COMMENTARIES ARCHIVE

Searching for Value

October 13, 2017

A number of worries could have derailed the market’s rise during the third quarter. Instead, investors shrugged off mounting tensions with North Korea, a deadly hurricane season and increased political turmoil with minimal concern.

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Q & A

September 29, 2017

As we end the third quarter of 2017, we thought it would be timely to highlight a few common questions we have been asked over the past few months. Those questions, and our responses, are as follows:

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Focus and Discipline

September 22, 2017

When I visited the offices of Caterpillar (CAT) equipment dealer Toromont Industries over 10 years ago, I thought I had made a mistake. I was dropped off in front of a light industrial building in Concord, Ontario that housed a CAT dealership.

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Risk Evolves

September 15, 2017

Last week, Equifax, one of the world's largest consumer credit agencies, announced cybercriminals had hacked their systems and obtained data related to 143 million individuals. The hackers gained access to driver's licenses and social security numbers - ripe information for identity theft.

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Take Some Time

September 08, 2017

For many, the Labour Day long weekend marks the final days of summer before kids head back to school.

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Romantic Investing

August 25, 2017

Do I find all of its qualities attractive? Am I just interested in it for its money or financial position? Do I think it is capable of making rational decisions or can it act unpredictably and crazy at times?

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Clouds of Smoke

August 18, 2017

Forest fires in British Columbia have continued to burn, and in Calgary we have seen an ebb and flow of smoke for many weeks. Park authorities have attempted to deal with unseasonably dry and warm weather by enacting fire bans throughout Alberta and British Columbia to limit potential risks.

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Comfortably Invested

August 11, 2017

Stock market volatility has been exceptionally low, and by some measures, at record levels. Maybe the dog days of summer have resulted in a lethargic investor base focused on holiday time, rather than worrying about the markets?

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Emerging Risk

July 28, 2017

In an environment where investors’ thirst for yield is insatiable, it is not surprising that capital has been flowing into emerging markets at a significant pace.

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Value Creation in Consumer Staples

July 21, 2017

‘Accelerated shareholder value creation’ has been a common bombast associated with global consumer staples companies in 2017.

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Sitting (& Staying) in the Driver’s seat

July 14, 2017

Overextended retailers such as Sears and Neiman Marcus have been in the news recently as they reinvent themselves to deal with accelerating industry changes while managing sizable debt loads.

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Investing in an Aging Bull Market

July 07, 2017

It has been eight years since the bottom of the last major bear market and economic recession. This marks the second longest bull market in Wall Street history, as well as the third longest economic expansion over that timeframe.

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What We Know Now vs. What We Knew Then

June 23, 2017

In our April 28th QV Update, we communicated our experience as investors in Home Capital. In the Update, we stated that although a case can be made for deep value in the stock, the business has failed to demonstrate the qualities and execution we expect.

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Striking a Balance

June 16, 2017

In setting our asset mix for our balanced strategies, we consider many different factors that influence our target weights for bonds and equities. We consider the state of the Canadian and global economies, and the policies that may affect their trajectory.

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Stable Markets in an Unstable World

June 09, 2017

In reading yesterday's semi-annual Financial System Review from the Bank of Canada

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It’s People & Principles Behind the Numbers

June 02, 2017

A friend of mine recommended reading a book on leadership and decision making. It was not written by a former CEO, nor a former world leader. Rather, it was written by two combat-proven US Navy SEAL officers who honed their skills in some of the most dangerous places in the world.

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Say on Pay

May 26, 2017

It’s proxy season - the period between April and early June when most public companies hold their annual shareholder meetings. It provides an important opportunity for shareholders to exercise their voting rights and participate in the corporate governance process.

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Red and Black

May 12, 2017

Annual provincial budget season has come and gone as the last finance ministers publicly unveiled their plans for the upcoming fiscal year a couple weeks ago. Our fixed income strategy holds bonds from the four largest provinces of British Columbia, Alberta, Ontario and Quebec.

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Does this Feel Familiar?

May 05, 2017

Most of us clearly remember the happy days in mid-2014 when West Texas Intermediate (WTI), the standard measurement for the price of oil, was merrily trading at $107 per barrel. The largest concern for many Calgarians was whether to buy the 60 inch or the 80 inch television for their new entertainment centre.

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Home Capital Group Update

April 28, 2017

We had to confront an investment gone wrong in Home Capital Group this week. Home Capital is a lending business with a large presence in the Canadian mortgage market. We have followed Home Capital for most of QV's existence and have owned Home Capital shares in a number of our Canadian equity strategies.

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Disruptors and the Investors Who Love Them

April 21, 2017

Displacement and disruption have become prominent themes for investors in the last few years - and not without cause. By market capitalization, many of the companies driving large scale disruption in traditional business models are now among the largest constituents in the S&P 500.

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What’s changed?

April 07, 2017

Between Brexit and the U.S. election, reading quarterly investment commentaries in 2016 was more interesting than usual. The first quarter of 2017 really had no blockbuster news to sway the market.

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Much Ado About Nothing

March 31, 2017

Who would have thought the title of this Shakespearean comedy, turned Hollywood "romcom" movie, would aptly describe Canada’s 2017 Federal Budget? In the story, the fates of two romantic relationships are at the mercy of a series of staged dramatic events, hearsay and accidental overhearing.

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Keeping up with the consumer

March 24, 2017

When analyzing consumer stocks, I cannot help but think of the wisdom shared by legendary investor Peter Lynch in his 1993 book, Beating the Street.

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Decisions, decisions...

March 17, 2017

In Canada, dividend growth has been an advantageous investment strategy for decades. The chart below shows the significant outperformance of dividend payers and growers relative to the broader index over the last 30 years.

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Lessons from the best

March 10, 2017

The National Football League’s Super Bowl 51 championship game was followed by much of the QV team this past month. The contest was a healthy reminder that anything can happen, even when consensus (myself included) concluded the game was over at half-time when the eventual winners trailed 21-3.

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Probabilistically Thinking

March 03, 2017

The famous 17th century mathematicians Blaise Pascal and Pierre de Fermat made significant advancements in our understanding of probability. Their important work gives us the ability to compute complex probabilities involving games of chance.

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Remember to look under the hood

February 24, 2017

Buying a stock can be similar to buying a used car. You see that cherry red coupe, and right away you think it’s the one for you. But the more disciplined part of your brain knows that an inspection is necessary.

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The debt overhang

February 10, 2017

The US equity market in local currency terms advanced again in January. Investors have continued to give the new US President’s pro-business policies the benefit of the doubt.

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What it means to be long-term

February 03, 2017

"Information is the oxygen of the modern age." - Ronald Reagan "We aren't in an information age, we are in an entertainment age." - Tony Robbins

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Uncomfortable but Necessary

January 27, 2017

We were asked at a recent client meeting whether we were surprised by the speed and magnitude of the global bond market sell-off in the fourth quarter of 2016. Our short answer was no.

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Cash, the Boring Friend

January 13, 2017

In the investing world, cash is like the boring friend in a high school group that always thinks they are driving too fast and skipping too many classes. While his concern is often sound, it is a real downer on a fun-filled Friday afternoon.

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A Year of Change and Extremes

January 06, 2017

“Nobody knows anything” - screenwriter William Goldman The quote above best describes 2016. With the surprise Brexit outcome, the Trump victory, and the Chicago Cubs finally winning the World Series after 108 years, the art of forecasting seems to be the year’s biggest loser!

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The Price You Pay

December 16, 2016

In 2012, good quality healthcare stocks were cheap. The S&P 500 healthcare index traded at an average price-to-earnings ratio (P/E) of only 12.7x and the QV Global Equity Strategy was able to add wonderful businesses like McKesson Corp., Varian Medical Systems and Aetna Inc. to our existing holdings in the sector at very attractive valuations.

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New Highs, New Opportunities

December 09, 2016

Not that 'The Donald' needs any more publicity, but it’s been exactly one month since he was elected to become the 45th president of the United States. In this time, the S&P 500 is up 3.8%, copper is up 7.7%, and oil is up 13.5%.

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Reducing Our Error Rate

December 02, 2016

Predicting events in 2016 across the global landscape has been a challenge. After a choppy start to the year, few at QV would have predicted an all-time high for the S&P 500 by late 2016.

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Investing for the Long Run

November 25, 2016

The fresh air, green trees and singing birds can all be savoured just a few strides from our office (well, in the summer that is). The rhythmic motion of ten thousand steps erases the cares of just an hour ago.

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Regime Shift

November 18, 2016

A regime shift, in ecology, is defined as an abrupt and significant change in the behaviour and/or structure of a system. For example, human activity is believed to have caused a material change in the earth’s climate.

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Jumping the Blue Wall?

November 04, 2016

The U.S. presidential election campaign will end on Tuesday, November 8th. We will not try to call the results of the election, but we think it is important to review the hurdles that Mr. Trump would have to overcome.

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The Spooky Season

October 28, 2016

Like so many others, as a child, Halloween was one of my favourite times of year. I would use an old pillowcase as a candy bag.

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De-risking our economy

October 21, 2016

The rapid rise of home prices in Canada since the financial crisis, coupled with the record high level of Canadian household indebtedness, is often cited as the biggest threat to the Canadian economy.

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Relatively speaking, everything is absolutely fine...

October 14, 2016

Quarterly Review - Post June’s Brexit scare, the majority of global stock markets posted positive returns. The fear created by the surprising vote was short-lived.

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"Lower for longer, not lower forever"

September 23, 2016

The title is taken from a speech delivered by Bank of Canada Governor, Stephen Poloz, on Tuesday. The intent seems twofold: 1) to ease concerns of future savers hoping for higher interest rates, and; 2) to encourage companies to invest today while funding costs are low.

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Back to School Blues

September 16, 2016

Stocks go toward stimulus as schoolboys from their books, But stocks from stimulus, toward school with heavy looks

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Value in Having Good Options

September 09, 2016

With stock markets near highs and interest rates near lows, our quest for value is no easy task. Some assets are trading hands at unprecedented valuation levels.

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ROC and a Class ACT

August 26, 2016

Often, I get asked how we decide which companies we want to invest in. One of our tests in selecting investments is studying the financial record of a business.

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Defensive Investing, by the Numbers

August 19, 2016

To use a baseball analogy for investing, a high percentage of singles and doubles provides a better result over time than the low probability strategy of swinging for the fences.

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The Case for Patience

August 12, 2016

Canada has been gripped by the endeavours of our athletes as they show tremendous will and determination to achieve the ultimate prize. These athletes understand that daily decisions to practice and sacrifice led to their long-term victory.

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Summer Diversions

August 05, 2016

The Olympic Games open today in Rio de Janeiro, Brazil. Like many, I look forward to the diversion offered by the feats of Olympians over what currently dominates the news headlines.

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Illiquidity

July 22, 2016

Liquidity in trading terms refers to the ability of an asset to be bought or sold without affecting its price. To put this in perspective, a million dollar house in a remote location is likely less liquid than a million dollars' worth of pigs beside a meat packing plant.

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Uncertainty Amplified

July 08, 2016

Humans have a natural tendency to want to know what the future will hold. It’s what makes the proverbial crystal ball so appealing.

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When is Nothing Something?

June 24, 2016

Last week, as Brexit concerns grew, capital flocked to perceived safety and German 10-year government interest rates sank below zero for the very first time.

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Resist the Urge to Pay More

June 17, 2016

What comes to mind if you were asked to name a high quality business? We have posed this question several times in meetings, and we hear many of the same companies mentioned each time, including "Starbucks," "Apple," and "CN Railway."

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Able and Willing

June 10, 2016

This week the European Central Bank (ECB) began purchasing euro-denominated corporate bonds within its €80 billion per month asset purchase program.

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Finding the Balance

June 03, 2016

Have you ever descended a staircase at night anticipating the arrival of the floor one step too early? That brief moment of terror must be endured for what feels like ages until you are finally back on firm footing.

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Defense, Discipline & Diversity

May 27, 2016

The month of May might be the time to ‘sell and go away’ but it is also the time of year for many Calgary based firms to hold their annual general meetings.

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Managing Through the Tough Times

May 13, 2016

As we near the end of the first quarter corporate reporting season, we note some of the major themes emerging from the earnings releases.

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A Negative Art

May 06, 2016

Investment legends Benjamin Graham and David Dodd famously referred to bond selection as a negative art in their book Security Analysis.

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Bumper Bowling

April 29, 2016

At least once a year, one of my kids is invited to a bowling birthday party. The bowling party is perfect because it allows the kids to release energy. Another positive aspect is the side bumpers they put up on the lane to eliminate gutter balls.

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To Have and Have Not

April 22, 2016

Joe and I recently attended the annual Raymond James investor conference in Orlando, Florida. With over 300 companies presenting, the conference is a great opportunity to gauge the operating climate of multiple industries.

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Emotional Investing

April 15, 2016

Successfully investing in the stock market can be very challenging. To do it as a formal profession typically involves years of post-secondary training and often another designation or two beyond that.

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Risk Persists

April 08, 2016

After starting the year with one of the worst stock market sell-offs on record, global markets rallied back to pare losses and in some cases gain ground in the quarter.

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What Comes Around

March 18, 2016

Last January, history found itself at odds with bullish market forecasters. As 2015 began, consensus was predicting that the S&P 500 would rise for the seventh consecutive year - a feat that had never occurred going back to 1871.

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Go West or Sell West?

March 11, 2016

In the midst of reporting season, 2015 results of firms exposed to Western Canada are showing continued pressure.

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Money Making Performance

March 04, 2016

Some of us arrived at the office a little late Monday morning. Each one of us had our favourite moment from the most riveting entertainment event of the year.

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Survey Says...

February 19, 2016

Investors are nervous. On Wednesday, the CFA Institute, a global association of investment professionals, released findings that revealed 30 percent of retail and institutional investors feel another financial crisis is likely within the next three years.

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The Race to Negative

February 05, 2016

The spectre of a competitive currency war is looming following the Bank of Japan’s surprise decision to cut their overnight lending rate below zero on January 29th. Japan now joins the Euro region, Switzerland, Denmark and Sweden in adopting negative interest rates.

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Navigating Storms

January 29, 2016

Earlier this week, while the eastern US recovered from a treacherous weekend blizzard, investors grappled with an ugly weather report of their own from the world’s largest public company:

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The Bear is Awake!

January 22, 2016

Just when we thought the bear was in its hibernating slumber, this month has shown us it is alert in many markets. A bear market is defined as one that has dropped by 20% or more from its highs.

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Shifting Debt Mentality

January 15, 2016

“We may never know where we’re going, but we’d better have a good idea of where we are” - Howard Marks

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Now What?

January 08, 2016

2015 had been a year of great anticipation. For movie buffs, the release of Star Wars: The Force Awakens was met with much fanfare and excitement, this on the heels of a huge build-up to the release.

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'Tis the Season (for tax loss selling)

December 18, 2015

Tax loss selling is not a very festive topic, but it is a phenomenon that comes around this time of year. It is a tax strategy where securities are sold at a loss to offset any capital gains.

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Keep On Digging

December 11, 2015

In discussing the lessons learned through this cycle, the CEO at one of our resource companies indicated how a downturn had been planned for, but when it arrived the impact was much greater than anticipated.

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Consistently Different

December 04, 2015

The Globe and Mail recently published an article entitled, “Revealing the closet indexers among Canada’s mutual funds.” The author reveals that many actively managed mutual funds sold in Canada fail to sufficiently distinguish themselves from their benchmarks.

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Desperate Transactions

November 27, 2015

Desperation and market transactions, whether to buy or sell are rarely a profitable combination. When transacting in stocks, real estate, or vehicles, desperation is more likely to lead to overpayment on purchases and receiving less than fair value when selling.

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Obscurity in the Average

November 20, 2015

Interpreting averages and aggregates can be a lot like peering at the ocean from an airplane. Both offer a glimpse of something large from a little window, but neither allow much comprehension of the swells or troughs which make up the entirety.

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Only Time Will Tell

November 13, 2015

The political and economic tides have most decidedly turned in Canada over the past twelve months. Our once G7 leading economy is now teetering on recession, and within that context, two long serving governments touting austerity are no longer in power.

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What doesn't the "Q" mean?

November 06, 2015

In a recent meeting with one of our clients, we were asked how we define quality, the "Q" in our name. We typically discuss the high profitability of the companies in our portfolio, the reasonable and logical actions of management, and the company's franchise, which is often difficult to replicate.

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Happy Halloween

October 30, 2015

In the above quote, Bram Stoker's vampire hunting Professor Van Helsing was asking permission to desecrate a grave. We could use the same phrase to convey our lack of confidence when trying to predict short-term market mysteries.

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Deals, Debt, and Demise

October 23, 2015

In our third quarter review of the QV Canadian equity strategy we touched on how slow organic growth and low interest rates have enticed many companies to aggressively acquire. We wanted to expand on this topic.

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Little Notes

October 16, 2015

We have mentioned in previous updates how the maintenance of a conservative payout ratio can bolster long term growth. In 2012 the payout ratio of the TSX Composite increased sharply as companies catered to investors' appetite for yield.

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Quarterly Review

October 02, 2015

After three years of consistent global stock market gains, equities retreated this past quarter. The sell-off was sharp enough to pull the majority of global indices into negative territory for the year.

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View from the Harbour

September 25, 2015

Last week QV Investors had the opportunity to attend the annual Asian-focused CLSA Investor Forums in Hong Kong. It was a whirlwind of corporate presentations, closed door management sessions, and thematic speeches.

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Whose ball is in play?

