Investment Letters for the Value Contrarian Fund


2019 Year-End
             Value Contrarian Equity Fund


Dear Partners,

It seems to me that [the coronavirus] it is unlikely to fundamentally and permanently change life as we know it, make the world of the future unrecognizable, and decimate business or make valuing it impossible.

Howard Marks

Oaktree Capital Management

March 3, 2020

Rosy prediction comes with a warning. Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the markets, perhaps of 50% magnitude or even greater.

                                                                                           Warren Buffett

2019 Annual Letter to Shareholders

Berkshire Hathaway

What we can say is that if something close to current rates [1.5%] should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt investments.

                                                                                           Warren Buffett

2019 Annual Letter to Shareholders

Berkshire Hathaway

The early 2020 rise in Tesla shares is emblematic of the speculative mind set… and other numerous asset bubbles going all the way back to the South Seas bubble of the 1720’s.


Moreover, when one our admin staff is complaining about not fully participating in the early 2020 market (Tesla) rally, you know retail “greed” has taken over from “fear”. FOMO (fear of missing out) amongst retail investors.


From our 30 years of stock market experience, in January and early February we witnessed what I would call the “taxi driver”, or folklore indicator. When your taxi driver (barmaid or locksmith) is suddenly talking about the stock market, it’s usually not a positive sign. Such was the case on February 21, 2020 when I bumped into my locksmith at the bank. After some quick pleasantries, he mentioned how he had been looking to make “some easier money”. His chosen path, day trading with T.D. Ameritrade. Outch!!


Retail activity like this, invariable occurs late in the cycle, near bull market peaks/bubbles.


Whether bitcoin, marijuana, dotcom, Tesla, (or whatever the speculative “flavour de jour”), over the long-term gravity (valuations) eventually pulls stocks down to earth. It’s the specific catalyst which catches investors by surprise. However, in the short to medium term, the stock market is often a popularity (momentum) voting contest. One must be prepared to look beyond the peaks and valleys to win at this game.


The coronavirus epidemic has certainly spread economic “contagion” from China to the rest of the world. With the resulting slowdown in China, global commodity prices (especially oil, copper, iron & steel) have taken a beating. Canada, as a major commodity producer, has obviously been affected.


The coronavirus consequences, by themselves, should be manageable if contained over the next six - nine months. Aside from the recent media hysteria, this is not a rerun of the Spanish pandemic of 1918 which killed 20to 50 million people. Thus, according to one voice of reason, “it’s one more seasonal disease like the flu, something we’ve had for years, have developed vaccines for, and have learned to deal with.”


The problem escalates, in our opinion, if the crisis somehow escalates, or combines with another “unexpected”, global shock. In that case, all bets are off, as they have not been discounted into today’s markets. Only in hindsight will we know if the TSX and the S&P500 peaked on February 19th and 20th of 2020.

2019 Performance: + 5.0%

If I died tonight the stock (Berkshire Hathaway) would go up tomorrow.

Warren Buffett

2017 Annual Letter to Shareholders

    Berkshire Hathaway 

… A decision to cut rates [i.e.: March 2020] isn’t necessarily good news. You can argue that, if there’s trouble ahead, we’re better off with a rate cut than without one. But that still doesn’t make it good news. First, it means the Fed thinks trouble is looming. And second, it certainly doesn’t guarantee the problem will be solved. (It’s worth noting that 18 months after that first rate cut in September 2007 – during which time ten more cuts followed…The S&P 500 finally bottomed out, down more than 50% from where it stood on the day of the first cut.)

Howard Marks

Oaktree Capital Management

July 26, 2019

December 31, 2018 – $ 3,210   (NAVPS after distribution)

December 31, 2019 – $ 3,370   (NAVPS before distribution)

December 31, 2019 – $ 141.07 (Distribution per unit)

December 31, 2019 – $ 3,229   (NAVPS after distribution)



Your Fund ended the year with a net asset value of $3,229 per unit.

For the calendar year 2019, the TSX Composite Total Return Index rose 22.8% and the S&P500 31.4%. (see attached VC Fund 1990-2019 performance history.)


As your Fund’s second largest shareholder, I share your frustration with our performance in 2019. As value investors, there have been previous periods where our results have significantly diverged from the broad market indices. We have never been “closet” indexers whereby we attempt, in a stealth manner, to track the major stock indices.


The history of The Value Contrarian Fund shows that we are likely to outperform during extreme negative years (2008/2018) and underperform during periods of frothy speculative markets late in the business cycle (1999-Nortel year, or 2018).


It is important for investors to understand the significance on stock prices when price-earnings (P/E) multiples expand (as they did in 2019) or contract. Simply stated, during times of “fear”, the P/E multiples on stocks contract. Conversely, as the business cycle progresses and investors become more confident, P/E multiples expand. When “greed” and exuberant markets arrive, (as in 2020) P/E multiples (especially on popular stocks) rise even further. This sets investors up for the inevitable unexpected recession/ and or geopolitical crisis induced P/E multiple contraction.


Take the recent example of Transunion – the well-known consumer credit gathering business. In 2019, this quality company had a price-earnings ratio of 19.6 X times earnings. However, by early 2020, the multiple had expanded to 28 X earnings. Thus, in 2019 investors were willing to pay $19.60 for every $1 dollar of Transunion earnings. But a few months later, in 2020, investors were willing to pay $28 for every $1 dollar of Transunion earnings. Voila, multiple expansion which translates into a higher stock price. But, as they say, “easy come, easy go”, especially during a bear market/ recession.


