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Investment Letters for the Value Contrarian Fund

 

Full Disclosure

Over the coming years we want to advise investors that the Value Contrarian Fund may be more volatile than has been the case in the past. Here is our reasoning:

 

1) When your Fund is fully invested, we are subject to the full volatility of the financial markets. As we don’t short stocks, cash is often the simplest, risk-free instrument to blunt stock market volatility.

 

2) Berkshire Hathaway, Warren Buffett’s investment vehicle, represents approximately 28% of your fund’s assets. We view this as a strong investment in all market conditions. Nonetheless, there will be years (like 2019 & 2020) where Berkshire underperforms the market and will impede your Fund’s returns.

 

3) In general, a rising Canadian dollar and a weakening US dollar will negatively affect your Funds results, due to our significant U.S. holdings. Presently, the Canadian dollar is approximately 71¢. However, if over the coming years it rose to 80¢ or 85¢, this would add a stiff headwind to your fund’s net results.

 

Predicting currency moves is about as easy as predicting the weather this time next year. Good Luck!

 

Benjamin Horwood

2024 Third Quarter
             Value Contrarian
Equity Fund

Dear Partners,

 

In the stock market, you are going to have a partner named Mr. Market, and the beauty of him as your partner is that he’s kind of a psychotic drunk and he is making lots of mistakes, so it’s built into the system that stocks get mispriced.


Warren Buffett

CEO Berkshire Hathaway

 


Markets are clear about what Donald Trump plans for his return to the White House: … Corporate tax cuts almost automatically boost stocks, tariffs almost automatically mean a stronger currency, bigger deficits mean higher bond yields and easier regulation helps bank stocks and bitcoin.
Whether this knee-jerk (investor) reaction proves right in the longer run is another matter.


James Mackintosh

Columnist - Wall Street Journal

November 7, 2024
 

 


… The Axis of Resistance was a vast looking exercise; the Shi’ite militias in Iraq, and Hezbollah in Lebanon were parasites, sucking and draining the wealth from the countries they inhabited and crippling the states and governments where they lived. And now, after only a few months, the Iranian (proxy) project lies in ruins. Hamas has been destroyed, Hezbollah has been crippled, Assad is gone, and the Iranian regime is severely weakened.


It should be said: most of the credit (unforeseen) goes to Israel by destroying Hamas, decapitating Hezbollah’s leadership, and leaving Iran’s leaders exposed, kicked away the support struts of Assad’s regime.
 

Dexter Filkins

Foreign Correspondent – Free Press

December 8, 2024

 


I don’t know how to predict whether genAI will be widely adopted or how much customers will be willing to pay. But it wouldn’t surprise me if it took longer and they paid less than expected.
 

James Mackintosh

Columnist - Wall Street Journal

December 7, 2024
 

 


In today’s environment of “irrational exuberance”, the rock star hedge fund manager is no better than the Uber driver punting on Tesla, Bitcoin, or GameStop.
 

Ben Horwood

Value Contrarian Asset Management

November 30, 2024

Third Quarter Performance: 

… Bitcoin can’t have a price-to-earnings multiple because it has no earnings. And it can’t have a yield because it pays no dividend. The value of crypto assets is therefore determined solely by what investors are willing to pay… making money on the investment depends on selling the asset to a “greater fool” for a higher price. (AKA: the “greater fool” theory).


The real reason the crypto industry is booming and institutions are (also) getting in on the action is simple: people think they can make money off of it. It is one gigantic FOMO trade.


John Heinzl

Opinion Columnist – Globe & Mail

November 16, 2024

 

 


Investors may want to ponder this. If nothing else, Mr. Buffett’s decision to sell stocks and build a cash mountain ($310 billion) suggests you may want to retain at least a bit of skepticism about what lies ahead for the market.

 

Ian McGuan

Opinion Columnist – Globe & Mail

November 16, 2024

Your Fund ended the third quarter with a net asset value of $4,921.54 per unit, an increase of $747.95 from the December 31, 2023 net asset value of $4,173.59 per unit [after distributions]. Your Fund returns Year-to-Date at September 30th: +17.92%.


