are cheap. We believe Canadian and U.S. stocks have rarely, if ever, been cheaper relative to their potential returns. Panic begets opportunity and according to many pundits we respect, this is a screaming time to buy. As the greatest investor of our time, Warren Buffett, says, “value trumps fear.” One strategist we respect notes, “it is ALWAYS valuation that stops these totally irrational, emotional panics”, and points out that the average stock is being valued at levels similar to the two best times to buy in the last 40 years—1974 and 1982.
THE WRITING IS ON THE WALL	July 25, 2008
SUMMARY: For our portfolios, this has been a period of violent but temporary fluctuations as stock prices (but not the underlying company values) have suffered. We don’t know where markets will be in a day, a week, or even a month. But the market’s appetite for stocks and for small cap stocks will return and we’re very confident that within a year, investors who hold and buy cheap and good businesses today will be rewarded. While no bell goes off at market bottoms, contrary indicators are reflecting severe pessimism, indicating that the fear is “in the market” and supporting a bottoming market. The put/call ratio is high, short interest at record highs, record new lows, investment advisory services are net bearish, and record cash on the sidelines. Stay fully invested in good cheap stocks and go lie on a beach.
BIRTH PAINS	MAY 1, 2008
SUMMARY: Stock investing may be painful periodically, but the end result is clearly better than any other asset class, especially on an after-tax basis, and especially in an inflationary environment. As we have reminded clients, stocks today are as cheap as they’ve been since WWII. Conception is often done passionately, sometimes irrationally. We believe our portfolios are thoughtfully conceived and, in due course, should engender the returns we expect. We can see the head of the emerging bull. Breathe deeply and push.
ACCENTUATE THE POSITIVE	FEBRUARY 29, 2008
SUMMARY: It’s a well known phenomenon that humans suffer roughly twice as much from losses as they receive pleasure from comparable gains. And because fear is a more powerful emotion than greed, most investors tend to believe the worst and disbelieve the best. Yes, the global economy is slowing and the US may be in a recession. But, investing in an evident slowdown, though contrarian, makes sense. The stock market generally discounts future events, and bottoms well before the economic downturn has ended. The ensuing market recovery can be rapid. There is considerable evidence that the market has already bottomed, so we need to be “in the game”, owning good businesses when they are as cheap as they’ve gotten. This is a time of opportunity, not a time to be feared.
FEAR OF FLYING	NOVEMBER 12, 2007
SUMMARY: At Trapeze, we try not to speculate. We’re not psychologists. We’re pilots. We invest. And we do attempt to limit the volatility in our portfolios—the short-term risk. There will always be misperceptions regarding risk, but for us, preventing permanent impairment is more important for overall capital preservation. As value investors, we maintain a long-term horizon in a short-term investment world.
DANCE CONTEST	AUGUST 20, 2007
SUMMARY: The market for us is, indeed, like a perpetual dance contest. We always want to be in step with the music, whatever the tempo. This means adapting to the changing rhythms and making sure we don’t get tapped on the shoulder, a loser, forced to retire to the sidelines. The market has recently been a frenzied dance affair. Yet we believe this is just a correction in an ongoing bull, not the onset of a full-fledged 20% decline type bear market. This is a time of opportunity. This ugly period will pass, and we’ll soon be doing the quickstep again.
TRADEOFFS	MAY 11, 2007
SUMMARY: In most worthwhile things in life, there is typically a tradeoff. As multi-cap value managers, we tend to invest where our clients' money will be treated the best. Though we do prefer the liquidity and theoretical staying power of larger companies, we find it difficult to resist small companies when the values are truly compelling. We often invest against popular wisdom, including certain consultants who cite the illiquid nature of small cap securities or the risk of concentrating in a particular security or industry. We don’t assume these risks lightly. But we very often trade off value for a modicum of calculated risk.