September 18, 2015

I am what one would consider to be a hack golfer. So you can imagine my excitement when I played in my first Texas Scramble, where more than four of my balls were used early in the game.

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Welcome back to...

September 11, 2015

Investors and many school children alike were treated to an unhappy summer end as September began. Some (un)fortunate children began the school year prior to Labour day, and close to -3% one day returns in the S&P 500 and TSX Composite welcomed investors into September.

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Healthy Developments

August 28, 2015

A balanced diet is part of a healthy lifestyle. In many diet programs the periodic "cheat meal" is encouraged in order to stay on track with the long term goals. Like the cheat meal, volatility is a necessary part of maintaining a healthy stock market.

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"Low rates begets lower rates"

August 21, 2015

The most recent move in July by the Bank of Canada to cut their policy rate to 0.50% was met with praise by some, and frustration by others. I must allow that I was in the latter camp.

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Quality Conundrum

August 14, 2015

Numerous high quality companies are trading at or near record high valuations. High quality traits include earnings stability, above average earnings growth and superior returns on capital deployed.

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Disruption

August 07, 2015

Change is the law of life. And those who look only to the past or present are certain to miss the future.

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Climbing Efficiency

July 24, 2015

For those not following the 2015 Tour de France, as of today, the peloton has completed 19 grueling stages across the country. The Tour is not for the faint of heart, riders climb 10 degree plus gradients in scorching heat.

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Risky Business

July 17, 2015

One of the fundamental principles of investing (and life for that matter) is that in order to reap rewards, one typically must assume a certain degree of risk. Different people have different definitions and tolerances for risk.

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European Ruminations

July 10, 2015

In June I had the opportunity to meet with European management teams and attend corporate presentations at investor conferences in Paris and Berlin. Below are a few observations from the trip:

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Record Highs, Record Lows, and Somewhere in Between

July 03, 2015

We all operate in a world of uncertainty; not knowing very much is a terrible untold truth. Yet, the energy that goes into trying to figure things out can be downright exhausting at times. It seems logical to assume that the more we research and study, the greater our confidence will be in our outcomes.

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Playing the Trap

June 26, 2015

“The Trap” is a defensive strategy used in hockey and made famous by the New Jersey Devils of yesteryear. It is a strategy employed to protect a lead early on in a game. A result of this type of play can be a lackluster, low scoring game for spectators, but it has been known to win Stanley Cups.

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Opportunities in a Frothy Market

June 19, 2015

Value investors live by the popular creed made famous by Warren Buffett in 2008; "be fearful when others are greedy and greedy when others are fearful".

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What a RIOT!!!

June 12, 2015

How much would you pay for the letters RIOT stenciled in black blocks letters on an aluminum panel? If you were the one who recently purchased this piece of art from a Sotheby’s auction, your answer would be $29.9 million. Strangely, this amount isn’t entirely surprising given that the same artist sold a blank canvas stenciled with the letters FOOL for $7.8 million in 2012.

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Bonds...not so boring after all

June 05, 2015

There has been a lot of talk recently about bonds in the news media. The CBC ran a headline news article on its website featuring actor Daniel Craig portraying the film character James Bond, and the headline, “The potential bond crisis no one has heard of”.

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Reverse Road Show

May 29, 2015

A "road show" in the investment business is when a company travels the country or continent to promote its business to investors. This may be to promote an initial public offering (IPO) or just a business update for investors.

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8 a.m.

May 22, 2015

Most that have come through our office and sat at our boardroom table have likely had small wooden splinters unknowingly knitted through their pant legs. Over the years our boardroom table had visibly aged with cracked edges that remarkably resisted the masking of tape.

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Value & Values Investing

May 08, 2015

Last week, a few fortunate QV’ers made the pilgrimage to Omaha, Nebraska. We were among the thousands present to hear Mr. Warren Buffett and Mr. Charlie Munger pass on wisdom.

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What to do about Housing?

May 01, 2015

In a recent interview with Ray Dalio, co-Chief Investment Officer of hedge fund Bridgewater Associates, the veteran manager was asked to what he attributes his success. Dalio's response was, "People think that my success is because of what I know. It's not. It's due more to how I deal with not knowing."

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Family Values

April 24, 2015

Family is a good thing. It provides a nurturing environment to start life and unconditional love through the growing pains. It provides guidance to misguided teens and young adults, and support for elderly members in need.

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Jenga

April 17, 2015

If you were a child of the '80s, had children or grandchildren at that time, you likely remember playing the wooden block game, Jenga. If you don't remember, here's a refresher:

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The Race to Zero… or Less

April 10, 2015

The first quarter of 2015 saw over twenty central banks execute stimulus measures, not to mention Europe’s inaugural Quantitative Easing (QE). The chart below shows the massive expansion in major central banks’ balance sheet assets since 2006.

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Small Caps - More than meets the eye

March 27, 2015

Sector diversification is not the first theme that comes to an investor’s mind when thinking about Canadian small caps. This is an understandable assessment with close to half of the market concentrated in junior energy and materials companies.

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Standing Room Only

March 20, 2015

In early March I attended the 36th annual Raymond James investor conference in Orlando, Florida. It is an event which QV has attended for many years because it showcases over 350 companies throughout multiple industries over three short days.

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It is all relative

March 13, 2015

As noted in our QV Update on January 30th, we recently lowered our target equity commitment

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Execution vs. Miracle

March 06, 2015

Target recently announced its exit from Canada. In 2011, Canadians cheered when Target announced its purchase of Zellers' leases and there began its entry into the Canadian retail space.

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Bravado and the Fear of Missing Out

February 27, 2015

The Nasdaq Composite Index is a highly followed performance gauge for technology and growth companies consisting of over 3,000 equities.

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Knowing the Knowable

February 20, 2015

"We have two classes of forecasters: Those who don't know - and those who don't know they don't know."

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What to do with a Dollar?

February 06, 2015

I hope that this is a problem that we all have from time to time. You earn some money, pay off your bills and have to decide what to do with the excess cash. Individuals may choose from a range of options such as investing it in the stock market or having a big night out.

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Question Period

January 30, 2015

Occasionally we like to highlight some of the insightful questions that we hear from our clients. Given the market environment as of late, it is no surprise that the following questions have been top of mind.

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Capital Preservation - Again

January 23, 2015

A new year usually brings with it new goals and resolutions. For most a universally common goal is to get more fit, or to lose weight. At QV, one unchanging goal is capital preservation.

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If Something Cannot Go on Forever, It Will Stop

January 16, 2015

In the context of the current bloodletting in commodity prices, the dry wit of the tautology above is eclipsed only by its veracity. Named after its economist Herbert Stein, Stein's Law holds true with other asset prices as well.

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Capital Flows

January 09, 2015

2014 has turned out to be an eventful but reasonably profitable year. Global stock markets finished in positive territory for the most part, but not without a dose of drama late in the year.

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Season's Greetings

December 19, 2014

Perhaps Ebenezer Scrooge could have taught a course in security analysis and investing.

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Gut Check

December 12, 2014

"Gut Check" according to the Collins English Dictionary is defined as "a pause to assess the state, progress, or condition of something such as an enterprise or institution." It typically does not involve a physical challenge, but rather is mental.

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Down Swing

December 05, 2014

Rarely do the capital markets move in a straight line. Instead, history has shown market valuations to be more cyclical than linear. We believe human emotion is a leading cause of these market oscillations.

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Discipline

November 28, 2014

In life being disciplined is usually somewhat difficult to do. It doesn’t make for good stories or life long memories.

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Escape Valves

November 21, 2014

In purely practical terms, when the stock market is at or near a peak, there are likely to be very few, if any, bargains to be had…there is, therefore, a naturally induced bias towards selling and building cash during such periods…

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Change is the Only Constant

November 14, 2014

The BoC's Governor, Stephen Poloz, recently reminded Canadians that the markets and economy are dynamic and adaptive systems.

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Betting on Red

November 07, 2014

If I were a betting person, I’d put all my chips on “Mr. Johnny Hockey” and the Calgary Flames. Yes, you read that correctly. The team has finally secured a talent that has significantly upped the ante.

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Roman Poets and Investment Legends Agree

October 31, 2014

Taken from a 2000 year old treatise on the art of writing poetry, this sage maxim adorns the opening passages of Security Analysis by Benjamin Graham

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Reality Check

October 24, 2014

Our thoughts and prayers go out to the individuals and family members directly affected by the events in Ottawa and in Quebec this week. The sense of peace and security we enjoy as Canadians was seemingly altered in one day.

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Risk Management

October 17, 2014

In writing our recent quarterly reports, we discussed the increase in margin debt and a more optimistic consensus. Low interest rates have pushed people to
take on more risk by moving into equity markets and lower quality bonds.

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Not much has changed... yet!

October 03, 2014

In preparing for this quarter’s market overview we previewed our past few quarterly reports. In reality little has changed. Our predominant theme has been the continued impact of low interest rates in encouraging risk taking and propping up asset values globally.

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All that Jazz...

September 26, 2014

Everybody loves a good story.  In fact, one of my all time favourite stories is none other than the one portrayed in the musical Chicago.  For those not familiar...poor, sweet and innocent Roxie Hart under the influence of liquor and jazz...

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Running of the Bulls

September 19, 2014

In a Friday letter dated exactly one year ago, QV debated whether positive images of stock market bulls (like the one below) are bad omens for stocks as market corrections typically accompany these cheery illustrations.  Our September 2013 let...

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QV Q&A

September 12, 2014

In meeting with several investors and analysts over the past week, we faced a number of very good questions. QV would like to share some of this dialogue with you in this week’s letter.

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Follow the Leader

September 05, 2014

We recently had the opportunity to draw the insights of Murray Mullen, President and CEO of Mullen Group Ltd. – a leading provider of trucking and logistics in Canada. Mullen has a successful track record of generating free cash flow througho...

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Filtering the Noise

August 22, 2014

The steady stream of economic indicators, headlines, and central bank actions can not only be dizzying, but also distracting for investors.  Getting too caught up in recent headlines and 'new' news can negatively impact an investor&rsq...

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Great and Getting Better

August 15, 2014

Great businesses can be classified as having enduring franchises whose stable earnings grow shareholder value consistently over time.  However, achieving such status is rare, as it requires durable competitive advantages which are generally ha...

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Risk Conscious

August 08, 2014

Volatility is back.  Geopolitical risks have evidently risen this week with the announcement of Russia’s foreign import ban, intensification of the Russian-Ukrainian conflict, and continued violence in the Middle East.  After reachi...

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All Aboard?

July 25, 2014

We are in the middle of the North American quarterly reporting season. From companies that have reported so far, we get the sense that numerous businesses are now growing top line at attractive organic growth rates.  Take our investment in Canadian National Railway as an example. The company reported record shipping volumes, revenue, and earnings per share earlier this week.

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Living with Neutral

July 18, 2014

The term “neutral” has been cited frequently in recent months in describing the current policy environment.  PIMCO, the famed global bond manager, recently referred to their new investment strategy framework as “The New Neutral”, a slight alteration from their previous strategy, “The New Normal”.  The premise of “New Neutral” is that the Federal Reserve Bank’s neutral policy rate is closer to 0%, lower than the widely accepted 2.0%.  In this context, neutral implies low real policy rates for the foreseeable future.

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"Rebel" - David Bowie

July 11, 2014

Imagine you are the Senior Vice-President of Marketing for the country's largest sport stores.  You walk into a meeting and propose the following:  Let's pull all of the paper flyers for the next two weeks and use a purely digital advertising strategy. It takes guts and conviction to be a rebel, but when a company knows its business and customers intimately, it can try these types of things.

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Autopilot

July 04, 2014

Where has the time gone? It seems like only yesterday the market was fretting about Greece going broke or the U.S. falling over the fiscal cliff.  If that didn’t worry us all enough, there was the announcement of Hostess, the maker of Twinkies filing for Chapter 11 bankruptcy.

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What Lurks in the Dark?

June 27, 2014

It would seem that outstanding execution in regards to security trading rarely makes the newspaper.  Headlines often reference a rule or law that has been accidentally or maliciously violated.  This week’s newspaper is no exception with the focal point being the New York Attorney-General’s accusation of Barclays for dark pool fraud.  In the trading world, a dark pool is an alternative market where anonymity is preserved until post trade execution.

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Don't Settle for Just Any Yield

June 20, 2014

"Canadian stocks have rallied to a record amid a resurgence in energy producers and gold mining shares," states a Bloomberg report. The S&P/TSX Composite Index has nearly doubled five years after closing at 7,567 on March 9, 2009. Alternatively, six years after a record high above 15,000 in June 2008, the TSX closed at an all-time high above 15,100 this week. A good portion of investors might be thinking - it's about time! Those who failed to participate in the early rally could be eager to do so now. To this we refer to economist John Kenneth Galbraith, who famously opined the financial memory is "notoriously short."

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Sustainable Returns

June 13, 2014

North American stock market returns over the past year have been great. Regardless of whether you are an optimist or a pessimist, it is constructive to think about where these returns have come from, and ask oneself, is this sustainable?

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Reducing Risk

June 06, 2014

Relative yield comparisons provide the context for which we assess the opportunity between bonds and equities. This is an important consideration in determining the appropriate asset mix in our Canadian Balanced Fund and our global balanced mandates. Relative yields between government and corporate bonds, small cap stocks and large cap, and Canadian versus global equities are also evaluated in setting the appropriate investment allocation within each class. Relative yield comparisons may signal an opportunity in the higher yield class.  They may also signal rising valuation risks.

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Value in Corporate Romance?

May 30, 2014

Thus far in the second quarter, the global value of merger and acquisition (M&A) activity has reached its highest level since 2007. While this is good for matchmaking bankers, studies show that M&A, especially for large transformative deals, can often corrode rather than create shareholder value.  Investors however, have generally reacted to recent M&A with fanfare in the assumption that value creation will be delivered even as acquirers make purchases at all-time high prices. Unfortunately such activity is often a hallmark of late cycle behaviour, and one which we can’t help but view with skepticism.

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The World is Difficult to Predict

May 23, 2014

While visiting Vancouver for client meetings this week, I was asked whether QV Investors forecasts macro trends.    My quick answer was no, but it needs some explaining. 
In "Thinking Fast and Slow", a book penned by Nobel Prize winning professor Daniel Kahneman, the  psychology of judgment and decision making is studied.  His book discusses research in which psychologist Phillip Tetlock interviewed 284 experts, who earn their living making economic and political forecasts.

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Berkshire Pilgrims

May 09, 2014

Last weekend, a few of us had the privilege of traveling to Omaha, Nebraska to attend the 2014 Berkshire Hathaway (NYSE:BRK-A/-B) shareholders meeting. As long-time followers of Buffetism and Mungerism, we were excited to hear what advice the two oracles would impart.  For six hours, Warren Buffett and long-time business partner Charlie Munger answered questions ranging from dividends to politics. Their clear thinking has led to investment decisions that have undoubtedly created shareholder value for many years.

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The Path to Investment Conviction

May 02, 2014

This weekend, a number of QVers are traveling to Omaha for somewhat of an investor pilgrimage. They will be attending Berkshire Hathaway's Annual General Meeting, chaired by arguably the world's most successful investor, Warren Buffett.

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'Tis the Season...

April 25, 2014

That is the season for market timing theory to take centre stage. Just as April showers bring May flowers, so does a heated market bring about proponents of the “Sell in May and go away” strategy. One of which, QV
does not practice by definition.

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The Loonie: Are the glory days over?

April 11, 2014

As many returning snowbirds are keenly aware, the Canadian dollar has lost some of its lustre over the past year.  The Loonie's decline began early in 2013 in conjunction with weaker commodity markets. The decline accelerated in the latter half of 2013 with the US Central Bank's tapering announcement, coinciding with Bank of Canada Governor Steven Poloz's more cautious outlook on the Canadian economy.  As we write today, the Canadian dollar in US dollar terms is valued at $0.91, down from $0.94 in January, 2014, and $1.00 (parity) at the start of 2013.

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Yipppeee!!

April 04, 2014

One could almost hear the cheers from investors this past quarter as the current bull market turned five years old.  What a journey it has been.  The extreme uncertainty and fear which gripped global markets back in 2009 offered a “crash” course on risk, but the lessons learned were only temporary and now seem long forgotten.

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An Exercise in Patience

March 28, 2014

Over my four years at QV I have studied and used various techniques to value businesses, listened to strategists describe the condition of market cycles, and engaged with experienced managers on their past investment actions. While these opportunities have been instrumental to my development as a practitioner, it is the current market environment that helps me understand best what it takes to be a value investor. Patience is certainly a key ingredient; especially in markets testing new highs and making the contrarian element of value investing a challenge.

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Layers of Conservatism

March 21, 2014

In 2011, Allstate Insurance released a survey on American drivers' ratings of their own driving abilities. 64% of drivers believed "their own driving knowledge, ability and safe driving habits are well above other drivers on the road". Other survey results confirmed a human bias we all know too well; it is usually someone else's fault. 56% of drivers surveyed admitted involvement in a traffic accident, but only 28% of drivers claimed fault for the accident.

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Warning of Warming

March 14, 2014

I recently escaped this seemingly never-ending winter to attend the 35th Annual Raymond James Institutional Investor Conference in Orlando, Florida.  It is one of my favourite conferences because of the vast number of companies (around 350) with broad industry representation.  Over the years that I have attended, no matter how cold it was in Calgary, (or how warm it was in Orlando) the conference has always provided a good proxy for measuring the temperature of the investment climate.

