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Starting From The Bottom


2023-03-03, Daniel Morgan

Last weekend Warren Buffett released his annual letter where he dealt his usual assortment of investing wisdom, some mathematics behind how shareholder value is created, open promotion about Berkshire’s businesses (namely See’s Candies), and a refreshing dose of optimism. One line in his latest letter stood out to me as a reminder about what’s important to keep our sights on as investors while there are inescapable narratives about the trend and outlook of the world’s economy being shared. It was brief, though Buffett mentioned his belief that “near-term economic and market forecasts are worse than useless.” He has written about this idea in past letters, how the macro future is not knowable, and that such concerns should have little to no bearing on how to invest. Many other legendary investors are advocates for bottom-up approaches and why they should be emphasized over top-down strategies. Bill Miller, whose own letters are worthwhile reading further, eloquently described in a 2021 memo:

“No one has privileged access to the future and market forecasts tend to be about as accurate as calling a coin toss. There are, of course, analogies that can be drawn about how the current environment maps onto previous historical data, but success in that depends crucially on how the future will, in fact, resemble the past, and whether the cited analogies turn out to be the governing ones. The record seems to show that sometimes they will and sometimes they won’t and we are back at the coin toss. “ -Bill Miller

QV Investors has for over 25 years realized success in employing a bottom-up strategy, investing in companies that fit our seven tests of quality and value. One of the best advantages of this approach is that it encourages a deep understanding of the fundamentals of a business which can help identify opportunities created by industry or macroeconomic concerns presiding over the market psyche. All the while, we attempt to manage risks through several tools including controlling the weights of our holdings based on the quality of the business and ranking the upside potential relative to the downside.


One of the best examples in recent memory where our risk-managed approach has prevailed despite the consensus outlook being poor includes the introduction of the trucking powerhouse TFI International (TSX:TFII) to the Canadian Equity Fund in April 2022. Around the time that we began buying shares of TFI, we were made aware that an influential freight market analyst had made strong arguments that suggested difficult conditions for the industry were imminent. We carefully considered their point of view but surmised that the market valuation of TFI had largely discounted such a scenario. Studying the company for a while before owning it, we understood that the quality of the franchise had evolved to become more resilient through cycles than it used to be. Further, its culture of decentralized decision-making rewards managers who actively align their capacity with incoming freight volumes. These were considerations that made the downside risk tolerable. Most importantly, we deduced that its business would not be so severely affected in a freight recession that its balance sheet or its franchise would become permanently impaired. Looking to the upside opportunity, our thesis remains that the company is maximizing the profitability of each of its freight services, and it will continue to compound capital at attractive rates through opportunistic acquisitions and internally sourced projects.

Source: S&P Capital IQ, QV Investors

Another example of a company that we have invested more into is one of our largest holdings, CGI Inc. (TSX:GIB.A). This IT services firm is occasionally underappreciated by the market due to factors that are external to its business. A matter which seems to crop up every US election cycle is how a change in the governing political party might impact CGI because its largest single client is the US government. CGI’s results and share price returns over decades have shown that it doesn’t matter who’s in charge because its services are bipartisan. Passport processing, cybersecurity operations, and several other critical functions in 35 federal agencies are entrusted to CGI. We like that CGI’s business is one which particularly calls for minimal pondering about how current events or an economic outlook could affect it. Instead, we monitor whether it is growing responsibly, returning free cash flow to shareholders, preserving its conservative financial condition, and acquiring other companies which will enhance CGI’s global franchise.

Source: S&P Capital IQ, QV Investors


Oftentimes, when uncertainties about an industry or the wider market are introduced and then dominate the consensus, excellent investment opportunities are created. We share a similar sense of responsibility that Buffett succinctly described in his letter to manage a portfolio of businesses in a manner that will achieve an acceptable result over time and that will preserve its staying power when financial panics or recessions occur. While wishing success to market strategists in their predictions, our team will be starting from the bottom-up to buy wonderful businesses at attractive market valuations.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Daniel Morgan | Research Associate

Daniel analyzes investment opportunities and monitors existing holdings for the Canadian large cap strategy.