In the short term, investor returns are much about lucky timing. For example, an investor purchasing Value Contrarian units on March 31, 2024, was purchasing units that had already appreciated 9.2% for the year-to-date. However, by June 30th, those same units produced a year-to-date return of 6.2%. By June, our March investor was now nursing a paper loss of 3%. Investors seem to easily forget that only if one sells units, will one incur a loss. Until an actual sale, your losses (or gains) are only on paper.


On the flip side, those investors who sold VC Fund units in June or July, have missed out on the bulk of the Fund’s 21%+ YTD (Nov.) returns. Thus, when it comes to investing, adept “timing” requires some experience, but more often than not, (especially in the short term) it comes down to pure luck!


This year, the Fund’s significant portfolio laggard has been TD Bank, down more than 10%. Unlike in some businesses, in the investment management business, your laggards/warts are immediately visible for all to see.


TD’s recent fourth quarter results fell short of investor expectations. This disappointing news resulted in TD’s 2025 guidance being suspended, and kept its shares in the penalty box. TD’s generous dividend will likely support the stock until the new CEO offers up a credible “growth” plan for the future.


On a positive note, Berkshire Hathaway, your fund’s largest position, has risen 35.4% YTD-November 30. With the company trading at an expanded multiple of its book value, Buffett has put a halt to share buybacks. In the case of Berkshire, share buybacks have been an excellent allocation of the firm’s cash, especially when investment opportunities are scarce. Simply stated, less brk.b shares outstanding, translates into greater earnings per share.


Over the past year, our position in Berkshire has been reduced from 31,000 shares, down to 22,500. Berkshire still represents 28% of your fund’s assets, mainly due to strong capital appreciation. Its large insurance operations have been providing strong returns – with a “hard” insurance market tailwind. With $310 billion of cash on its balance sheet, Buffett is ensuring that when the next bear market rolls around, Berkshire Hathaway will have ample cash to act on numerous opportunities.


Over the years, Buffett’s “words” are usually positive towards investing, including his famous expression, “never bet against America”. But as they say “actions” speak louder than words. Interestingly, his “actionsover the past year point to a much higher degree of investment caution.

Perhaps, in 2024, Buffet has taken more chips off the table due to a desire to reduce Berkshire’s large concentration in a few names, where valuations are stretched in relation to growth prospects. And with Berkshire’s trillion dollar market cap, there are simply less opportunities in “size”, and at the right price, to make a difference to the Berkshire portfolio. Thus, cash builds up.


In our opinion, Buffet would likely not be disappointed with a huge market sell-off. But that might be years away, or just around the corner.


Final note: with another Canadian rate cut coming this week – don’t be surprised to see an eventual .67¢ dollar over the next year. Book your holiday plans today!

Outlook

But history also suggests no link between nosebleed valuations like we have today and returns over the next year. Expensive stocks can always get more expensive, and often do.


James Mackintosh

Wall Street Journal

December 7, 2024

 

 


Presidents are seldom the main driver of economic performance. Trump’s policies may have less to do with how the economy performs over the next four years than larger forces and unexpected events such as crisis, a war or a boom driven by new technology.

 

Greg Ip

Columnist - Wall Street Journal

November 7, 2024

 

 

Hamas is not there for them, Hezbollah is not there for them, their air defences are not there anymore, their ability to retaliate is sharply diminished, and they are worried about Trump…


Which means that Tehran is either riper than ever for negotiations to curb its nuclear program or riper than ever for an attack by Israel or the Trump administration -or both- to destroy those nuclear facilities.

 

Thomas L. Friedman

The New York Times

November 2024

Despite temporary “ceasefires”, the Middle East conflict is a slow motion “train wreck” that always has the potential, in the months and years ahead, to surprise and blow up into something much bigger. Nobody really knows how the “tea leaves” will eventually play out. Likewise, a mere four weeks ago, no one was boldly predicting the fall of the 50+ year Assad family regime in Syria.


Iran (its nuclear program and any Israeli/U.S. response) is a key element to this Mid East chess board and any long-term peaceful resolution. As a result of recent events, the Iranian nuclear project is exposed like never before to an Israeli attack. Moreover, an important question to ask: will Iran now make a “mad-dash” to complete a nuclear weapon, thereby setting off a chain of future military reactions?