TRAPEZA	FEB 27, 2007
SUMMARY: We believe the economy is slowing and it’s a time to be cautious. Despite the economic slowdown and the recent market decline, we don’t think the market correction will be prolonged or severe. Though the US and Canadian markets remain undervalued in our work based on anticipated earnings and interest rates, we continue to be highly selective and to focus on companies that are cheap, growing and can seemingly withstand a downturn or have already declined sufficiently to discount the impact of the downturn. Market corrections also offer up opportunities and, if there are attractive values, you know we’ll be ready to pounce. You can take that to the trapeza..
ABOVE THE CROWD	NOVEMBER 24, 2006
SUMMARY: As we continue to rationalize our still fresh and somewhat controversial corporate name, being on the Trapeze is suggestive of having a top down view, which allows for a perspective on investment opportunities and pitfalls that might otherwise be myopically obscured. As dyed-in-the-wool value investors, bottom up stock picking for us is the paramount fundamental. But investors always have to be astute to overriding macro influences that can affect certain groups or the market as a whole. While we’re above the crowd and want, as themes, to emphasize oils and golds and quality blue chips and be defensive for the short run, there’s always opportunity for a “no theme”, easy, bottom up stock pick.
VALUE IS OUR SAFETY NET	AUGUST 28, 2006
SUMMARY: Although, ostensibly, our new name “Trapeze” might imply risk taking, we think, as it applies to disciplined value investors, it suggests a cautious and skillful conduct of the money management process. And, after asset allocation, the most important aspect of that process is to look for values, for cheap stocks, reasoning that if those stocks are already low in price, the risk of loss is minimized.
HIGHER PERSPECTIVES	JUNE 5, 2006
SUMMARY: As our new firm name and the title to this letter imply (albeit somewhat pretentiously), from our lofty perch at Trapeze, we have a superior view -- a superior ability to discern reality from perception in the investment world. Despite the name Trapeze, we try to be sensible, not daring. We always take more account of risk than reward. To do otherwise would be speculating, not investing. As contrarians, we often buy when others are selling and when the wall of worry is obviously high. We know that free markets work and allow for constant adjustments to changing realities.
TRAPEZE ACT	FEBRUARY 28, 2006
SUMMARY: Managers of investment portfolios need to be like trapeze artists—trained, disciplined, agile, proficient, well balanced and, needless to say, aware of what can happen if they misstep. Which is why we say we always look down first. Why we buy what’s already low, to maximize returns, but first and foremost, to minimize a potential fall—the downside risk. Value is our safety net, even if normal market fluctuations may cause temporary dips.
LOOKING FOR THE PONY	NOVEMBER 23, 2005
SUMMARY: We’re from the school that believes there’s always a “bull market” somewhere. That doesn’t make us optimists necessarily, but it does make us unabashed opportunists. Opportunists prefer when the market is going up, but can take advantage of the downs, buying cheap stocks even cheaper and profiting from short selling. While there’s opportunity in asset allocation among stocks, bonds, cash and short sales, and also among different groups, such as the oils and the golds that we now favour, in the end, the ultimate pony is good, old-fashioned, bottom up stock picking.
A PENNY EARNED IS A PENNY SAVED	AUGUST 24, 2005
SUMMARY: Risk means different things to different people. Business texts define risk as volatility—typically short-term fluctuations—“standard deviation”. Though we’re conscious of short-term volatility, so as not to make the clients unduly anxious, this is not how we view risk. We think we’re professionals that have a thoughtful appreciation of risk. And reward.
GOOD STRESS	MAY 19, 2005
SUMMARY: Any stress now should be regarded as good stress – after all, it derives from a lower risk portfolio with much better potential for gain when the correction inevitably ends.
REALITY SHOW	FEBRUARY 15, 2005
SUMMARY: As value money managers, we always need to measure reality against perception, recognizing that, in the short term, perception may be the vogue, resulting in temporary, ignominious “drawdowns” in our portfolio values. Ultimately, reality will prevail and so will our clients. Short-term pain for long-term gain. Survival for us means intelligently managing our clients’ portfolios, so we never have to hear those words immortalized by Donald Trump: “You’re fired!”