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Warren's Lessons

March 07, 2014

Each year, one of the most eagerly anticipated events at QV is the release of the Berkshire Hathaway annual report. The Chairman's Letter, written by legendary investor Warren Buffett, is usually filled with great investing insights interspersed with candid remarks about the various businesses that drive Berkshire's results. Warren's letter to shareholders often provides a crucial reminder about the importance of a long term investment horizon, patience, and a value-driven investment philosophy.  This year was no exception.

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Paint Drying

February 28, 2014

"Investing should be more like watching paint dry or watching grass grow.  If you want excitement, take $800 and go to Las Vegas" - Paul Samuelson, Economist.

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Digging a Hole

February 21, 2014

Last weekend I had the good fortune to go on my first cat-skiing trip at K3 Mountain in BC. For those who have never been, it is absolutely bucket list material (75cm of fresh powder helps too). Although our guides ensured we were never exposed to even the remote possibility of danger, the trip began with an avalanche safety lesson followed by a test where our group used avalanche transceivers to locate and extract two dummies buried in the snow.

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Concern Brings Opportunity

February 07, 2014

“When written in Chinese, the word “crisis” is composed of two characters – one represents danger, and the other represents opportunity.”   - John F. Kennedy

Last Friday ushered in a new lunar year in the Chinese calendar.  According to some strategists, the year of the horse could prove dangerous if the stock market runs away from its fundamentals.

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Cookin' up Some Safety Stew

January 31, 2014

QV Updates this year, and the latter half of last year have had an increasingly cautious tone.  Our assessment remains unchanged and we have positioned our portfolios accordingly.  Among the myriad of elements that cause concern about future market returns is margin debt as a percent of nominal GDP.  Investech Research does an excellent job of monitoring this.  As can be seen below, historical peaks have a strong correlation with market tops.  Both appear to be on shaky ground.

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Staying Sober in the New Year

January 24, 2014

How does the adage go, “let us not drink to the past, but to the future”? The New Year remains an opportunity to reflect and to plan. In the investment community, managers, strategists, and analysts have been releasing 2013 reviews and 2014 forecasts. By and large, value managers warn that stocks are no longer cheap. It could be that the healing process from the wounds of 2008 is well underway, or maybe the market has just had one too many drinks since the ‘08/’09 crisis and is due for sobering up.

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Truths for the Long-term

January 17, 2014

New years are usually rung in with market gurus providing predictions for how investors can outwit the market. It can also be a time to challenge ourselves to think about the uncertainties the future brings. A good quote that recently made the rounds in the inter-office email from Charlie Munger was:

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Driving in the Fast Lane with the Rear View Mirror

January 10, 2014

The economy has been improving. US manufacturing data has shown robust expansion since the summer. Nondefense factory orders have reached all-time highs. So has the For-Hire Truck Tonnage Index. The yield curve remains steep. Unfortunately these data points offer little insight into future stock returns. The stock market is a discounting mechanism – it leads the economy. As such, 2013’s returns likely represented the market factoring in better growth and lower uncertainty.

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Like Shooting Fish in a Barrel

January 03, 2014

“It ain’t what you don’t know that gets you into trouble.  It’s what you know for sure that just ain’t so.”
– Mark Twain
There are no truer words for investors.  Human nature instinctively seeks definitive answers and investors have a way of convincing themselves they are right even though it is often to their own detriment.  Over the last year we have begun to see a broad based resurgence in overconfidence.  This leads us to be more circumspect about the investing environment in 2014.

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Joy, Joy, Joy

December 20, 2013

Oh the weather outside is frightful, yet the market is so delightful, stocks are on a roll, let them grow, let them grow, let them grow.

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IPO - It's Probably Overpriced or Inapparent Pocket of Opportunity?

December 13, 2013

As a general rule we tend to view Initial Public Offerings (IPOs) with a good deal of caution at QV.  Our wariness is derived by a good body of empirical evidence which shows that in general, long term returns associated with investing in IPOs are subpar.

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Pushing Through the Fourth

December 06, 2013

I settled into watching a Toronto Raptors basketball game on TV Tuesday night. In the first three quarters of the game, the Raptors came on strong and led by as much as 27 points. But as in the past, they began to stumble in the fourth quarter, losing their composure and eventually the game.

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Yellow Signs

November 29, 2013

All throughout Banff National Park are coloured signs that communicate the threat level of a potential forest fire.  Green indicates a low threat, blue for moderate, yellow for high, orange for very high and red for extreme.  In terms of the market, I think we are in the yellow phase.  Now my intention is not to frighten.  Rather it is simply to communicate what we see as a growing adoption of risk.

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Bamboo Investing

November 22, 2013

When I was a kid, my best friend’s dad was a successful realtor in Edmonton.  There are two things I remember from his home office.  The first was when he made calls he reversed his name.  As an example, I would call and say, “This is Dansereau Darren speaking”, which I think helped people remember his name.  The second thing I remember is the rows of Zig Ziglar motivational cassette tapes.  When I read this excellent quote in a piece written by John Hussman, I realized the wisdom in those tapes.

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Cash (Flow) is King

November 15, 2013

Repeatable performance over the business cycle is an emphasis of security analysis at QV. Questions on business performance in past downturns, and most importantly, business performance over the next cycle are important considerations.

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Defense in a "Quality Bubble"

November 01, 2013

There have been many references to a “bubble” emerging in equity markets as of late.  Recently Laurence Fink, the CEO of the world’s largest money manager BlackRock, expressed concern about the “bubble-like” markets at a panel discussion in Chicago:  “We’ve had a huge increase in the equity market.  We’ve seen corporate-debt spreads narrow dramatically…it’s imperative that the Fed begins to taper.”

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Getting its Pigs in a Row

October 25, 2013

In February, 2011 Ian Cooke wrote a QV Update addressing Maple Leaf Foods (MFI) and the issues the company was facing at that time.  It had recently announced a massive $1.3 billion restructuring plan.

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Marching On

October 18, 2013

As we progress through our third-quarter reporting period, the tone of our outlook remains the same. We still favor equities over bonds on the basis of the yield differential between the two asset classes, but we feel that cash is becoming an increasingly important part of the asset mix.

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The Friday Letter - QV Update

October 04, 2013

Today’s “QV Update” is the last letter I will pen for QV Investors. Joe Jugovic and I inked the first of these Friday letters to clients over twelve years ago, after the dot.com mania cast a long shadow over our Firm’s growth.

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Fair Value Doesn't Mean No Value

September 27, 2013

We are habitually cautious about commenting on broad market valuations.  Large pockets of the market can become overvalued while small segments of opportunity remain.  Broadly speaking, during the technology bubble, stock markets were trading at record valuations. During that period, tech stocks acted as a vacuum, sucking up investor money from old economy stocks. This resulted in deep valuation discounts in numerous high quality bricks & mortar businesses, setting the stage for tremendous gains once the bubble popped.

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Say it ain't so!!!

September 20, 2013

The recent cover of Time Magazine donned a bull with a party hat, cool shades, and confetti indicating it’s party time for stocks. Historically this is a bad omen.  The appearance of bulls and other positive images of the stock market on the cover of national magazines have a track record of being major contrarian indicators.

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Preparing for a Lower Dosage

September 13, 2013

Never before has the rate of money printing been so furious and prevalent in the history of mankind. In a recent speech, Bank of Canada’s Deputy Governor John Murray commented that four of the most influential central banks (European central bank, U.S. Federal Reserve, Bank of England and the Bank of Japan) hold bank assets anywhere between 20% to 33% of GDP, with the Bank of Japan planning to increase its balance sheet to nearly 60% of economic output.  The sheer volume of liquidity seemed to have stabilized the global economy from financial ruin.  The promotion of greater risk appetite has translated to improved confidence levels.  However, excessive risk taking and debt accumulation has the potential to create another financial crisis.  Quantitative easing (QE) must be tapered to avoid long-term addiction to easy money policies.

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Quality Please

September 06, 2013

The firm’s name was QVGD Investors Inc. when I first started here.  In many meetings, people would ask Leigh Pullen what the letters meant and why he chose them.  His response was he selected a name that reflected our process so that when we came into work there would be no doubt what we were looking for every day.  QVGD stands for Quality, Value, Growth and Diversification.  When we moved to our new office in 2007, we shortened our name to QV Investors.  We did not dismiss growth and diversification, but we have incorporated them into our definition of a quality company.

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Summer Reflections

August 23, 2013

As I return to my desk following a brief summer respite from the world of investing, catching up on the news that moved the markets can be a harrowing experience.  During my absence, gold stocks found new life despite write-offs in excess of $25 billion.  Long-term bond yields continued their march higher even though central bank rate hikes seem a distant reality.  Now popular market strategists are garnering press declaring the end to the secular bull market in bonds. Wow…I was only away for two weeks!

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Bucking the Trend

August 16, 2013

We often remind ourselves in good and bad times to be wary of whether investment performance has been driven by factors such as multiple appreciation or fundamentals. This is crucial to our goal of preserving and growing capital over the long-term. Valuations that stray too far from fundamentals can be a great opportunity, or conversely a large risk. When evaluating if the price investors are willing to pay for an asset has been bid up, or if management has grown the earnings power of the company, a key question is whether performance is sustainable. This thought process can lead to taking divergent views from others.

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Let the Good Times Roll!

August 09, 2013

The tone in the market seems to be improving as of late.  Negative headlines are becoming scarce and economic data is generally improving.  A fail-safe indicator for improving confidence reveals itself when I scan my inbox for the word “bullish” to find 21 emails this week versus half that number when I scan for “bearish”.  The TSX Composite is up just shy of a modest 1% so far this year while the Dow Jones and S&P 500 are up 18% and 17% respectively and continue to set new highs. People are feeling good about it.

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"Where are the tens at?"

July 26, 2013

- asks Leigh, who sits behind the Bloomberg terminal. “Up five beeps and it’s the same across the curve.” I reply. We nod and revert to our screens. We’re not traders so daily
moves are not of great concern. But as long-term investors, structural shifts are top of mind. The consequences of higher interest rates are important to highlight as their effects span borders and cross assets.

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We Bid Adieu to a (Shoppers) Optimum Investment

July 19, 2013

In a February QV Update we espoused the virtues of the Shoppers brand, the financial record and the opportunity for growth through increased pharmaceutical volumes in conjunction with an aging Canadian population. We made it the largest holding in the QV Large Cap Fund after initially investing in early 2011.

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Drill Bits, Snaffle Bits, Bits & Pieces

July 12, 2013

The Calgary Stampede is hootin’ an’ hollerin’ this week with dances, pancake breakfasts, and horses and cowfolk white hatted and blue jeaned and shakin’ off the muddy cold rinse we enjoyed last week courtesy of the Bow and Elbow River floods.  You can’t keep this town’s spirits down and damp as the rodeo and the sun come out.

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QE's on first...

July 05, 2013

It seems the investing world is as confused as poor Costello was during Abbott & Costello’s classic satire “Who’s on First?” This quarter we’ve had Fed Chairman Ben Bernanke lay out the game plan for future monetary stimulus.  Unlike his predecessor, Alan Greenspan, you can actually understand the relatively plain English he uses.  Nonetheless, investors seemed more confused after Mr. Bernanke spoke than before. Makes us wonder how Abbott and Costello would have played this investing skit out:

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The Virtue of Not Doing

June 21, 2013

For many of us, a state of temporary inaction is often a foreign notion, or at least at odds with modern culture’s hi tech assisted obsession with constantly doing and the instantaneous gratification it affords.  In a recent report by Kleiner Perkins Caufield & Byers, a top venture capital firm in Silicon Valley, the company estimated that every day the average smart phone user checks their phone 150x (we wonder who these people are and how they get anything done?).  Although this statistic would help us understand the source of an epidemic in carpal tunnel syndrome, the idea that a tool intended to enable us has become a perpetual preoccupation of our time reveals something striking about our incessant urge to constantly do.

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High Quality Assets can be Risky

June 14, 2013

The ‘Q’ in our name stands for Quality.  The most common misperception is that the quality of a company determines its riskiness.  However, it is really the price paid for a particular asset that determines its risk level and the success of that investment.  Therefore, a high quality company bought at too high of a valuation can result in a risky investment with low return potential.

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Trust During Uncertain Times

June 07, 2013

The Latin word for credit is credo, which is to believe or trust. An investment in any security requires at least a little credo with an exchange of payment for a right to an asset and/or the future cash flows of an asset. In the case of a bond investor, credit risk is focused on capacity and willingness to pay. Over the past month there has been increased anxiety for bond holders as yields have had an abrupt move higher. This has exposed the risks to bond asset values and leveraged companies. It is no coincidence that highly indebted REITs have begun to underperform the broader market indices as of late.

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A Change in Leadership

May 31, 2013

Governor Mark Carney presided over his last Bank of Canada monetary policy meeting this week before taking up his new post as Governor of the Bank of England. His final communiqué did not contain any material policy changes or any changes to their macro view.  Canada’s overnight rate remains at 1.0%, inflation remains subdued, and global economic activity is expected to grow “modestly” this year.  The language regarding the future direction of interest rates remains the same: “…after a period of time, some modest withdrawal of monetary stimulus will likely be required consistent with achieving the 2% inflation target.”   Translation: the next rate move is higher, we are just not sure when.

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Did You Know...

May 24, 2013

Did you know the words “silent” and “listen” contain the same letters.  Without silence you cannot listen.  Without listening you will not hear, which brings us to the market.

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This Time is No Different: Avoid Complacency

May 10, 2013

We’ve been uncomfortable equity and corporate bond bulls for over four years now.  Early in our stance, discomfort spawned from headline after headline related to the credit crisis and economic recession. Investor sentiment was downright awful, reflected by corporate bond spreads that offered record wide yields and stocks trading near record low valuations.

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Big Bets on Canadian Banks

May 03, 2013

In reporting our quarterly performance to clients we are often asked where we see opportunities in the market. With the materials sector off 22.9% year-to-date our screens find plenty of value in this space, but our fundamental analysis finds little quality. Another area of the market where we see opportunity is in the financials sector, which includes both insurers and banks. The sector is up just 0.8% year-to-date, compared to the S&P/TSX Composite Index of 1.2%.

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Quality companies...at a price.

April 26, 2013

As most of our readers know the Q in QV Investors stands for quality.  Our goal is to build high quality diversified portfolios which both protect downside and provide an adequate total return.  That all sounds nice, but really what is “quality” and why does it matter?

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Printing Imbalances

April 19, 2013

With a stroke of its pen, the US Federal Reserve is expanding the monetary base through its purchases of treasuries and mortgage-backed securities (MBS) at a clip of US$85 billion a month.  Akin to Bernanke and Co., the Bank of Japan has followed suit with its recently announced policy to purchase securities at the rate of US$70 billion a month.  Major central banks have injected trillions into our financial system since the depths of 2008.  This has created some market distortions that we believe present risks to investors. The blunt edge of quantitative easing may result in unintended consequences that nullify the merits of its original intention.

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High Quality & Good Value - "Metro and Me"

April 12, 2013

The focus in the media has been what is going to happen with global growth.  There are many companies in the Canadian market that are not dependant on global macroeconomic factors, which is where we have had large positions over the last number of years in our Funds.  One of those companies is Metro, which brought their Chief Financial Officer and head of treasury into our office this week. Metro is an example of the type of company we look for at QV. Metro Inc. operates 565 food stores and 260 drug stores in Ontario and Quebec.

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Reflexivity

April 05, 2013

Sometimes our expectations become our behavior.  William Thomas said that “the situations that men define as true become true for them.” 
\Reflexivity asserts rising prices influence behavior, create rising expectations, and that price change becomes self-reinforcing.  Well, until it is not.

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Mergers & Acquisitions: Critical Contemplation

March 22, 2013

In this past year, roughly a third of the holdings in the QV Canadian Small Cap Fund have participated in varying degrees of merger and acquisition (M&A) activity. Terms like ‘accretive’, ‘transformational’, and ‘tuck-in’ are commonly used adjectives in press releases and analyst research notes to describe this activity.  QV holding, CCL Industries recent acquisition of Avery Dennison’s label converting division could be described as transformational. While hardware distributer Richelieu’s acquisition of CourterCo in the US could be described as a tuck-in.

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The March Hare

March 15, 2013

“If you want to have better performance than the crowd, you must do things differently from the crowd.”  
\-Sir John Templeton
\“It’s finally starting to happen: After five years of extraordinarily defensive investing, the nation’s largest wealth-management firms are growing wary of bonds and more upbeat on stocks.” 
\-Karen Hube, Barron’s, March 2, 2013

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Aloha!

March 08, 2013

I, Mark, have recently come back from a holiday in Hawaii.  It was far from relaxing.  We did everything from whale watching to horseback riding to poking lava with a stick.  It is nice to be back to the relaxing world of trading stocks in turbulent times.

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The Market's Mixed Signals

March 01, 2013

We are two-thirds of the way through another period of corporate financial reporting, and for the businesses held in the QV portfolios, the results so far can be described as stable. A good example to characterize the last quarter for most of our companies would be the results of Canadian National Railway (CNR). CNR experienced single-digit earnings growth year over year, kept its balance sheet healthy, and increased its dividend. It is a business that continues to create long-term value for shareholders. Of the 32 businesses we hold in the Canadian equity and balanced portfolios, 22 dividend payers have reported their financials, and of them, 11 have increased their dividends. Here we emphasize the consistency in our businesses. Markets on the other hand are suggesting something other than stability or consistency.

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Following the Smart Money

February 22, 2013

Warren Buffett recently announced plans to partner with another investor and purchase Pittsburgh based H.J. Heinz Co.  We like to study transactions that Mr. Buffett is involved in as we can learn a lot from assessing the actions of the world’s most successful investor.  Several key themes we take from the Heinz transaction are discussed below.