Critics from the press, and outside observers, correctly point out that Prime Minister Netanyahu has refused to fully reveal what comes next. He’s offered no “grand” political or diplomatic solution for the “day after.” The only clear goals seem to be that Israel and the West will not tolerate Hamas as a governing body in Gaza.


There will be no easy solution to a lasting peace in Gaza. Whether it be a partial Israeli occupation, a Palestinian Authority takeover, an Arab peacekeeping force, or some yet to be figured out solution. Israel is in no rush to show its “day after” hand because there are no easy answers, but many potential pitfalls and traps for the naïve.


The historical dilemma for Israel is easy to understand. As one astute journalist recently stated, “Israel can defeat its enemies… but it can’t conquer its way to peace.” And on the other side, you need a Palestinian population that demands “land for peace” from its leadership, rather than providing majority support for radical Islamist parties or pipe dreams of “from the river to the sea”.


For Israel, turning its military wins into political/strategic gains has always been the unattainable part. Simply stated, Israel is not a superpower and thus has neither the resources, manpower or will to rebuild and win the hearts & minds of 2 million Gazans, let alone the country of Lebanon.


Israel’s key military asset is simple: “super deterrence”. That means… leave the resourceful “bumble bee” alone, and it goes about its daily routine peacefully. But interrupt & attack that same busy bee from its daily tasks, and the consequences can be fatal/catastrophic for the aggressor. This has been the case in Gaza over the past year, and now in Lebanon.


Unfortunately, stinging “deterrence” alone will not bring long term lasting peace to the region. At best it will only bring extended periods of shaky calm.

As many before us have already stated, in the absence of a mutually agreed political agreement, there cannot be a durable solution on the Palestinian/Israeli conflict. For that to happen, it still takes “two to tango”. Meaning, from the two main protagonists.


In our humble opinion, what would be a clear signal that a durable peace could be on the horizon? When a Palestinian leader emerges along the lines of the late Egyptian president Anwar Sadat. Sadat was the first Arab leader (post 1948) who made the bold decision, and historic step in November 1977 to travel to Israel seeking peace.


It took four years after the end of the October 1973 Yom Kippur war for Sadat (having regained Egyptian honour on the battlefield) to embark on this historic journey to Jerusalem. A similar “Sadat” moment in history would give us a positive reason for hope. We will just have to wait and see what happens by 2029! Nothing happens overnight in this region.


As for the markets – the Buffet Valuation Indicator (a market valuation measure) is signaling potential danger as it surpasses levels last seen during the dot-com bubble and the 2007-2009 Great Financial Crisis.


This indicator, attributed to Warren Buffet, compares the total market capitalization of stocks (Wilshire 5000 total market index) to the gross domestic product (GDP) to determine if equities are undervalued or overvalued.


While this indicator ratio is far from perfect on timing, it can be, according to Buffet “a very strong warning signal”. The current Wilshire 5000-to-GDP ratio stands at approximately 208%, surpassing the 140% ratio at the height of the 2000 internet stock frenzy.


In conclusion, from our years of investing experience, overvalued stock markets by themselves don’t cause bear markets. Rather rising interest rates and/or a surprise shock to the financial system are often the necessary ingredients to eventually derail bull markets. Normal market corrections in the months ahead can be expected, it’s all part of the game.


And finally, today’s stock market valuations speak volumes about more subdued future market returns.
 

 

 

Respectfully yours,


Benjamin D. Horwood

Portfolio Manager
December 12, 2024

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Value Contrarian Asset Management

 

Bank of Commerce Center

1155 boul. René Lévesque West Suite 2500

Montréal, Québec 

H3B 2K4, Canada

Contact Information

 

Tel: (514) 398-0808

Fax: (514) 398-9602

 

Email: adminasst@valuecontrarian.com

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2016 Value Contrarian Asset Management

 

Value Contrarian Asset Management

 

Bank of Commerce Center

1155 boul. René Lévesque West Suite 2500

Montréal, Québec 

H9K 1J5, Canada

Contact Information

 

Tel: (514) 398-0808

Fax: (514) 398-9602

 

Email: adminasst@valuecontrarian.com

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