POUND WISE PENNY FOOLISH	NOVEMBER 12, 2004
SUMMARY: At Trapeze, we’re dyed-in-the-wool opportunists, not conventional modern portfolio theory adherents. Theory be damned, we go where we think the money will be treated the best. Where superior value may reside from time to time. We don’t agonize about defining our style and don’t want to be pigeonholed in any restrictive mode. Bottom line, we are alpha investment managers. We seek positive returns even if the general market is down.
FOREST FOR THE TREES	AUGUST 09, 2004
SUMMARY: As value based portfolio managers, we focus on the enduring market drivers rather than short term indicators. Value is driven by earnings, interest rates, leverage, returns on capital and the implied multiples – and in our SVA™ work, those drivers indicate the market is undervalued by 35%. In hindsight, the market correction will have been a mere tree. The forest will be the confirmation of an ongoing bull market in which the recent pullback will be seen to have been a buying opportunity.
ROLL WITH THE PUNCHES	MAY 20, 2004
SUMMARY: For us, the market fight is a continuum with an unlimited number of rounds. Because we’re able to roll with the punches, we think we’ll continue to win more rounds than we lose and stay ahead on points. That’s what active money management is about.
MAYA'S TAKE	FEBRUARY 24, 2004
SUMMARY: As portfolio managers, our objective is not to make relative, but to make “absolute”, or positive returns for our clients, regardless of the direction of the market. In a risk averse way. With reasoned diversification. Without undue leverage. Or undue speculative positions. Thoughtfully. Patiently.
HIGH WIRE ACT	NOVEMBER 24, 2003
SUMMARY: The recent strength in the economy may be illusory, so we continue to be worried about the macro-economy. We are walking a ‘tightrope’ trying to balance capital preservation and capital appreciation. Portfolio Managers must continue looking down before looking up – studying and worrying about the downside before calculating the upside. Risk avoidance is what we think about first and foremost. Caution, value investing and the SVA™ work continue to guide our investments.
PUNCHBOWLS AND UNCONVENTIONAL TIMES	AUGUST 11, 2003
SUMMARY: We tend to be “bottom-up” stock pickers believing “value will out.” Nonetheless, we continue to contemplate and remain concerned about the macro-environment. These are unconventional times, which warrant an unusual amount of attention to the big picture. As money managers, this is a time to be more careful than ever.
THE GOOD THE BAD AND THE UGLY	MAY 7, 2003
SUMMARY: Professional and experienced Money Management is required to differentiate the good from the bad. This has been an unusually tricky period for Investment Managers, characterized by what may be anomalous and unsustainable investor behaviour. But if we stay with the tried and true fundamentals, buying what’s cheap and selling what’s expensive, and use our SVA™ timing work effectively, our clients will continue to make money.
WINNERS AND LOSERS	FEBRUARY 13, 2003
SUMMARY: Corporate earnings improvements driven by cost cutting will position the companies that survive -- the “winners” -- to enjoy super earnings improvements whenever “top lines” start to improve. As Investment Managers we need to continuously select the odds-on winners and avoid losers, since the weak players will fail and the survivors will benefit. Our value investing and contrarian philosophy, along with our SVA™ methodology keep us well positioned to do so.
ELEMENTARY PHYSICS	NOVEMBER 1, 2002
SUMMARY: For every action, there is an equal and opposite reaction. The opportunity in this for investors is that while the public focuses on the headline economic and political problems -- the “actions” -- it is not taking much account of the forces at work to counter those problems -- the “reactions”. Going forward, we think we will be in a stock picker’s market where some stocks will go up, but lots will go down. Selectivity is the watchword..
THE GLASS IS HALF FULL	JULY 26, 2002
SUMMARY: Bear markets end when the selling is finally exhausted, bad news is fully discounted, and value asserts itself, regardless of any temporary negative outlook. Corporate America is restructuring, cutting costs and lowering breakevens. As portfolio managers, it is now time to focus on bottom-up value investing, while being discriminating and continuing to diversify.
DEJA VU ALL OVER AGAIN	MAY 7, 2002
SUMMARY: Something suggests that we are in a peculiar period when investors need to consider a lot more than mere cheapness. While we do not anticipate the severity or duration of a 1930s-style downturn, the effect of the economy on investments could be profound, prolonged and warrant caution. The paramount focus within our Portfolios is preservation of capital.