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Happy New Year (新年快乐)

February 08, 2013

We’ve read plenty of stock market predictions so far this year, but the really exciting stuff is just around the corner.  The Chinese New Year Almanac.  We give as much weight to this insight as we do to the economic forecasting we read … maybe more.

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A Tale of Two Charts

February 01, 2013

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…”   
- Charles Dickens, A Tale of Two Cities

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Questions

January 25, 2013

It is during a car ride to hockey that from the back seat I hear an important word – why? This word helps us understand topics better.  In the case of my five year old son, he will ask a variety of questions, like why can’t we buy a helicopter?  In the case of current and prospective clients, they will ask a variety of questions to better understand our process.  We thought sharing some of these questions would provide more insight into our process.

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Lessons from 2012

January 18, 2013

Starting a New Year can be full of hope and last week we had a forward looking perspective of 2013. Some of the hope hinges on lessons learned from the past. More specifically, on how these lessons will improve decision making and thought processes in the upcoming years.

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A Wish List for 2013

January 11, 2013

In keeping with the spirit of the New Year, and our natural affinity for making resolutions, we offer our own wish list for 2013.  Unlike resolutions where we have some control over the outcome, we cannot control these outcomes. It never hurts to hope that our wishes may eventually come true.

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2012 Results - Total Returns

January 04, 2013

Despite what seems a messy world, it was not a bad year for QV’s clients.  We trust you will agree. 
\An analysis of the asset and sector returns within the benchmarks shows equity results outshone bond performance last year.  Also the past strength of the energy, material and utility sectors faded, earning only very low single digit or negative results.   The softening outlook for China and the slowing decline in interest rates seems to have influenced their results.  Sectors showing high teen or low twenty percent gains included the REITs, industrials, consumer discretionary and consumer staples and financials.

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Notes from the Road

December 14, 2012

We recently had a chance to visit some of the businesses we own in the Montreal area and thought we should share a few observations with you. First of all, the infrastructure needs in Montreal are more obvious than in any other major city in Canada. A number of roads are in terrible condition and traffic congestion is extremely unpredictable. If you find yourself traveling in Montreal, leave yourself plenty of time to get to the airport!

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Reinvesting can pay dividends

December 07, 2012

Dividends have been cited to compose roughly 40% of the stock market’s long-run total return. It comes as no surprise that US investors are concerned about the risk of taxes on dividend income sharply rising from 15% to 43% in the New Year. The effect on Canadian dividend paying companies should be minimal, but we have seen some response. CCL Industries (a label and packaging manufacturer held in the QV Small- and Mid-Cap strategies) may have responded to the potential impact on its US institutional investors by accelerating its next quarterly dividend payment to before 2013. Dividend yield remains an important part of portfolio returns, especially for investors seeking an attractive and dependable income stream in today’s low rate environment.

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It's Business Time

November 30, 2012

Europe is in recession.  China’s economy is decelerating.  North America is on pace to achieving 1 to 2 percent economic expansion over the next few years.  Debt spurred growth rates in the developed world have reached a limit and an age of deleveraging must follow to pay down debts.  Economic growth cannot be driven by the same factors that got us here.  Other contributors are needed to ensure GDP growth remains positive.

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Dear Santa...

November 23, 2012

Dear Santa, we know it’s a little early for our Christmas list, but we’re only asking for one thing this year – a cat’s nine lives!  Why you may ask?  It seems a number of topics relevant to QV have been proclaimed either dead or on the verge of dying lately.

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Rolling Over

November 16, 2012

This is a stock chart we hate to show.  Well, in the short term we do.  In the long term, we don’t.  WGL Holdings is the parent company of Washington Gas and Electric.  We hold WGL in our international portfolios.  WGL is a utility.  It provides electric current and natural gas to the professional providers of hot air in America’s capital and has done so for a long time.   As you see, the share price has found some woefully bad breath recently.  Since the beginning of November, oh let us be more specific, since the day after November 6 election day, WGL has fallen 10% from $40 per share to $36.  WGL met a market “cliff”.

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Welcome Back Mr. President

November 09, 2012

The market has provided a less than warm reception to President Obama following his election win.  In the first day of trading after winning re-election, the Dow Jones Industrial average tumbled, generating its biggest one-day decline this year.   Tuesday’s election left Democrats in control of the Senate and Republicans retained their majority in the House of Representatives.  Because of this, there is concern that the same political gridlock that the US has faced over the past two years is set to continue.

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At a Standstill

November 02, 2012

The US equity markets were at a standstill this week as Hurricane Sandy caused the longest weather related shut down in more than a century.  The financial toll is estimated to be in the billions, a cost to be borne by already stretched local and state governments.

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Core Consistency

October 26, 2012

“[W]e’ve seen continued economic weakening and uncertainty…We’re focused on being very nimble and taking actions to respond…It requires a pragmatic and steady approach as we balance our actions in the short term with what we need to do to be prepared for better growth when the world economy improves.” – Doug Oberhelman, CEO of Caterpillar Inc.

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The Next 23 Years

October 19, 2012

“It ain’t about forecasting, it’s about examining.”
                     - James Grant, 2012
Incoming economic indicators of late have shown that the global economy is slowing down.  In response, major central banks have been printing money at an unprecedented clip to fight these deflationary forces and keep the economy moving.  Large fiscal deficits have been and continue to be funded with debt that will not produce an income stream to pay it back.  This is deeply concerning, as we have witnessed governments trapped in this vicious cycle of piling debt have eventually lost access to the cheap capital that they have grown so accustomed to (e.g. Greece).

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Leon Tuey - The Technical Analyst

October 12, 2012

I met Leon Tuey too many years ago to count. It was after the last ice age, but not long after, when share prices were graphed in paper books and technicians measured trend lines with fountain pens and steel rulers. He was a “technical analyst” working at Nesbitt Thomson. I was an analyst at National Trust. Latterly in his career, he shared his wisdom at RBC Dominion Securities from which he retired in 1987.

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Weighing in on the Corporate Debt Discussion

September 28, 2012

“With the strongest balance sheets on record and benefiting from one of the most resilient financial systems in the world, the need for Canadian firms to build precautionary cash balances appears limited.  There is a balance between prudence and action.”

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Back to the Basics: The P/E Ratio

September 21, 2012

At QV Investors we constantly monitor our portfolio and stock attributes on a variety of metrics.  Our main focus is to track our valuation, growth, and risk characteristics, not only against appropriate benchmarks, but against our own historical values.  We do a formalized risk management audit every month to understand how our portfolios are positioned and to identify areas that could be improved.  We slice and dice our portfolios on almost 40 metrics.  Deciphering all of this information can be a little daunting at first glance.  We do not place the same magnitude of importance on all metrics in all situations.  Certain metrics have very specific purposes, but the price to earnings (P/E) ratio can be applied in a broad array of circumstances.

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No Real Surprises

September 14, 2012

This week two of the worst kept secrets of the year were confirmed.  The iPhone 5 was released with the typical flair of a staged event unveiling the new features.  The problem was many of the upgrades such as the larger screen going from 3.5 to 4.0 inches in length, the new processor and the revamped look have been leaked out over the past three months.  This is similar to the release we received Thursday from the Federal Reserve indicating it was taking more action to stimulate the US economy.  Ben Bernake has foreshadowed this action most recently at a meeting in Jackson Hole ,Wyoming on August 31.

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Canada - a safe haven?

September 07, 2012

While debt woes and political uncertainty are common headlines as of late when discussing the state of affairs in Europe and the United States, they are not necessarily common in reference to Canada.  However, this was the case over the past few weeks, as ballooning budget deficits, debt warnings and political discontent dominated the news. 
Moody’s is the latest firm to warn about Canadian consumers’ growing debt problem. As our debt to income ratios move to record highs (152% is the latest figure), they warned of the impact on the country’s ability to whether another economic downturn.

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Betting on Red

August 24, 2012

I’m not much of a gambler. After losing $40 at a hand of blackjack I vowed never to gamble again. I recall sitting at the table with angst, knowing win or bust comes down to one card. (It’s clear what happened next). My $40 loss was small by betting standards and easily reasoned away as the cost of a fun night out with friends. Now consider the bet the world is making on China, which saw $7.6 billion of foreign direct investment in July.

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Active Conviction

August 17, 2012

“You are neither right or wrong because the crowd disagrees with you.  You are right because your data and reasoning are right.”                       - Benjamin Graham
The word ‘investing” is overused these days and encompasses such a broad array of asset classes and styles that the word can be applied to almost any purchase.  And in the most general sense the intent is all the same.  Purchases are made in hopes they will provide returns in the future, at a greater value than for which they were acquired.  At QV we aim for just that, to provide superior and stable returns to our clients.

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Good-bye Mr. Bolt, Hello Mr. Market!

August 10, 2012

As the 2012 Summer Olympics close this weekend, the television at the QV office will be dutifully shifted back, from displaying the emotional spectrum of athletic contests, to the equally emotional highs and lows of Mr. Market.

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Let the Games Begin!

July 27, 2012

We’ve always assumed readership of our QV Update during the summer months was low given the multitude of better things to do.  With the start of the 2012 London Summer Olympics it may be difficult getting anyone to even edit this letter internally, never mind have one of our clients take the time to read it.  But we march on, chin held high, ego squashed, knowing we’re up against a bunch of Olympians.

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S&P TSX: Over Exposed & Under Water

July 20, 2012

This week in New York, another example highlighting the importance of diversification in portfolio management was served up. Instead of coming from the money changers on Wall Street, this lesson came straight from Times Square, home of Modell’s Sporting Goods. Founded in 1889, Modell’s is America’s oldest family-owned and operated retailer of sporting goods with a strong presence in the New York area. In February, Mitchell Modell, the Company’s 4th generation CEO, amassed an enormous amount of merchandise related to Jeremy Lin, a Harvard University graduate who became the first Chinese-American to play in the National Basketball Association.

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A Sustainable Growth Model

July 13, 2012

We will be soon entering our fourth year of the low interest rate policies implemented by the world’s central banks in 2008.  In an attempt to ward off the deflationary effects of the collapse of the US housing bubble, and with it the near collapse of the global financial system, interest rates fell to near zero in the developed world, and other fiscal and monetary stimulus policies were enacted to ward off the crisis.

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Black Clouds / Silver Linings

July 06, 2012

“Will things get worse before they get better?                                                 
\-Barron’s Mid-Year Round Table
\Marc Faber: Yes, possibly much worse. Central bankers will argue that more stimulus is needed.  But the crisis has occurred in large part because governments have grown excessively large. The private sector produces growth. When government is 40%, 50%, 60% of the economy, the economy won’t perform well.

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Exploring for Value

June 22, 2012

The announcement of Canada’s inflation rate falling to 1.2% from 2.0% underscores that inflation is not an immediate concern in North America (although disinflation might be). As a result, we wonder if inflation hedging assets like gold and oil will continue to see some near-term weakness. With a $2.65 trillion monetary base, expected slow growth of around 2%, and a federal deficit fast approaching $1 trillion, the US Fed’s resistance on Wednesday from announcing a third round of quantitative easing (QE3) is comforting.

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Uncertainty

June 15, 2012

The saga continues in Europe even after the $100 billion Euro bailout of Spanish banks.  Unfortunately, the yields on many troubled countries’ debts actually went up after the recent cash infusion.  Not the outcome everyone was hoping for and another signal the level of confidence remains fragile even with these short term fixes.  From this state of nervousness comes the risk for a potential mass exodus of a country’s debt. This would suddenly drive up rates significantly to levels where current and new debt cannot be financed.  This is the scenario the euro area and the rest of the world remain concerned about.

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More Walking, Less Talking

June 08, 2012

“Rhetoric is a poor substitute for action, and we have trusted only to rhetoric. If we are really to be a great nation, we must not merely talk; we must act big.”

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Anxiety

June 01, 2012

Stock markets have continued their downward trajectory this week on anxiety over the European banking crisis, fiscal austerity and slower economic growth.  Growth has been declining in many world’s key economies – India, China, the US and Europe.

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Return on Capital Reckoning

May 25, 2012

“In the short run, the market is a voting machine, but in the long run it is a weighing machine”
-Benjamin Graham
The 15 percent decline in the S&P/TSX composite index over the past 12 months is proving Mr. Graham’s point.  Resoundingly negative votes have dominated the recent votes in the market ballot box, as fear and complacency have dominated investor sentiment. While this has occurred, the weighing machine has quietly been measuring the financial heft, or lack there-of, for each of the index constituents. Companies that grow profits, over time, are valued off of this increased monetary girth.  Those that don’t are eventually starved of capital and cease to exist.

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Austerity? Pas pour nous!

May 11, 2012

With the election on Sunday of Socialist Party leader François Hollande as France’s new President, the French populace quickly changed the tone of the markets, and the direction of European fiscal policies.

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The Transformation of Communications

May 04, 2012

Many of the businesses we hold in the Canadian Equity Fund have been highlighted in the press over the past week. When companies we hold hit the front page, naturally we become more interested in what the press has to address.

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The wall of worry - our friend.

April 27, 2012

It’s an old market adage that the stock market often climbs a wall of worry.  This saying refers to the resilience of the market to climb higher notwithstanding the temporary obstacles (worries) in its way.  Interestingly enough, when the wall seems nearly insurmountable, the greatest opportunities abound.  When you feel you can easily hop over it is when you should be very careful.  At the market bottom in March of 2009 the wall was massive (stock markets around the world went up well over 50% shortly thereafter).  During 2007’s period of prosperity there seemed to be no wall (stock markets around the world fell around 50% shortly thereafter).

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Who's on the Bus?

April 20, 2012

At QV, we take a lot of time to get an understanding of the management team at the helm of the companies in which we are invested.  We review the share ownership of the board and executives, the succession plans and the culture. We ask how management is compensated, whether promotion from within is important, or whether executives are transferred within the top ranks of the company to get a better understanding of the overall business.

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In Transit

April 13, 2012

“The Moving Finger writes; and, having writ,
\Moves on: nor all thy Piety nor Wit
\Shall lure it back to cancel half a Line,
\Nor all thy Tears wash out a Word of it.”

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Points of Inflection

March 30, 2012

Over the quarter we have noticed trends that we view as positive signals for investors.  Have we reached or passed the nadir which guarantees positive economic growth going forward?  We do not have a crystal ball, but conditions are firm enough for us to comment on a seemingly inevitable swing in momentum.

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Diary of a travelling analyst

March 23, 2012

I recently returned from holiday in Southeast Asia. A region of the world I called home for a significant duration of my youth. It has been at least ten years since I was last in the area, so it is an understatement to say that a lot has changed. The most prominent changes I observed were the numerous real estate developments and infrastructure projects occupying the city centres, as well as the Starbucks logos in the most convenient locations. The area was clearly living up to publicised growth rates for emerging market economies of between five and seven percent, in real terms.

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The War of 1812

March 16, 2012

On Friday morning, BCE Inc. announced the acquisition of Astral Media for $50 per share, a 39% premium to its Thursday close.  Shareholders of Astral will vote on the proposal May 25th.  QV Investors holds a large eight percent position in Astral Media.  We favour the transaction.

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Have a Merry Annual Report Season!

March 09, 2012

I often joke that this part of the year is like Christmas for us investment nerds.  It’s the time of year that annual reports are filed and delivered to shareholders. These reports typically contain a letter from the Chairman of the Board, commentary from the Chief Executive Officer, a description of the business along with the company’s financial statements.   Reading annual reports can provide an investor with a sense of management style, strategic direction and financial performance.  What more could an investor ask for!

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Wise Words

March 02, 2012

This past weekend Berkshire Hathaway Inc. released it’s 2011 Annual Report which we always enjoy reading (www.berkshirehathaway.com).  These letters provide valuable insight, honesty, and humility.  Take for example the assessment on his housing market call, “I thought the housing market would recover in 2011…was dead wrong!”  In a follow up interview, he mentioned single-family homes in the US represent good value, and if he could find a way to manage them, he would like to buy up a couple million homes for investment.  Below are some contrary blogger responses to his views:

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Right the Ship

February 24, 2012

Roughly three and a half years ago, Lehman Brothers filed for Chapter 11 bankruptcy after the investment bank found its books were overexposed to the unravelling subprime mortgage fiasco.  Since then the world has witnessed the adverse consequences of taking on too much debt without the capacity to pay it back.  Europe is the current example of this.

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The Demand for Yield Continues

February 10, 2012

Yield has been a dominant theme in the markets for the last year or so.  It is argued that companies which pay dividends will provide a more consistent return versus those which do not.  The volatility in prices over the last few years has increased demand for more stability.  However, caution is warranted.  If the dividend is unsustainable or the thirst for dividends is priced into the value of the security, the risk of capital loss increases.

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Say it ain't so Harry!

February 03, 2012

It’s hard to believe we are already through the first month of 2012.  We’ve seen all kinds of forecasts and predictions for the year ahead, but few as bold as renowned best-selling author Harry Dent Jr.  Dent predicts the Dow will trade as high as 13,200 by mid-summer and the S&P 500 as high as 1430. The bad news is "then we could see another major crash" Dent says.  The Dow could trade as low as 3300 in a worst-case scenario over several years. "Bubbles go back to where they started or a little lower, the stock market bubble started at (Dow) 3800 in late 1994."  Before we run for cover we should recognize that sometimes forecasters get it wrong.  For example, Mr. Dent in the year 2000 forecast the Dow would reach 40,000 by the end of the decade…Oops.

