Johann Sebastian Bach is one of the greatest musical composers of all time. Bach produced well over 1,000 unique musical arrangements over his lifetime, equivalent to about one new piece every two weeks in his adult life (he died in his 60s). In between composing, he also travelled extensively throughout Europe and was a renowned music teacher. In his personal life, Bach married twice and fathered 20 children. When asked how he managed to accomplish so much, Bach said, “Anyone can achieve my success if they work as hard as I do.” Clearly, Bach was being modest – you don’t become the greatest on hard work alone. There was obviously something special about Bach – talent, passion and curiosity are also prerequisites for greatness. But by his own admission, having “something special” alone would not have made Bach a legend – sometimes it is just doing the work.
If you are a regular reader of our Insights, you’ll likely have read many versions of how we put QV’s philosophy and processes to work. That, in our opinion, is QV’s collective “special sauce”. We pride ourselves on developing, encouraging and hiring those who are passionate about investing and analysis. The collective wisdom we have built over the years is what we consider our talent, and our collective curiosity is what drives our goals for continuous improvement. That is all well, but I wanted to write about the other, just as important, component behind why we feel we can deliver superior risk-adjusted returns, which is just doing the work.
What We Own
The Canadian large cap team collectively monitors a universe of about 200 investable companies and invests in somewhere between 35 to 40 of them. In any given year, we aim to complete a minimum of two fulsome semi-annual reviews on all current investments, including an update of our detailed internal financial model, internal quality ratings and any other pertinent information. We also strive to meet with most of the management teams we invest in once a year, participate in regular conversations with sell-side analysts and conduct specific industry analysis. This is just the work we do on the companies we own.
What We Don’t Own
The above is not what I think differentiates us – I take pride in the amount of work we do to analyze opportunities we know won’t come to fruition any time soon. The direct benefit of analyzing what you already own is important and is easy to justify, but it takes a curious mind and willingness to apply the same approach to opportunities we know probably don’t make sense at the current time. It can feel redundant, boring even, but it is this work over a long period of time that compounds our collective ability to make great decisions quickly. In any year, we conduct about 30-40 assessments of companies we do not own and pass on 80-90% of them. Over time, because we look at considerably more opportunities than we actually invest in, it is not uncommon for newly introduced investments to have years of internal analysis already completed before we allocate any dollars of real capital to them. We build more understanding than we need at that moment, but the collective understanding built over many years is what enables us to act when opportunities do open up.
Acting Quickly
In early 2020, we were able to quickly initiate on multiple new investments when the market was seeing significant turmoil, including Intact Financial, CCL Industries, Brookfield Asset Management and Sun Life. Today, all four investments occupy top-ten positions in the Canadian large cap strategy. Years like 2020 don’t come around often, but times like these are when the long-term investments in our own knowledge base really shine. It is a lot of work to maintain and build our inventory, especially when it seems like the companies are simply not investable at the time of assessment. We know that opportunities arise at unexpected times and are always glad to have done the work ahead of time.
It doesn’t always require a global financial crisis or pandemic for something within our long-term inventory to become an actionable opportunity. Take, for example, BRP Inc., which we just initiated within the last few months. Our very first write-up and analysis of the company was done in 2009, shortly after its IPO. Not uncharacteristically, we proceeded to pass on the opportunity. Additional follow-on evaluations were completed in 2017, 2019, 2020 and 2021. Each time, we continued to pass on the investment. It took multiple guidance downgrades and share price weakness before we were finally able to make use of our many years of research and invest in the company at a more attractive valuation. BRP is a high quality manufacturer of sporting equipment – not exactly the most defensive business in our universe. Without our internal notes and collective knowledge on BRP over 15 years, we likely would not have been comfortable enough to initiate on the company.
Delivering strong risk-adjusted returns takes two things – something that makes us special, which in QV’s books is the discipline to use a consistent philosophy and process, not to mention a genuine passion for stock selection and company analysis. While philosophy, process and curiosity are crucial components of QV’s investing, I hope this update also gives the reader some insight into the less exciting part of our job, which is simply showing up and doing the work.