MILLENNIUM HANGOVER	JANUARY 29, 2002
SUMMARY: We continue to be highly selective and look for value stocks, including some smaller capitalization Canadian names, which should outperform the broad market. There does not appear to be a lot out there to buy and we’re probably in for an abnormally volatile and generally weak market. What we did last year certainly worked for our portfolios, even in an ugly bear market. We think we can do it again in 2002.
LOOKING THROUGH THE VALLEY	OCTOBER 29, 2001
SUMMARY: Our Wealth Management vocation requires us to make judgments between what is a real risk and what is a perceived but less than real risk. We look for the opportunities to capitalize on the misperceptions. That is how mispriced assets, “bargains”, are created. Value investing is about exploiting misperceptions. We have been able to achieve superior returns in a bear market by picking good stocks, and we hope to continue to do so.
THE MARKET IS THE MESSAGE	AUGUST 7, 2001
SUMMARY: Normally, as value investors, we want to find good, cheap stocks and hold them for the long run. But in the current financial environment, we are nervous holders and we have had to adapt to the precarious and volatile market environment by trading more. Utilizing our powerful SVA™ tools that assist us in recognizing good points to buy and to sell, we are able to make short-term profits or cut losses if we have to.
STICK TO WHAT YOU KNOW	MAY 14, 2001
SUMMARY: We have been bearish for some time and have believed the recent debacle was inevitable. But, like in all cycles, even though the news may get uglier, each day brings us closer to the inevitable recovery. We’re not in the forecasting business - our objective as Portfolio Managers is to stick to what we know. We’ve continued to perform well throughout a very poor market by not "playing the market", but by buying value. It’s not just about potential reward; it’s about the attendant risk too.
CAB DRIVERS, OLDSMOBILES AND A BOUNCE	JANUARY 19, 2001
SUMMARY: Rather than employing an economist, whose views are generally based on “historical” data, we tend to pay attention to the views of cab drivers, bellhops, retail salespersons and general advertising. They tell us the economy is a bummer as it hits. But when it appears the bleakest is when we, as professional wealth mangers, we’ll be seeing the great bargains -- longer-term investments for the next inevitable bull market and economic upturn. In the meantime, capital preservation for our Managed Accounts is paramount.
GOLDILOCKS AND THE BEAR	OCTOBER 25, 2000
SUMMARY: It now appears obvious - though not yet to all investors and money managers - that a full-fledged bear market decline, not merely a short-lived "correction" is upon us. Despite our pessimism, we have been outperforming the market and hope to be able to continue to do so by being careful and occasionally opportunistic. This phase will pass, but we think things will get worse before they're better.
ANATOMY OF A BEAR	JULY 25, 2000
SUMMARY: Different bear markets have different durations and degrees of severity. We want to position our portfolios to weather the storm, and even to capitalize on it by picking up bargains. We’re not gold bugs, but as value money managers, we are clearly contrarian and tend to gravitate to the bargains that are out of favour. Gold is clearly out of favour and our SVA™ work shows that the gold stocks are at historic lows and are buys. As important, we believe they are hedges against a falling stock market.
RIDING OUT THE STORM	APRIL 24, 2000
SUMMARY: We believe corporate earnings for this cycle are peaking and that the red hot economy will indeed soon show evidence of slowing. Rising interest rates, rising inflation, an overvalued dollar and peaking earnings and growth rates are not healthy for a grossly overvalued market. Our main goal is to preserve capital within our managed accounts. So we hold some cash, some stocks unrelated to the direction of the overall market, some cheap stocks that have had their bear markets and gold stocks, as a hedge.

These investment letters are provided for reference purposes only and are not intended to provide any form of advice. The information contained therein is not a substitute for investment advice from qualified financial or investment advisors and should be verified with your financial and/or investment advisors prior to being relied upon by you.

Trapeze Asset Management Inc.
Investment / Financial Asset Management for Canadian and U.S. Investors