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Quality + Value + Patience = Returns

January 27, 2012

We had some good news in the Small Cap Fund earlier this week. US based Semtech Corporation entered into a definitive agreement to buy Fund holding Gennum for $13.55 per share, a 120% premium to its recent trading price.  This is one of the largest premiums offered in a Canadian takeover in recent history.  The transaction appears to be a win-win for both Semtech and Gennum shareholders as Semtech management expects meaningful earnings accretion from this transaction.  Gennum is engaged in the design, development and marketing of semiconductors and intellectual property for signal integrity in video broadcasting and data communication.  This is not an easy business. It requires constant product enhancement and is economically sensitive.  Gennum is a frontrunner in this sector, with a history of industry leading profit margins.

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Balancing Yield and Risk

January 20, 2012

Another week, another round of bad news headlines:  “France loses their coveted AAA rating after a downgrade by Standard and Poor’s.”  “Greek default is inevitable after negotiations with lenders breakdown.”  “Euro Woes to temper growth:  Bank of Canada.”  All the more reason to hold 10-year Canadian government bonds priced to yield 1.9%?

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What is it you do again? - Revisited

January 13, 2012

With every New Year comes the opportunity to create annual goals, or resolutions. British media recently published survey results that revealed “despite 2.6 million people starting diets last Tuesday…this weekend 92 per cent of dieters gave up, shunning exercise and gorging on comfort food.” This survey suggests that individuals are prone to making choices that are often short-lived.

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2012 - Gosh!

January 06, 2012

We’re a touch atremble.  In reading financial and geo-political prognostications, we sense most columnists feel a dead body may evidence more life than the economy or the markets in 2012.  “Scouring the economic and financial landscape for bright spots can also be something of an exercise in futility,” says Alan Abelson of Barron’s.  We like that.  Distress brings opportunity.

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STOCKS - "BAH! HUMBUG!"

December 16, 2011

Sorry for the less than cheery title to our final letter of the year, but how else do you describe the mood?  The year started out with a lovely first quarter rally in the S&P/TSX Composite Index of 6%, but by October the Canadian market was down by more than 20% from its March peak.  Ebenezer Scrooge made his appearance.  For any of you with children who have asked Santa for a “bear” … please have them be specific!

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Are we there yet? - Nope

December 09, 2011

The European leaders have been meeting over the past two days to again ‘solve’ the crisis in Europe.  It is the 4th meeting this year and the 15th meeting held in the last 23 months. However, a viable long-term plan has not been unveiled.  To make matters worse, this week S&P threatened to downgrade the debt of 15 of the 17 European countries in the currency union including AAA rated countries Germany and France.  As we have stated before, a solution will be found, but we don’t know what it looks like or when it will come.  In the meantime, corporations, governments, and consumers continue to reduce their debt levels.

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The Only Constant in Life is Change

December 02, 2011

How true and apparent is this quote in the context of today’s global economy.  A call for change is happening right before our eyes, and rightly so.  Change is needed to fix the global imbalances that have allowed profligate nations to run for far too long.  Balance sheet excesses have allowed for wasteful spending.  Now with the market raising borrowing costs by pushing bond yields higher, market participants are calling for immediate fiscal reform.  There is a growing realization that the current rate of debt-financed overconsumption is not sustainable.

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Painted with the Same Brush

November 25, 2011

Herd mentality is in full force. The chart below shows that the correlations between large cap American stocks have reached record levels at nearly 70% compared to historic averages closer to 26%.  Perfect correlation of 100% would imply all stocks would move in the same direction together.

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This too shall pass...eventually.

November 18, 2011

“I think the future of equities will be roughly the same as their past; in particular, common-stock purchases will prove satisfactory when made at appropriate price levels.  It may be objected that it is far too cursory and superficial a conclusion; that it fails to take into account the new factors and problems that have entered the economic picture in recent years – especially those of … the movement towards less consumption and zero growth.  Perhaps I should add to my list the widespread public mistrust of Wall Street as a whole, engendered by its well-nigh scandalous behaviour during recent years in the areas of ethics, financial practices of all sorts, and plain business sense.”

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Remembrance Day

November 11, 2011

November 11 is Remembrance Day.  We remember all those who came before, those to whom we owe our joys, knowledge, life, and our successes and those who made the ultimate sacrifice on whatever field of battle.

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Sound businesses will "full-steam" ahead

November 04, 2011

It’s that time of the year again where investors sit on the edge of their seats in anticipation of third quarter financial reports from the businesses we own. To date we’ve seen some very good earnings…and some not-so-good earnings. However, it is important to keep in mind that interim performance should be assessed alongside the long-term achievements of a business.

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On Small Cap Watch

October 28, 2011

We have been given notice as a result of our small cap performance.  And so we should.  Warned that is, by trustees exercising their responsibilities.  We take notice seriously.  Our Canadian small cap results have not matched the market returns as measured by the BMO Small Cap Index.  The basis of the notice is our failure to match or beat the index over a four-year period, the time typically thought of as a market cycle.  Here are the numbers over the two, three, and four-year periods.

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What Happens in Europe Matters

October 21, 2011

The European financial situation has been front page story for many months now.  Well known strategist Don Coxe, formerly with the Harris Investment Management division of BMO, says the companies in which investors will make the most money are those on page sixteen. We agree.  The sectors or companies on the front page of the newspaper have usually priced in the risk or opportunity.  This would imply many of the risks in the European financial system are priced into the market.  We believe the risks are definitely recognized.  We suggest there may be further downside if a long-term sustainable resolution is not found.  We do not know the exact solution, but we know it will get fixed…as there is no other choice.  In the end, either the markets or the politicians will impose austerity, default, deferral, inflation, or a combination of all four.

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Equities & Good Companies

October 14, 2011

After decades and dollops of debt and denial, we are having the consequent contagion, first in America, and now Europe.  Dexia SA was a multi-line Belgian/French bank.  From a high of EUR 22.40 in May of 2007, the shares now trade at EUR 0.80.  In the second quarter, Dexia wrote down its Greek debt and other “fair value adjustments” by EUR 4.1 billion on an equity base of about EUR 19.0 billion.  Three weeks after Dexia SA passed the banking “stress tests” it failed as wholesale lenders withdrew their support.  The governments have stepped in to sell off the assets.  If the stress tests missed Dexia, we guess they have likely missed others.

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Beware of "Melting Ice" Businesses

September 30, 2011

Yellow Media (YLO) has been making headlines this week after announcing a $2.9 billion write down to goodwill and the elimination of its dividend. Best known for the production and distribution of the Yellow Pages telephone books, Yellow Media was at one time viewed as a very stable business with a dominant position in Canadian directories market. It was once a darling of the income trust craze. The size of its initial public offering in 2003 was record setting. The stock was highly sought after and quickly traded above its initial offering price of $10.00 per unit.  For several years after its initial IPO, the company continued to garner substantial investor interest. In 2006, the company was added to the S&P/TSX 60, the large-cap index that includes Canada’s largest companies. At the time, YLO’s market capitalization was close to $7.5 billion dollars. How the mighty can fall. At time of writing, the company’s market cap had dwindled down to less than $70 million.

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A panacea or desperation?

September 23, 2011

On Monday, former US Central Bank Governor, Paul Volker, wrote a short opinion piece in the NY Times.  The central theme of the article was a warning to policy-makers on the dangers of a little inflation. “My point is not that we are on the edge today of serious inflation…but the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems – our economic imbalances, sluggish productivity and excessive leverage – we would soon find that a little inflation doesn’t work.”  A clear message directed at the current Fed Governor on enacting potentially dangerous inflationary policies.

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Fresh off the press!

September 16, 2011

At times it seems like all recent news has been negative.  Especially as we end the week with Research In Motion's (RIM) stock down 20% today after reporting double-digit declines in revenues and earnings in its second quarter financials on Thursday.  The disappointment resulted from much lower BlackBerry device and PlayBook sales than anticipated, and higher operating expenses.

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Bulls**t Bingo

September 09, 2011

This week, you might have read of the concerns of Mr. Carney, Governor of the Bank of Canada or those of Mr. Bernanke, the Fed Chairman, or those of Mr. Obama. Their thoughts parallel somewhat the words of Christine Lagarde, Managing Director of the IMF.

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The Good, The Bad, & The Ugly!

August 19, 2011

Yields on government bonds on both sides of the Atlantic have fallen to record lows this week. The U.S. 10-year note yield declined below 2% for the first time, even lower than the 2.03% after the 2008 financial crisis. In Europe, yields on benchmark 10-year German bunds and U.K. gilts also hit record lows and closed at 2.09% and 2.31%, respectively. Continuing concerns about the slowing global economy and European banks’ ability to fund themselves have investors everywhere running for the safety of government securities.  In Switzerland, you’ll pay for the privilege of lending the government money. Bloomberg reports the yield on the Swiss two-year note fell to negative 0.06%. Investors are making a bet they will make up for their interest loss with an appreciating Swiss franc.  We are blessed to be living in interesting times … so they say!

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A Dizzying Week, a Focused Philosophy

August 12, 2011

This has indeed been a precarious week, full of rumours, new fears, and volatile market movements. Over the past two weeks, the Dow fell -8.2%, the S&P 500 dropped -9.3%, and the TSX declined -3.1%.  In comparison, the QV Canadian Balanced Fund slowed approximately -1.1% and the QV Canadian Equity Fund fell approximately -2.9%.  While clearly market sentiment has turned sharply negative, at QV, we remain focused and disciplined.  It is amazing to see how quickly fear sets in, forcing panicked investors to act irrationally.  And so a closer examination of the drivers behind this change in sentiment is warranted, and also provides a backdrop to illustrate our portfolio positioning at QV.

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What a Week!

August 05, 2011

On Thursday, (when the S&P/TSX dropped 435 points or 3.4% and Dow Jones dropped 512 points or 4.3%) a woman in Townsville, Queensland, Australia, opened her groceries and found a rat had chewed a hole in her loaf of bread and was loafing inside the plastic package.  “The thought of a live rat in my loaf of bread and so close to me was pretty gruesome.”  A follow-up note said that it was not a rat…it was a mouse.  You see, things are never as bad as we think.  She got her bread and a pet mouse to boot.  What is the problem with those Aussies?

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A Dedication to Dividends

July 22, 2011

Part of QV’s investment process includes a monthly audit of fundamental portfolio characteristics against a relevant benchmark. In recent reviews of the QV Canadian Equity Fund and equity portion of the Balanced mandates, we have witnessed the dividend yield of the Fund come down to a level in line with the S&P/TSX Composite Index at 2.5%. Since the introduction of income trusts to the Index in 2006, the dividend yield of the Fund has generally tracked that of the Index. However, we are confident the businesses held in the Fund will help us build an improving dividend component going forward.

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Changing Landscape

July 15, 2011

The Canadian media landscape is transforming as consumers have many more options in accessing music, TV and movies.  As an example, if you are interested in watching old episodes of Undercover Boss, a television show in which the CEO of a large company goes into the field for a week, you can either watch it on your local CTV channel or you can watch it on Netflix.  Netflix is one of the Over the Top (OTT) providers of movie and television content over the Internet for a monthly fee.  If you like to watch HBO programs, such as Entourage or Dexter, there is only one place to find that programming in Canada and that is through your cable, satellite or Internet Protocol TV provider.  Companies such as Astral Media, which is held in many QV portfolios, licenses movies and Pay TV shows from studios and sells them to your cable provider. The question we ask ourselves is: Can Canadian media distributors like Astral retain a competitive advantage from the threat of Internet video consumption? 

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We Are All Greeks Now

July 08, 2011

Neither a borrower nor a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.

\- Polonius, Shakespeare's Hamlet

\Well, we certainly have dulled the edge of husbandry in the Western world.

\After years of running up debt at cheap money rates, borrowers are running out of credit.  Lenders are running out of patience and confidence.  The European banks have exhausted their ability to rollover their faltering sovereign loans.   Greek relief buys time for the banks.  We do not know for how long and QV fully expects more anxiety over our banking system’s faltering loan portfolios.  The low rates in the US tell us that their banking system is hardly out of the woods.  Further, we are aware of concerns about Russia’s and China’s banks.

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Hold 'Em or Fold 'Em?

June 24, 2011

Battle scars of the 2008-2009 bear market temporarily built conservatism into forecasts. As a result, earnings revisions over the past two years have been biased towards the positive.  With GDP forecasts recently declining, the positive revision trend appears long in the tooth.  Although we would not be surprised if the positive earnings revision theme has largely played out, this view is not consensus.  Myles Zyblock, of RBC Capital Markets, noted earlier in the week that S&P 500 earnings estimates have been revised upward by 3.1 percentage points to just over $100 during the past three months. This is despite consensus US GDP growth estimates falling over this same period by 0.5 percentage points to 2.8%.  Negative GDP revisions have historically been much more conducive to negative earnings revisions, not the increases that some analysts are currently continuing to suggest.

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Ruin In Market - RIM

June 17, 2011

Gosh if we didn’t have enough to fret with floods, beansprouts and Middle-East tribulations and in our line of business - the slowing global economy, the end of money printing by the FED, the contraction of credit in China and India and the Europeans juggling debt bombs, QV ended the week with the headache of Research in Motion’s stock getting crushed.

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Consequences of a Slowing World

June 10, 2011

“Austerity” is defined in the Oxford English Dictionary as a state of severe simplicity.  In the world of economics, the word is used to describe a policy of deficit-cutting and lower spending.  No matter how you frame it, defining government policy with a word like “austere” or “severe” does not illicit comfort to those that rely on government programmes.  It does, however, provide assurance to lenders that government fiscal policy will be focused on reducing deficits to meet their debt obligations.  Absent significant private sector investment, austerity programmes may also produce a slowdown in growth.

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Pass the Advil Please!

June 03, 2011

Many of us at QV are suffering with headaches these days. A number of QV’ers are studying hard for their high pressure Chartered Financial Analyst (CFA) exam this weekend, we wish them luck. For those of us in the office following the worldly ups and downs, it’s downright confusing. One day investors are worried about inflation the next day deflation. Last month, the jobs data was stronger than expected and the market rallied. This month it was weaker and the sell-off ensued. All this focus on a single data point drives us nuts. Consider how much dollar value is traded back and forth globally on numbers that are less than scientific and often revised. Our outlook remains unchanged … we don’t know. Let us clarify, we don’t know how sustainable the recovery really is.

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Financials?

May 27, 2011

With the debt risks talked about in financial markets around the world, the immediate reaction would be to stay away from any company related to the financial sector. While risks do remain, primarily in foreign debt markets, the Canadian banks have minimal holdings in these risky assets. It is more the indirect impacts which an investor may need to be concerned with.

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Putting Cash to Work

May 13, 2011

When we're not discussing how the Canucks will win theCup, cash flow is a hot topic among many of us at QV.Positive, sustainable cash flow is a quality we hold in highregard when looking at our businesses and seeking outnew ones. As Darren highlighted in February, it paves theway for a company to repurchase shares, pay dividends,and fund growth opportunities. Simply put, it gives acompany options on how best to create shareholdervalue.

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Looking Beyond the Day to Day

May 06, 2011

This week commodity markets have taken a drubbing.Silver has declined in excess of 25%. Oil was downnearly 10% yesterday alone. Much of the recent gainsin commodities have been erased in a time framescarcely longer than a wink of an eye. Their rapid risefollowed by liquidation is an example of how in thisday and age the market is not driven by traditionallong term investing. Much of the recent stock marketmoves have been driven by untraditional and excessiveshort term speculation brought on by casinocapitalists; gamblers betting on future prices ratherthan investing with the intent to own part of abusiness over the long haul.

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Good Debt and Bad Debt

April 29, 2011

I recall watching a PBS documentary a few years back titled Secrets of the Parthenon; it described the historic significance and intricacies of this ancient Greek temple. It was and remains a majestic architectural achievement, made entirely of marble and limestone, and fabricated with such extreme precision in an age of manual technology. Built in 438 BC, this Athenian temple has survived centuries of harsh weather, rocking earthquakes, looting of its sculptures, and a damaging explosion when it was used for munitions storage in the 1680's. Despite all this, it still stands as a lasting monument of ancient Greece.

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Funny Paper, Funny Markets, Funny Profits

April 15, 2011

Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.
- Milton Friedman
Inflation expectations are rising. Record commodity prices are headlines. Silver hit a 31-year high. Gold, copper, crude oil, wheat and livestock have surged. Resource stocks and the Canadian dollar won big in Q1's sweepstakes. Bonds were losers. The gas pumps and grocery check-outs are telling us, this is not going to be pretty. In the measured tones of The Bank of Canada's April survey, "firms expect their output prices to increase at a greater rate over the next 12 months" and "driven by food and energy prices, expectations regarding total CPI inflation over the next two years rose..."

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Q1 Review

April 08, 2011

Markets climbed the proverbial wall of worry in the first quarter of 2011. Increased tension in North Africa and the Middle East, natural disasters in Japan, and the risk of sovereign credit defaults in Europe were not enough to shake investor enthusiasm. Recent gains in equity markets appear to be driven by continued positive economic news combined with the persistently low cost of money (low interest rates). Bonds underperformed equities for the second consecutive quarter with negative returns generated by longer duration Canadian bonds.

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High P/Es and High Returns

April 01, 2011

We recently met with a company whose core business is private equity investment. Some highlights from their investment strategy include: 1) finding businesses with high quality cash flows; 2) using financial leverage cautiously; 3) buying at a discount to fair value; 4) avoiding businesses highly correlated with commodity prices; and 5) staying disciplined. In keeping with its value-oriented philosophy -- similar to those at QV -- the company claims to be able to find around three good investment prospects per year.

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Transitory Inflation?

March 25, 2011

Recently, the New York Fed Chief William Dudley was seen publicly explaining how inflation in the US is not a problem for Americans. He grounded his thesis by showing that consumers can now buy an iPad 2 for the same price as an iPad 1, but with twice the computational power. "I can't eat an iPad!" someone shouted in response. Clearly, broad-based price increases have been felt by many.

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The Crisis in Japan

March 18, 2011

We write today's letter with heartfelt sympathies for the people of Japan as they deal with the devastating aftermath of last week's earthquake and tsunami. We are also tremendously thankful that QV employee Michelle Chang, who was vacationing in Japan when the earthquake occurred, has arrived safely back to Canada. It is extremely difficult for us to write about market implications from this natural disaster. At root is an enormous tragedy that has killed thousands, left many more thousands unaccounted and created unimaginable hardship.

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Black Gold

March 11, 2011

This week marks two years since the TSX hit rock bottom at just under 7,500. Today, the market has roared back to the 14,000 level with little interruption. Over this time period, oil has also been moving up from its low of $35 at the end of 2008 to over $100 today. The strength in the oil price has coincided with an improving economy, increased oil demand, and cheap money as discussed last week. As each piece of positive economic data was released, oil prices crept higher. When the turmoil in the Middle East and North Africa broke out, oil spiked as investors became concerned that supply disruptions were probable.

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"Let's Stop Global Whining"

March 04, 2011

On a recent holiday on the island of Maui, I parked behind a small pick-up bearing the above bumper-sticker, a dig at the fuss over global warming. Complementing the climate comment was another, "Yes, This is My Truck. And NO, I Won't Help You Move."

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This, That, or the other Thing

February 25, 2011

Maybe it's just the time of the year with people thinking about their RRSP contributions, but there sure is a lot of "advice" being offered. In glancing through the newspaper, there is no shortage of reasons to invest in gold ETF's, small cap stocks, emerging markets, etc. etc. The most compelling stories are usually backed up by the most recent returns. For example, both gold prices and the small cap index have gained roughly 30% in the past 12 months. Those returns comfort the potential investor who's hopeful there's a chance they'll be repeated.

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Why we love cash flow

February 11, 2011

We are in the midst of earnings season with a multitude of the companies we own reporting. Earnings per share are usually the first numbers reported outlining profits using accrual accounting. Earnings per share are more easily manipulated as certain decisions on depreciation (or other accruals) can be made to enhance earnings.

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新年快乐 (Happy New Year)

February 04, 2011

Happy Chinese New Year! According to the Chinese zodiac we have now entered into the year of the rabbit. It is supposed to be a year in which you can catch your breath and calm your nerves. It is also a time for negotiation. The directors at Small Cap Fund holding Maple Leaf Foods (MFI) appear to have taken this to heart. Maple Leaf Foods is a leading Canadian food company. If you eat bacon or bread, you've probably purchased their products from the grocery store at some point.

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The Crocodile

January 28, 2011

As Lewis Carroll's Alice, in pursuit of the rabbit, fell down the rabbit hole to Wonderland, she started to think of matters mathematical and geographical and poetic, to recover her bearing and sense of self. She recited the poem "The Crocodile" in the process.

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Value still exists, and it still rewards.

January 21, 2011

It's been a busy start to the New Year and we've witnessed several encouraging signs for sustaining growth. Flaherty further acknowledged Canada's rising household debt by tightening mortgage rules; Obama stepped closer to corporate America by recruiting General Electric's CEO to his economic advisory board; and earnings season has kicked off with some spectacular numbers from companies like Intel and Apple. However, as Joe emphasized in last Friday's Update, risks are building. Jobless rates remain high, US housing is still depressed, Europe's sovereign debt crisis lingers, and commodity prices have run-up significantly. Nevertheless, investors have upped their risk profiles by riding the momentum in equities.

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A reason to dump this small cap fund!

January 14, 2011

We've never really thought of this letter as a marketing piece, but more of a communication tool. I think you would agree that the title to this week's letter would fully support this notion.

The fourth quarter results for our small cap fund "trailed" that of the market. Who are we kidding, they were way behind. The fund gained around 8%. From our perspective we were actually pleased with the return given the risks we took to generate it. But in this supercharged market our tortoise shell is certainly showing.

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Q4 - Quarter End Review

January 07, 2011

Equity markets finished the year on a high note, rallying for most of the fourth quarter. Gains were made as investors became increasingly confident in the global economic recovery. The announced extension of the much debated Bush tax cuts and proposed payroll tax deductions provided more clarity and stimulus for the world's largest economy. Assets were also bolstered by the reintroduction of quantitative easing by the US Federal Reserve. These actions improved stock market sentiment in the short term, causing an increased appetite for riskier assets.

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Understanding the Rest of the Story

December 17, 2010

The other week Ian mentioned the deep freeze we were experiencing in Calgary. Like the stock market, the weather has changed. This week, I noticed a gentleman sitting outside Starbucks sipping on his latte. Here we go again, like the hit comedy series Seinfeld which was based on the concept of "nothing", QV is going to fill a page babbling on about the weather. If we were as entertaining as Jerry Seinfeld, we could probably pull it off. Unfortunately, we're more a group akin to his neighbour Kramer!

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Experience from Bad Judgment

December 10, 2010

In today's Globe and Mail, in the Lives Lived column, Tom Eisenhauer, writes a tribute to his Father, Andrew, who died October 28 in Lunenburg, Nova Scotia. He was 87. Tom describes his Father as a family man, engineer, entrepreneur, community leader and a good man.

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Reaching Your Goals - Consistent Investing

December 03, 2010

This week QV Investors was honoured to be the recipient of the Best Canadian Balanced Pooled Fund award at the 16th Annual Canadian Investment Awards and Gala. If you ask Leigh why he started QV back in 1996 he'd tell you it was to provide excellence in security selection, in portfolio management, and in service to clients. It has never been about winning awards. But the smile on his face when he found out about the award tells me that it sure feels good to be recognized.

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A Warm Visit with Crombie REIT

November 26, 2010

We have had a bone chilling week in Calgary. The weather dropped so low on Tuesday that the city was for a short period the second coldest place on earth behind the South Pole. Despite the deep
freeze, QV has not gone into hibernation. We have been busy analysing some new investment opportunities and revisiting the risks and opportunities within our existing holdings. On that arctic Tuesday afternoon we had the chance to meet with Crombie REIT's Donald Clow (President and Chief Executive Officer) and Glenn Hynes (Chief Financial Officer). They braved the miserable Calgary
weather to provide an update on Crombie's operations.

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Short term solutions are only band-aids

November 19, 2010

Since the Federal Reserve's November 3rd announcement of the Quantitative Easing 2 (QE2) program, the Canadian and US stock and bond markets have moved opposite the expected direction. It was anticipated QE2 would decrease yields and increase stock prices. It is evident that the effects of QE2 were already imbedded in the markets before the actual announcement. Yields increased and stock prices have been flat to down.

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Virtuous circle, or something all too familiar?

November 12, 2010

With US Thanksgiving two weeks away, how many American families do you suppose will serve turkey with their holiday meals? Before taking a guess, Bloomberg has reported US wholesale frozen turkey prices have reached an all-time high. To be candid, I don't know what the answer is. And in all likelihood, the 28% annual price increase is not going to affect a timeless holiday tradition a great deal.

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What is wrong with this bond anyway?

November 05, 2010

Whatever the ultimate outcome of Mr Bernanke's purchase of bonds, Quantitative Easing 2, (we are certain it is unlikely to be of an enduring benefit), we recognize that QE2's anticipation has pushed bond, commodity and equity prices to new recovery highs in US dollar terms. The dollar, alas, has gone the other way. The fall in short-term bond yields has created the steepest interest rate curve since the Second World War. In other words, the difference or spread between short and long rates has never been greater.

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Let the Market Clear!

October 29, 2010

We recently met the management team of Whistler Blackcomb during a road show for their initial public offering. In short, we were impressed with the executive team and the underlying asset but a few issues will keep us from investing.

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Q3 - Quarter End Review

October 15, 2010

Equity market performance in the third quarter was nothing short of spectacular. It did not matter if an investor owned Canadian equities, up 10.3%, US equities, European equities, or even emerging market equities. The returns were all positive.

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Nortel, Real Estate, Bonds?

October 01, 2010

When people are discussing their holdings of government bonds at yields less than 4% per year, the conversation is considered dull. Remember the good old days in 1999 when stocks like Nortel or Pets.com would provide capital gains of 4% on some days, or in 2006 when real estate in Kelowna was going up at 4% a month. This week we have had strategists from two of the Canadian banks come through our office. The biggest themes they discussed and the headlines in the news are the same - investors love bonds.

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Technology: Protector and Friend

September 24, 2010

When I read about the speed of advancement in technology, it's hard not to conjure up scenes from The Terminator. Beyond the forecast of how the world would end, the movie portrays how moving too far, too fast can be detrimental to civilization. Instead, a steady pace in innovation is advantageous. From the printing press to the Internet, technology has shaped the world's economic landscape by developing industries and creating jobs and wealth. In today's environment of high unemployment and low productivity, is it any wonder that governments are looking to businesses to innovate and spur growth?

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Corporate Cash Conundrum

September 17, 2010

We had a chuckle when reading an article in Wednesday's Globe and Mail titled: "Budget cuts leave no rest for Irish travellers". The article claimed that motorists using Ireland's new motorway network should expect to find themselves bursting for the bathroom because the government can no longer afford to pay for road-side rest stops. For the Irish, not only has the punch bowl been taken away, the toilet bowl has been taken away too!

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More of the Same - No Whiff of Candour

September 10, 2010

The government can't figure out what to do to revive the economy. As of last week, the S&P had recorded a 10-year loss of 1.30%. So who in their right mind wants to be an equity investor? Johnson and Johnson issued 10-year bonds at 2.95% but pays a dividend of 3.70%. Maybe that is all you have to know.

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Why is US Housing Important?

August 27, 2010

The run up in house prices prior to the crack in 2007 resulted in euphoria. Refinancing was common as homeowners increased their mortgage as their house price increased. Typically, the new mortgage was done at lower interest rates. Homeowners used this cash to purchase boats, vacations, renovations and so on. One word which could have been used to describe these individuals was confident.

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Bond Bull or Bear?

August 20, 2010

According to Historychannel.com, on this day in history 99 years ago, the first around the world telegram using commercial service was delivered. It was sent from New York and it was relayed through 16 different operators. It took 16.5 minutes to be delivered. We can now send an investment letter from Calgary to people around the world in a nanosecond, at the push of a button. Amazing, isn't it? The communication and technology revolutions of the past hundred years have allowed critical thinkers around the world to debate in real time. One such debate this week was triggered by an article in the Wall Street Journal this Wednesday titled "The Great American Bond Bubble" by Jeremy Siegel and Jeremy Schwartz.

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The Confused Fisherman!

August 13, 2010

Happy Friday the 13th! It's a rather gloomy end to the week in our fair city, wet and cold for this time of year. We won't let this get us down though, especially if one enjoys the fine sport of fly-fishing. One of the pleasures of living in Calgary is fishing the Bow River in the summertime. Unfortunately, over the years many people have discovered this to be an enjoyable pastime and the crowds on the river have increased, unless it's raining.

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Expecting the Worst

August 06, 2010

Worry kills. So don't do it. But some days we arrive at the office, we read the news, and we want to turn off the computer, sell everything or ignore everything and start the weekend early.

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Cheap or Expensive?

July 23, 2010

If we read through analyst reports or newspapers, we would receive differing opinions on whether the stock market is cheap or expensive. John Hussman helped by providing an analysis of the price to earnings ratio of the S&P 500 using forward operating earnings over the past 50 years to help answer this question. According to his research shown in the chart below, the average forward P/E of the S&P 500 is 12x. If we exclude the technology bubble, this average drops to 10.6x. Currently, the S&P 500 market is trading at 15x forward earnings while the S&P/TSX Composite is trading at 15.5x. Based on this information alone, the market looks expensive.

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A Whole Lot of Noise

July 16, 2010

The week started with the Spaniards defeating the Dutch in a 1- 0 extra time victory to conclude South Africa's World Cup. The vuvuzela horns which hummed throughout the tournament causing viewers from around the world to ask; what is that noise? have been, at least temporarily, silenced. Despite this, Calgarians have yet to receive any peace and quiet. The steady buzz from vuvuzelas has been replaced by the rodeo horn at the Calgary Stampede. For the brave cowboy that can last a full eight seconds on the back of a forbidding bull, the prize can be sweet. For the first time ever, prize money will top the $2 million mark.

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Deflation Investing

July 09, 2010

The second quarter ended with a slump in leading indicators, in confidence, in equity, and commodity markets, in the Canadian dollar, and in interest rates. Bond yields, all along the yield curve, fell to new lows for the year. In the U.S., 10-year yields fell below 3.00% to 2.95% and the 30-year bond fell below 4.00%. Bond prices are at new highs for the year. Yields have not been this low since April of last year. Only in the eye of the financial storm in November and December 2008, when the 10-year US bond traded down to 2.4%, did they trade lower. In Canada, the same pattern prevails; the respective 10 and 30-year yields are 3.08% and 3.65%.

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The Fence

June 25, 2010

The fence around the area holding the G20 conference is three metres high. A formidable barrier that ensures each participant stays on his or her respective side. The new law passed by the Ontario government for the next two weeks will also assist in curtailing fence jumpers. According to the Toronto Star, Ontario passed "regulation that empowers police to arrest anyone near the G20 security zone who refuses to identify themselves or agree to a police search." Obviously, no one is going to the other side very easily. We believe this will also be a theme inside the conference rooms. Let me explain.

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Swimming with Sharks

June 18, 2010

On this weekend back in 1975, Steven Spielberg's summer blockbuster Jaws was released in theatres across America. The film's musical score, a simple alternating pattern of two notes, quickly became a classic piece of hair raising suspense music. As a child growing up on the prairies, the musical score haunted me during each visit to the ocean. "Duh- duh, Duh-duh".

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Current Policies & Reasons Why

June 11, 2010

Fiscal and monetary policy settings are vitally important today. As the world's banks and economies are so leveraged any negative wiggle or change, any restraint or removal of stimulus, becomes magnified through the system and the markets. Debts create the preconditions for excessive volatility. We've got it.

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Sailing on the Red Ink Sea

June 04, 2010

Those who govern, having much business on their hands, do not generally like to take the trouble of considering and carrying into execution new projects. The best public measures are therefore seldom adopted from previous wisdom, but forced by the occasion.

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What I've Learned - Mark Dyki

May 28, 2010

To me, monitoring the process of learning is like trying to watch the hands of a clock move. I'm not insinuating that I am a slow learner but more to the point that progress cannot be appreciated until you remember a snapshot of your knowledge from a point in the past and compare it to today. It has almost been two years since I started working at QV Investors' as a research associate. As a new member of the industry working at a generalist firm, I have learned a little bit about a lot of things. Thankfully, as I sat down to write this letter I realized that my knowledge gained over the last two years could not quite be confined to just one page so I'll focus on a very obvious, but very important lesson.

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An update from Stephen Roach

May 14, 2010

This week we had the chance to sit down with Stephen Roach, Chairman of Morgan Stanley Asia, while he was visiting Calgary. Mr. Roach served on the research staff of the Federal Reserve Board from 1972 until 1979 and was the Chief Economist of Morgan Stanley for 16 years prior to becoming the Chairman of Morgan Stanley Asia in 2007.

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What happened?

May 07, 2010

Did a trader hit the 'b' versus the 'm' button and sell a billion shares instead of a million? Did a trader sell too much Proctor & Gamble stock, a member of the Dow Jones Index and set off a panic?

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A Bunch of Black Swans

April 30, 2010

Worry is us!
At the height of the suspension of some international flights resulting from the Icelandic volcano's ashcloud, a client asked about its market impact. Despite the outcry over too rigid a safety call and the airline angst over costs, we thought the impact modest. After all what is a week when lives are at stake.

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A change in tone...

April 23, 2010

The main tool for Central Banks to effect changes in monetary policy is by changing the target for the overnight rate. This is the rate at which banks borrow and lend funds among themselves. Lending and deposit rates are then set at specific spreads over this rate, depending on term to maturity and credit quality. The Bank of Canada set the target for the overnight rate in April 2009 at 0.25%, the lowest on record. The Bank of Canada argued at the time that the global recession was deeper than anticipated and the unprecedented easing stance was required to stimulate economic growth. The Bank committed further to keeping their overnight rate at 0.25% until the end of the second quarter, 2010. This commitment was conditional on the Bank's outlook for inflation.

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Inching from Stimulants

April 16, 2010

For 2010, the 2009 policies of low interest rates, fiscal spending, and bankruptcy salvation (now in the form of sovereign bailouts) continue stretching the equity markets into post-crash highs. Canadian equities are up over 60% from their lows. Canadian housing is frothy. Commodity indices are firm and rising. Investor and corporate confidence is high. Leading economic indicators have rebounded from the depression of last spring and economic growth numbers have been mid-single digits over the last two quarters. Hence, we have continued to hold the companies garnering some of the growth the stimulus has provided, but not the fluff.

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Refinancing Growth

April 09, 2010

On March 30, Athabasca Oil Sands Corporation raised $1.35 billion in an initial public offering co-led by GMP Capital and Morgan Stanley. This is the largest capital raise in over ten years on the Toronto market.

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Investment Indigestion

March 12, 2010

The 2010 Canada Budget includes an end to the medical expense tax credit for liposuction. Could there be a more symbolic gesture for "cutting the fat"? Unfortunately, fiscal imbalances require much more than a tummy tuck. In the US, Barack Obama has promised to trim discretionary spending (excluding defence and homeland security) by $250 billion over the next ten years. With the US deficit tipping the scales at over a trillion dollars, this too looks more like cosmetic surgery than a permanent weight loss program.

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Petitions for Patience

March 05, 2010

The Prayer of Saint Francis speaks to the balance all need in their lives between satisfying appetites and maintaining sanity and good will. Balance in government, business and finance allows management to sustain a solid franchise.

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Why do we talk about book value?

February 26, 2010

The much anticipated Berkshire Hathaway annual letter penned by Warren Buffett will be released tomorrow. Book value has always been a key topic for Mr. Buffett as well as QV. Book value (BV) is defined as the assets of the firm minus its liabilities or simply its net worth. The BV grows as the firm generates net income or profits. If a firm does not pay a dividend, the BV will grow by the earnings each quarter. If the firm pays out a dividend, the BV will grow by the net earnings minus the dividend.

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Why the Materials Underweight?

February 19, 2010

The index that we get benchmarked against has a 31.9% weight in Materials. The QV Small Cap Fund is underweight the sector with an 11.0% weight. Sometimes we get asked why we are taking on such a big risk by being so underweight. We don't see this positioning as a big risk. Our job is to preserve and grow capital, not to mimic the benchmark. Eyes at a race track tend to focus on the horse with the best recent race record. In investing, sectors with successive years of outperformance tend to garner the most attention. Indices can become overly skewed to areas of the market at exactly the wrong time. This is akin to betting on the fastest horse when the bookie is gladly offering the worst odds.

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Market Outlook

January 29, 2010

"We believe the S&P 500 will close out the year at 1320 ..." This is a recent quote from one of the typical market outlooks one finds at this time of year. Exactly how do you get a target of 1320 on the S&P 500? Easily, you speak confidently, throw around a bunch of
numbers which can't be outright disputed and pretend your formulas are scientifically based. For those of us involved in giving advice in this industry you know the importance of having an outlook. It often doesn't matter if it is right or wrong you just need a point of view.

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Emerging Markets - The only place to be

January 22, 2010

Developed world ... sounds like we're all done. It's been a good run, now pack up your bags and get the heck outta here. The picture of a massive growth phase in emerging markets is hard to argue. The headlines above are a few we've pulled out of the paper this week. There is no shortage of cheerleading for this theme. Let us be clear, we too understand the importance of these emerging countries and their impacts on global growth. But history is riddled with examples of emerging market problems. Even if this time is different, famous last words, the growth will not be without bumps. The really good news that investors of the developed world seem to be depending on has little room for error. We wholeheartedly disagree with the quote above from Mr. Palma that emerging markets are really the only place to be. Very rarely do the bulls on this theme discuss valuations or domestic competition driving margins down for these supposed sure bets.

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Why a weak US economy matters.

January 15, 2010

Canada has faired relatively well in this extremely difficult economic environment. Canada did not have to rescue any Canadian Banks like in the US, nor did the Federal Government have to come up with an insane number of programs (e.g. cash for appliances, and TARP) to keep the economy alive.

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Year in Review

January 08, 2010

We are often asked by potential new clients what our performance looks like through a cycle? When does our style work best and when does it not? Well the good news is we seem to understand our process and how it responds to a given market/economic backdrop. The bad news is when we tell potential clients we generally preserve capital in tough markets and won't keep up with very strong ones, we aren't kidding. The chart below shows our annual returns going back to the late 1990's.

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Christmas Cheer

December 18, 2009

Although 2009 had a miserable start, capital markets have been in a gift giving mood for most of the year. Near zero interest rate policy combined with unprecedented global fiscal stimulus resulted in assets catching a bid. A year ago at this time, companies with excessive debt were at risk of going bankrupt. Today access to capital is abundant. This week alone, I am having difficulty counting on one hand all of the Canadian Real Estate Investment Trusts that have come to market to raise funds. Even Dubai World, the poster child of excessive borrowing in the credit bubble now appears able to refinance. To top off the twelve month turnaround in equities, Time Magazine has named the stock market's Santa Claus; Federal Reserve Chairman Ben Bernanke "person of the year", crediting him with keeping the economy from falling into an abyss.

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It's all about your expectations!

December 11, 2009

I recently had the pleasure of seeing my dentist for a root canal. Even typing the words sends a jolt through my spine, but you know what it wasn't that bad. I expected it to be terrible and when it wasn't I felt relieved. Then just the other day I went in to get a little mole removed. No, usually I don't have this many medical mishaps. Never having had this done though I thought they'd just zap it off and it would be painless. Well a few stitches later, blood on my shirt, and me wondering if "Edward Scissor-hands" had taken up the practice of mole removal I was done. Now I wouldn't say it was painful, but because I wasn't expecting any discomfort it was disappointing.

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Surprise!

December 04, 2009

I haven't been able to decide what has been more of a surprise - the better than expected job reports today, or the reaction in North American markets.

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Oh My, Oh My, It's Debt Repayment Time for Dubai!

November 27, 2009

On Wednesday Dubai asked creditors to agree to a debt repayment standstill as they look for ways to refinance obligations outstanding from their gluttonous growth of the past decade. A Dubai default would be the largest sovereign debt default since Argentina defaulted on foreign bond repayments in 2001. Neil Reynolds, in a November 25th article in the Globe and Mail, reminded us that if you take a look back over history, sovereign debt defaults are really not all that uncommon. More governments than not have at some point in time defaulted on their financial obligations. New Zealand, Australia, Canada and the United States are some of the very few exceptions. The lack of default from these countries may be more related to their relative youth than their fiscal prudence. As fiscal deficits around the world continue to balloon, we must consider the risk of continued sovereign defaults.

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Fixing the System

November 20, 2009

On Nov. 18th, Venezuelan President Hugo Chavez stated in a televised address that he wants to find a different way to calculate his country's GDP. This was after the release of the third quarter 2009 GDP figure of negative 4.5%. He stated "We simply can't permit that they continue calculating GDP with the old capitalist method."

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St Andrews Sprint

November 13, 2009

The G20 finance ministers met at St Andrews last weekend to provide a progress report on the economic and financial actions put in place since the onset of the financial crisis. Trivia buffs know that the beach at St Andrews is also the setting for the opening scene of the 1981 film Chariots of Fire. In that classic scene, men run bare foot along the wet sand as the Chariots of Fire theme song resonates in the background.

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What is it you do again?

November 06, 2009

Our philosophy - is to buy a portfolio of sustainable and enduring businesses run by capable, committed and candid people. We select equities on the basis of good value. We hold positions over an indefinite period of time.

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Trick or Treat?

October 30, 2009

The tradition of trick-or-treating dates back to the middle ages. The act of people going door to door resembles what was known as "souling," in which people went door to door begging for food. In exchange for food, the beggars would pray for the donors deceased loved ones.

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A perspective on time

October 23, 2009

This week the U.S. Treasury and the Federal Reserve Board unveiled measures to cut executive pay at firms which were recently bailed out. In addition, they will monitor banks' pay policies to ensure they don't promote excessive risk taking. Any measures which move us down the road to incentives which reward long-term value creation rather than short term gambling we applaud.

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Quarterly Review

October 16, 2009

During the third quarter of 2009 the Canadian market saw widespread appreciation as eight of ten sectors posted gains. The small cap market was even stronger with nearly every sector posting positive double digit returns. The areas which performed the best were those most sensitive to economic expansions, whereas the weakest were the more defensive groups.

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Choose your Dance Parnters Wisely

October 02, 2009

"Music begins to atrophy when it departs from the dance" -Ezra Pound
If the market was a sonata, the Conductor's arms would be mighty tired. They have been working overtime, applying a magnificent crescendo since the middle of March. If the music was accompanied by dance, the floor would have been jam-packed with up tempo movements of all forms, from an eight count Charleston to my very bad version of the Fox Trot. Luckily, my awkward motions would have likely gone unnoticed under the exuberant energy oozing out of the dance hall. Over the past six months, as long as a person/investor was on the dance floor/in the stock market, they were bound to be having a good time.

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What does the Q & V stand for again?

September 25, 2009

Jeremy Siegel, who is a well regarded professor at the Wharton School of Business, has written books outlining the benefits of long term investing. In his most famous book titled Stocks for the Long Run, Dr. Siegel has studied asset class returns in the US market over the past 200 years. He has determined that the highest return with the least volatility or risk would be awarded to those invested in the stock market. In his follow up book published in 2005 titled The Future for Investors: Why the Tried and True Triumph over the Bold and New, he outlines that the superior returns are greatly dependant on the price or valuation at which a stock was purchased. Dr. Siegel summarizes the following:

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Rubber Chicken Risk?

September 18, 2009

I was at my nephew's third birthday party last weekend. A clown was in attendance and had the children mesmerized with her balloon animals and rubber chicken gags. To be honest, I was pretty impressed by her ability to make butterflies out of balloons. The rubber chicken skit however, felt a little stale. After being a staple for comedians around the world for years and years, hasn't the rubber chicken overstayed its welcome? Apparently not. We started the week with the U.S. announcing tariffs on Chinese rubber tire exports to America. The Chinese swiftly responded by saying they would investigate complaints that U.S. companies were dumping chickens into Chinese markets at below market prices. This is a dispute with undertones that make me wonder whether politicians are borrowing ideas from a comedian's repertoire.

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Hakuna Matata

September 11, 2009

You may recognize the above lyrics from the award winning Walt Disney production "The Lion King". In case you have forgotten, when the baby lion Simba was distraught along came his new found friends, the warthog Pumbba and the lemur Timon. They brought their philosophy of hope. We won't bore you with the details and probably shouldn't compare Federal Reserve Chairman Bernanke to a lemur or President Obama to a warthog, but if there is a stock market theme song for 2009 it is Hakuna Matata!

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What Credit Crisis?

August 28, 2009

Financial and Technology sectors typically lead in the early stages of the business cycle. The above commentaries from two of the heavy weights in those industries are suggestive that we are through the worst of the Great Recession. Indeed, there has been a "V" shaped recovery in credit markets with credit spreads improving substantially over the past six months. By most measures, the cost of borrowing is now at or below pre-Lehman Bankruptcy levels. Refinancing activity has been robust as individuals and corporations alike take advantage of the lower costs of credit.

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What are we worried about?

August 14, 2009

In his August Insight, Gary Shilling superbly outlines six key factors which he believes will restrain global growth. Dr. Shilling is a US economist who correctly forecasted the most recent global slowdown, and he was also one of the few voices calling for a recession in the early '70s. The 1973-74 recession he predicted resulted in a stock market decline of 45% over that period. Here are his main concerns which we share:

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Second Quarter Earnings Season

August 07, 2009

We are in the midst of the Canadian earnings season. Below you will find a snapshot of results from some of our largest holdings that have reported this week:

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What a Fight!

July 24, 2009

The month of July has been like a boxing match. But not just any boxing match, this one's an epic battle. A real "one for the ages" bout, the type of fight that inspires thoughts of greatness, think: Sylvester Stallone in his prime. The main event involves two veteran sluggers: Mr. Bull vs. Mr. Bear. They have been arch rivals from the beginning with staunchly opposing views of the world. Mr. Bear takes no prisoners. Mr. Bull, although suffering a string of losses in the recent past, has carried many triumphs over the years.

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That car won't pay you dividends

July 17, 2009

As investors, we are often influenced by numbers and reports based on the near term. It is very apparent that the majority of businesses in the economy are being negatively impacted by the current circumstances. What we have tried to do is concentrate our holdings in businesses which have the franchise and balance sheet to see them through these times.

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Q2 2009 - At a glance

July 10, 2009

The Fund rose approximately 16.0% (before fees) in the quarter compared to a gain of 29.7% for the benchmark BMO Small Cap Index (unweighted). The under-performance relative to the benchmark was primarily a result of a continued large underweight in the Materials sector. The BMO Small Cap Index had a 30% exposure to these highly cyclical and economically sensitive stocks whereas the Fund had 7% invested. Our overall focus on more stable businesses rather than cyclical ones held us back from participating fully in this quarter's stock market surge.

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A Confession

June 26, 2009

First and foremost, we advertise ourselves as fundamental, bottom up, company analysts. We must know with whom and in what we are risking our clients' dollars. And we are adamant in hewing to our categories of corporate tests - management, their financial record, their competence in building a business franchise and their awareness of potential risks, their commitment to managing cash flow, paying dividends and maintaining a fit balance sheet. At a minimum, we must tick all these boxes before selecting a company for inclusion in our portfolios.

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Return on Equity

June 19, 2009

We often speak of financial return and quality interchangeably around the hallowed halls of the QV campus. Speaking of our campus, we are about 60,000 square feet, sorry make that 6,000 square feet, of comfortable office space attained during the peak of the Calgary real estate bubble. Commercial real estate timers, we are not. We may not be as large as some of our competitors but we do offer coffee, tea, or water to all of our guests. If you want a pop or juice, you'll have to buy it yourself; come on, you know we are value based investors.

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Cyclicals versus Defensives

June 12, 2009

Is nothing sacred in this upside down world we live in anymore? Just when you think you know how to beat the market by selling in May and going away, it doesn't seem to work. How about the old adage, "don't fight the fed"? Rates were falling in 2008 alongside a plunging market so the historical wisdom of the market again was put into question.

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A Spring in the Market's Step

June 05, 2009

For three months, from the March lows, stock markets, commodity markets, and the Canadian dollar have put in rallies of 20% to 40%. Moves of 100% or more in small companies, distressed resource, and bank issues were common thus partially reversing last year's collapses. Ian Cooke ranked the recent performance of the shares in the BMO Small Cap Index relative to their profitability. As you might expect in a speculative market companies with no profits appreciated the most.

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Dynamic in Approach, Grounded in Principles

May 29, 2009

This week is rich with illustrations supporting the old adage "the only constant is change". Nortel's market cap is less than $100 million today compared to $380 billion at its peak. Jim Flaherty's estimate of the budget deficit is now projected to be a record $50 billion compared to $34 billion three months ago. Conan O'Brien is taking over the reigns from Jay Leno on the Tonight Show. Although all of these are tremendous headline grabbers, they aren't the news getting the most airtime at water coolers. That spot is reserved for the famous red haired comic book character named Archie Andrews. Apparently after over sixty five years of chasing girls, he has finally decided to marry Veronica Lodge.

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"Grab that cash with both hands and make a stash" - "Money", Pink Floyd

May 22, 2009

Initial Public Offerings (IPOs) were all the rage during the technology bubble. In 1999 there were a total of 492 IPOs in the United States totaling $63.7 billion. In 2000, the number was 422 with a total dollar amount of $97.35 billion. This list contained many names people will remember with disdain such as Priceline.com or Pets.com. They raised money because the market was hot and money was available.

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Earnings Season

May 08, 2009

It's been a busy week with many of our companies reporting their quarterly earnings. Some have been relatively good and others down right terrible. The consensus earnings expectations for the market have been reduced significantly for 2009 after market analysts were slow to react late in 2008. For many companies, analysts may have overshot estimates on the downside. We are starting to see what the market refers to as "upside earnings surprises."

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May, may be full of substance

May 01, 2009

I was a K-car kid. That and a Dodge Caravan were the underpinnings of my mobility growing up. They were popular cars and were largely credited with saving Chrysler from near bankruptcy in 1979. Witnessing the official demise of Chrysler yesterday could put a question mark on Peter Lynch's simple investment principal; "invest in what you know". To be fair to Mr. Lynch, Chrysler's weakness has been evident for a long time and its popularity seemed to fade with the now long gone K-car. Chrysler took their eyes off the road and the K car and the Caravan are rear view memories. Today, without offering products that the market wants and a balance sheet to get them through the tough times, the business became road kill. With so many options out there, will Chrysler really look that attractive after slimming down their debts? Until they can offer a product with substance while generating a return on their capital invested, we will remain skeptics.

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Inflation vs. Deflation

April 24, 2009

My father always referred to economics as ikcy-nomics. I agreed with his conclusion in University as I studied obscure theories and hideous formulas. However, economics is essential to understanding what is occurring within the current marketplace. It is not the obscure theories, but rather the understanding of basic financial relationships which we focus on.

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Finally Some Relief

April 17, 2009

Thirty nine years ago to this day, a colossal sigh of relief resounded around the world. Four days after Commander James A. Lovell famously said "Houston, we've had a problem", the crew of Apollo 13 successfully returned to earth. Against all odds, they survived an explosion on their space shuttle while 200,000 miles from home. Today, in a much less humanitarian context, relief is again present. The stock market has recently reminded investors that it doesn't just go down and all is not lost.

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Cash is King...for now

April 03, 2009

The best performing investors over the past 12-18 months have hoarded cash, a good call to say the least. Currently, the average investor is acting as they have historically; they are chasing what has worked rather than considering the opportunity or risk ahead. People see that those who have invested in treasury bills and money market funds have not lost as much as those invested in balanced and equity funds. Worse yet, many have sustained substantial losses, panicked and sold in a distressed environment to hold cash; an investment which yields near zero. The chart below is a picture of fear, it shows the percentage of dollars being ploughed into money market funds.

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Lessons from a Surgeon!

March 27, 2009

If I am ever faced with the need for heart surgery, I wouldn't want a brain surgeon performing the operation. I would want the most experienced and knowledgeable heart surgeon. If I was facing what some call the worst recession since the Great Depression, I would want two recession specialists in this area. We are facing a serious recession in the world today, and two very experienced and knowledgeable economic surgeons are in the operating room.

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Seasons Change

March 20, 2009

After a cold winter we welcome with open arms the first day of spring. But as a radio commentator reminded us, "it's only 274 days until winter again". It is not only those directly involved in the investment industry which have become "the glass is only half full" types, heck the glass is shattered for most!

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Be Aware

March 13, 2009

With today being Friday the 13th and the Ides of March fast approaching, there is ample ammunition for fear mongering. We aren't going to go there today but we do reiterate the importance of exercising caution. In an era where we are being bombarded with negatives, we thought a few constructive data points should also be highlighted:

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Ownership Equals Committed Stewardship

March 06, 2009

We think property ownership encourages a person to buy into society. We think ownership allows for increased productivity, responsibility and stability. Pride also comes with ownership and may be reflected in a homeowner's pristine lawn or a car owner's well presented automobile. While we do not own the shares, we like the intent behind the WestJet slogan - "Because Owners Care". We think human beings tend to take better care of the objects we own, versus rent. This concept does not change when it comes to running a business.

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Remember China and India?

February 27, 2009

Remember the inundation of articles over the last few years promoting the notion of infinite demand in China and India for commodities. The Chinese population was reported to be moving into cities at the pace of one New York City a month.

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Don't Buy Stocks for 2009!!!

February 20, 2009

Two weeks ago the subtitle of our letter was -
Investment Manager Marketing - BEWARE. Our marketing department would be outraged by our title in this week's letter. But hold on, before we are delegated back to the "research room" let us explain ourselves. First off, we have no marketing department, secondly there is one key word in the above title, and it is for. When we say don't buy stocks for 2009 it is based on the premise that investors buy into stocks for the potential to see share prices rise as the earnings of a corporation grow. This element of earnings growth will be absent in the near term. So if you are focused on growth in earnings for 2009 you'll be sorely disappointed and probably figure it's just best to sell.

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Quality - It's all how you define it

February 06, 2009

Investment Manager Marketing - BEWARE
Our portfolio of quality companies with strong management, blah blah blah. How many times have investors heard about the quality companies their manager owns? Just this week there was a column on a hedge fund manager who has regularly been profiled in the media. The column reported this manager had a loss of 81% last year. Many of the manager's investments were in illiquid Russian and private companies.

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Brand New Crisis

January 30, 2009

2008 was the year of the financial crisis and it appears that 2009 will be the year of the economic crisis. In our December fifth, Weekly Update we suggested that even more dismal economic headlines should be expected in the New Year. We have not lived through much of 2009 yet and these unnerving articles are already appearing in abundance.

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Misconceptions in Finance

January 23, 2009

Many years have passed since I finished my business degree, but academic misconceptions in finance remain. Dividends are promoted as payments made by companies that are unable to grow. Business textbooks state the only reason people will buy these companeis is due to their quarterly cash enticement.

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Potemkin Villages Everywhere

January 16, 2009

The year was 1787. Empress Catherine the Great was touring Crimea, now part of her Russian Empire. General Grigori Potemkin hosted her excursion, where she saw from her carriage, flourishing villages off in the distance. She concluded Crimea was a valuable asset and the General was doing a fine job managing her bounty. For him, initially this meant accolades. Eventually he became the most powerful man in Russia. Legend has it that General Potemkin staged the entire thing. Crimea was utterly impoverished. In a desperate attempt to impress the Empress, he had portable stage fronts built and moved along the landscape. These facades were elaborate, complete with eye-catching structures and actors. No one knows for sure whether or not the Potemkin village story is true, but the term "Potemkin village" lives on to describe false fronts in both the material and metaphoric sense.

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2008 Portfolio Review

January 09, 2009

PERFORMANCE - The QV Canadian small cap model portfolio declined 16.97% in the quarter, versus a loss of 30.41% for the benchmark BMO Small Cap Index (unweighted). The annual loss for the Fund was 29.54% versus a decline of 49.68% for the benchmark index. (These returns are gross of fees and are representative of our internal model portfolio, other products' returns will differ somewhat). The global equity plunge in the fourth quarter of 2008 was historic in nature, broad based, and most acute in assets which are considered "risky." Canadian small cap stocks would fit into the risky category and significantly underperformed their large cap peers. The Fund outperformed both the small cap and the TSX Composite index, but this offers little comfort given the substantial decline.

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Investment Industry - Ba Humbug

December 19, 2008

Sorry for the less than cheery title to our final letter of the year, but how else do you describe it? You may find it surprising though, we are not in fact referring to the 2008 stock market crash. Rather, the recent criminal actions of individuals in our industry. Mr. Bernard Madoff, revered former Chairman of the NASDAQ, genius hedge fund manager, and one of the greatest white collar criminals of all time. You sir are a disgrace and an embarrassment to the people in this business who act with integrity and care for their clients.

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The Dreaded "R" Word

December 05, 2008

In times like these no one has the answers. Neither the government, nor the self-proclaimed economic experts have instilled much confidence in the public. People are becoming more and more uneasy with the situation and want answers. In this regard it appears there is one industry which is proving to be recession-proof, the industry of fortune telling. A recent interview in the Globe and Mail discussed Toronto clairvoyant Deborah Levin's booming business. Her new clients are overwhelmingly interested in their financial futures, she says. "A lot of the new clients I'm getting were maybe at one time total sceptics, but they're at a loss, they've tried everything. I'm seeing a lot of professionals, people in the banking industry, a lot of small-business people, a lot of entrepreneurs ..." The experience of Ms. Levin is illustrative of the level of anxiety which is growing amongst the general public.

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Stimulus Please

November 28, 2008

Today is "Black Friday" in the United States; the official beginning of the US Christmas selling season. This term is used to reference the Friday after Thanksgiving. It originated in Philadelphia in the 1960s to refer to heavy traffic flow, but the media and retail industry use the term to indicate retailers showing a profit or "black" on their income statement. This year looks like it will be tough sledding with consumer confidence as low as it is. Overstock.com, which is a company that liquidates excess inventory for retailers, can't believe the number of Gucci and Prada products being sent for clearance. Excess inventory means big discounts and lower profits for the retail sector. Other sectors such as the automakers and the banks are also feeling a lot of pain. As an example, the US financial services sector has eliminated over 120,000 jobs year-to-date.

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Book as a Measure of Value

November 21, 2008

"...it's not been possible to completely avoid the unprecedented global liquidity crisis of the last few months" - Ed Clark CEO of TD Bank commenting on TD Bank's profit warning and asset write downs earlier this week

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Top Ten Update

November 07, 2008

The credit crisis has clearly evolved into a crisis of confidence. This is impacting the economy in a very real way as business and consumer spending has ground to a halt. This environment is stress testing business models to an extent we have not seen in decades. The feeble franchises are failing. Portfolios and Portfolio Managers are also being stress tested as some companies that seemed like profitable investments in the good times are quickly turning into liabilities.

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Just Your Average Joe

October 31, 2008

Here we are, Halloween, one of my favourite times of the year. Ahhh, the tootsie rolls and the little munchkins dressed up as spooky ghosts and goblins is just the diversion most of us need right now. To top it off, the local Starbucks is giving free coffee to those who dress up for the big day. In this bear market we're not going to miss this chance. This year I've decided to go as Joe the Plumber, I'll be the guy with the low cut jeans and the media frenzy!! I give the other Joe credit for creating his fame; it's not easy being "an average Joe", there's lots of us around.

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How Things Change

October 24, 2008

Over the past year there have been extreme changes on so many fronts. In November of last year the front cover of India's national newspaper displayed a cartoon of an indestructible sacred cow in a superman costume celebrating the new found wealth brought by the great bull market. Fast forward less than a year and the Bombay Stock Exchange, like so many other exchanges, is trading at less than half of its value from a year ago.

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Sporting Contests Have Two Halves

October 17, 2008

What a week this has been! Currently, governments around the world are trying to alleviate liquidity problems in the first half of this economic environment. The halves of this sporting contest can be separated into liquidity concerns in banks and a slowdown in the economy.

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When the Going Gets Tough...

October 03, 2008

It is tough out there. The S&P 500 has declined 29.8% from the peak reached at this time last year. According to data provided by Myles Zyblock at RBC Capital Markets the current decline is in-line with the average 29.7% drop in the S&P 500 during other bear markets over the past fifty years. It is in times like these that fortunes are won and lost. We have witnessed major financial institutions with histories that go beyond a hundred years evaporate over a weekend. On the flipside, some are attempting to strengthen their presence and competitive position in major ways. As an example, this morning Wells Fargo bid $15.1 billion for all of Wachovia, including its toxic liabilities. If successful, Wells will become the largest deposit taking institution in the United States. Wells Fargo has a reputation as one of the best managed banks in the world. Despite all of the doom and gloom, especially in the US Financial sector, Wells' stock price is actually up year-to-date.

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Update on RBC Dexia

September 30, 2008

To our Valued Clients,

Market volatility and uncertainty over the state of global financial institutions has resulted in many people questioning the solvency of their own financial institutions which hold their assets. As most of you know, RBC Dexia provides custodial, record keeping and valuation services for QV Investors pooled funds. The money you invest in our pooled funds is therefore held in safekeeping for you at RBC Dexia. RBC Dexia is jointly owned by the Royal Bank of Canada and Dexia SA of Luxembourg. RBC Dexia, formerly known as the Royal Trust for Canadians, was formed in 2006 through a joint venture between these two institutions.

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Setting Expectations

September 26, 2008

There has been so much headline news yet so little of it seems to make much difference in this environment. The investment in Goldman Sachs by Berkshire Hathaway early in the week seemed to be a positive, for about six minutes. The supposed bailout later in the week rallied the markets for a little longer. But then we had the seizure by government regulators of Washington Mutual, now the biggest U.S. bank failure in history. We could go on but what's the point? It's great for the media but nauseating for individuals with their life savings invested in the stock market.

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What's Next for Small Caps?

September 19, 2008


"I'm phoning about my exposure to AIG, Lehman and Freddie Mac and Fanny Mae?
"You haven't any."
"Whew."
"You're invested in smaller Canadian companies. They have no exposure."

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Buyers Market for Financials

September 12, 2008

We have been inundated with news on the bailout of Freddie Mac and Fannie Mae. These firms, which the Globe & Mail calls "Fraudy and Phony" have further displayed the turmoil in the US credit markets. We believe the authorities placed a lot of hope that the bailout of Government Sponsored Entities (GSEs) last weekend would stem the losses in the financial sector. They displayed the same hope when the US government brokered the sale of Bear Stearns, one of the largest investment firms in the US.

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Tough Love

September 05, 2008

It has been a long week back from the long weekend. The TSX has been plunging, down approximately 9% since the beginning of the week. Energy and basic material equities have fared the worst, following the underlying commodity prices down. The commodity bulls have been quiet, and one bull in particular has been silenced permanently. Ospraie Management announced Wednesday that they were shutting the doors on their multi-billion dollar commodity fund after being down 27% in August. We expect more announcements of this nature as the impact from high volatility and declining asset values takes their toll.

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Making up Losses

August 22, 2008

On occasion we've been asked, "what's the point of being cautious and defensive in your investing, after all you invest in stocks to make money don't you?" It is our belief that you invest not to maximize gains but rather to minimize losses while achieving a reasonable return. Sure we could have made greater profits on certain sectors and stocks over the past cycle, but the object is to do it consistently over a long period (decades) of time. High risk investing will lead to big gains and big losses. Below are a couple of fun examples of risk and return.

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An Unhappy Anniversary

August 15, 2008

This Sunday marks the one year anniversary of the beginning of the US Federal Reserve's rate reduction program in response to the global credit crisis. On August 17, 2007, the Fed delivered their first of seven rate cuts to alleviate pressure on the US banking system.

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08/08/08

August 08, 2008

The Summer Olympics in China commenced today (08/08/08) at 8:08:08pm China Standard Time. There were 15,000 performers at the opening ceremonies and 30,000 fireworks. What a start to the most expensive Olympics on record, with costs estimated to be as high as US $40 billion! Eight is a lucky number in China. The word sounds so close to the Mandarin word for wealth that many believe that the number is linked to prosperity.

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Inside the Fund

July 25, 2008

That's right, the title says it all, this week we're talking about the portfolio. No economics, no monetary reports, and no commodity reflections - just the portfolio. For those of you who read this Update you know our outlook on the economy and for those of you newcomers ... let's just say it's not that rosy.

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Bull Market in Pessimism

July 18, 2008

Have we been too bearish? I received an e-mail from one of our more insightful clients yesterday, "Dear Leigh, I received and read your quarterly report last night and must admit that I found it to be right up there with root canals and colonoscopies! Being in the centre of the energy world, I do wonder if we missed an investment opportunity by not being more aggressive in the energy sector. While the valuation multiples are perhaps ridiculous, the current pricing of the commodity is likely the new benchmark for a long time...

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There is Some Light at the End of the Tunnel

June 27, 2008

These markets are volatile! As I write this letter, the Dow Jones Industrial average is down 9.9% month to date. Most European markets are down over 10%. The S&P/TSX Composite is down only 3% as it has benefitted from the strength in the price of gold and
oil.

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"Pete's Tax"

June 20, 2008

The above is the 'one man's meat is another man's poison chart'. What is good for oilmen is not so good for bankers. Our proposition is, this is about to change and the shift will result in higher interest rates.

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Barometric Pressure = 101.1 kilopascals

June 13, 2008

Before we get into the hot topics of the past five days lets talk about the weather. Yes, for much of history the weather has been a topic of discussion for both idle chit chat as well as major global events. Today the weather has taken on a whole new importance in the investing world. Just this past week an article in the Globe and Mail described the success a former TV weatherman had in converting himself into a consultant for investment clients spanning the globe.

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A Sure Thing?

June 06, 2008

The National Post today has an article discussing the 140th Belmont Stakes which is set to take place this Saturday. According to the article a horse named Big Brown is attempting to win the coveted "Triple Crown". For those who aren't horse racing fans, the Triple Crown of Thoroughbred Racing consists of winning the Kentucky Derby, The Preakness Stakes and The Belmont Stakes. In the more than 125 year history of US horse racing events, only 11 horses have won the Triple Crown and none in the past 30 years.

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What inflation?

May 30, 2008

Mark Carney, the relatively new Bank of Canada governor, dropped interest rates 0.5% at the end of April. In their release, the Bank of Canada stated: "The Bank is now projecting a deeper and more protracted slowdown in the US economy. This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008."

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Don't you guys get it ?!?!

May 23, 2008

Here we go, we're ready for the criticism, as they say, "Bring it on". What has been the area of the stock market which has been hugely successful in the past three to four months? The answer, commodity stocks particularly energy companies. What has been the area of the market which has been painful, disappointing and aggravating? The answer, almost everything but energy stocks.

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Performance Review

May 16, 2008

As you can see, our long term performance is in the top five percentile but our shorter term performance has moved towards the median. For the past year our performance was in the 30th percentile.

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Oil, Gas, and Dilly Bars

May 09, 2008

Well, we finally did it. After a number of years of talking about attending the Berkshire AGM, we finally packed our bags and joined the other 30,000 or so people making their way to Omaha.

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Market Update

May 02, 2008

Yogi Berra is reported to have said that forecasting is very difficult, especially when it comes to the future. If we didn't know that Yogi was a Major League Baseball Hall of Famer, we would have guessed that he was a money manager!

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Small Cap Financial Exposure

April 25, 2008

A crucial vote on the $32-billion restructuring plan for the frozen Canadian asset-backed commercial paper market will go ahead today. In light of this, it is timely to provide an update on the small cap fund's largest financial holdings.

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Keeping us on our toes!

April 18, 2008

One of our long time supporters in the Fund recently sent us an e-mail inquiring about some of our holdings. We thought that instead of giving you the usual macroeconomic outlook we'd share our thoughts on the things which matter most, individual company investments. For disclosure, we have paraphrased some of the dialogue.

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High Expectations

April 11, 2008

According to the consensus earnings estimates in Canada and the United States everything is going well. The anticipated growth in Canadian earnings is 10.0% for 2008. In the US, the market is even more optimistic with an expectation of 16.6% earnings growth.

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Q1 Review

April 04, 2008

Problem we have is, a lot of folks aren't responding to over a million letters sent out to offer them assistance and mortgage counselling. You know, these mortgages can be pretty frightening to people. I mean, there's a lot of small print.

President George W. Bush, speech to the New York Financial Community, March 14, 2008

American authorities, especially Federal Reserve officials, harbour the mistaken belief that swift action can forestall a Japan-like collapse. The greater imperative is to avoid toxic asset bubbles in the first place. Steeped in denial and engulfed by election-year myopia, Washington remains oblivious of the dangers ahead.

Stephen S. Roach, Chairman, Morgan Stanley Asia, March 6, 2008, International Herald Tribune


All right, who didn't read the small print? It would appear the answer is just about everyone. The real answer is they didn't care. At the end of the quarter, Washington announced the overhaul of the rules governing its financial system. Stephen Roach, the former Morgan Stanley Strategist, so prescient over the last few years, now might allow that Washington, in surveying the greatest global train wreck in the history of credit, is oblivious no more.

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Trust and Truth

March 28, 2008

A number of months back in our Small Cap Update we discussed the concept of "trust". Without it confidence in the system is lost, a terrible occurrence and one difficult to repair. Sometimes the question of truth is not as blatantly violated but should be more subtly questioned.


Bush, Fed Chief See No Recession Ahead - The economy is in turmoil, yet President Bush and Federal Reserve chief Ben Bernanke say the country will weather the storm. Neither sees a recession on the horizon. - Associated Press - 02/28/08

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