Or take the example of Apple stock. Between 2012 and 2016, an investor could have purchased Apple shares for between 10.5 X -11.5 X earnings. After Buffett made significant purchases in Apple stock, the P/E ratio started to climb. By January 2020, at $327 per share, Apple stock had a P/E multiple of over 26X earnings. Voila, multiple expansion, from 10.5X to 26X earnings. Thus, an investor’s potential risk had increased with this multiple expansion. P/E multiples can both expand, and also contract.

As the business cycle matures and enters its tenth year (March 2009 – March 2019), stocks have moved from undervalued, to fairly valued, and at times, to being overvalued. At the end of the day, either higher interest rates and/or frothy valuations eventually act as “gravity”, pulling stocks down to earth.


Investor expectations need to be tempered this late in the business cycle. Over the past 30 years, we have sought to educate our partners regarding the importance of capital presentation and discipline (patience), as a key component to long-term investing success.


At the end of the day, all stock market cycles are unique. While the catalysts may change, the end results remain the same. Bear markets have not gone the way of the dinosaur or disappeared from the business cycle menu!


One thing is certain, during the next recession – bear market, P/E multiples will contract on most stocks. This will translate into lower equity prices. It’s just the nature of the stock market cycle.


Getting down to the “nitty gritty” behind our performance in 2019:


  1. Your Funds 30% cash equivalent holdings in short-term fixed-income investments was a significant drag on our short-term returns. Presently, we will only invest in the most liquid and highest grade fixed-income investments. Last year, these T-bills were yielding 1.5%-2.0%. In any future credit crunch/crisis, we have no doubt about the federal government’s ability to pay off its obligations. Government secure cash like (teddy bear) investments, help us sleep well at night. Moreover, they give us future firepower during inevitable market panics.

  2. On the Canadian side of our portfolio in 2019, the chartered banks were underperformers (National the exception) alongside our energy positions as        discussed below. SNC-Lavalin also detracted from our returns. We had ample warning of looming issues at SNC, because in 2014, at the peek of oil prices, SNC went out and blew $2.1 billion on Kentz – a global oil and gas service company. The press release at the time crowed how “Kentz’s capabilities will make SNC-Lavalin a leading global E&C player in the oil and gas sector.” Outch – Fake news!This was a textbook example of dreadful timing and very poor capital allocation. As a result, SNC paid top dollar at the peak of the commodity cycle. This transaction should have sent your manager running to the phone lines screaming “SELL” – “GET ME OUT”


Rio Tinto made a similar ill-advised overpriced commodity related purchase when it bought ALCAN near the peak of the aluminum cycle. In the end, both companies suffered millions/ billions of dollars in write-downs.


  3. On the U.S. side of our portfolio, last March, we purchased an additional 10,000 shares of Berkshire Hathaway at a little over $200. Berkshire represents    the single largest investment in your Fund’s portfolio. With $130 billion of low yielding cash sitting on its balance sheet, this situation certainly contributed        to Berkshire’s modest 11% advance last year (although it is now the single largest Apple shareholder). We will discuss later, in further detail, why we like        this particular investment, especially at this juncture in the stock market cycle.


  4. In 2019, in the American markets, by not owning a market weighting in Apple, Facebook, Microsoft, Amazon, and Google, an investor would have had a    hard time keeping up to the U.S. indices. This reminds us of 1999, when your manager did not have a market weight in Nortel, and thus did not keep up        to the Index returns.

Again, these are classic traits of a late stage bull market whereby a few extremely popular growth stocks power the indices to new highs.

  5. Here’s our mea-culpa for 2019. Every year or two, we make an ill-advised investment decision. Let’s diplomatically call it a “learning experience”.       PrairieSky Royalty Ltd is our latest example.         

 The beauty of PrairieSky’s operations is that on its lands, it does not directly conduct operations to explore for, develop or produce petroleum and natural   gas. Rather, third party development of the royalty properties provide the company with royalty production revenues as petroleum and gas are produced   from its properties. Simply stated, the more energy (and/or the higher the prices) that’s sucked out of PrairieSky’s lands, the more (in theory) royalty income   it receives.


As a result, the company’s earnings can be significantly impacted by two factors,

1) fluctuations in commodity prices; and 2) production volumes/ drilling activity on its properties. This latter factor, drilling and production volumes, are influenced by present energy prices and the future outlook.


Our error was to not fully comprehend that higher energy prices alone do not necessarily translate into higher royalties received. Royalty companies do not fully control when wells are drilled and production brought online. Drilling activity and dividends tend to shrink when either oil and gas prices are low or the future outlook on energy prices is cloudy.

Unless energy prices and drilling activity are in a clear long-term uptrend, best to avoid these particular oil and gas companies. Better to stick with Suncor or Canadian Natural Resources. These companies, despite significant capital expenditures, still gush free cash flow, while controlling their own production destiny.


  6. Berkshire Hathaway continues to represent your Fund’s single largest investment (18%). The company’s undervaluation is partially explained because it    is a highly discounted conglomerate (an out of favour structure) little followed by analysts, while holding an exceptionally large cash position

 ($125 billion +) in low yielding instruments. In addition, many are left with the impression that Berkshire’s shareholder returns are dependent on Warren     Buffett’s   extraordinary stock-picking abilities. However, this was a better reflection of Berkshire’s past and no longer reflects the company’s current reality.


Once viewed as an “investment fund”, this is no longer the case. Less than half of Berkshire’s value is held in publicly listed shares (i.e.: Bank of America, Moody’s, Coke, Apple, etc.…)


Berkshire’s primary asset is the world’s largest insurance business (reinsurance and auto insurance -GEICO)

According to one smart investor, “Berkshire’s strong competitive advantages are derived from its enormous capital base, efficient underwriting … and its focus on long-term economies rather than short-term accounting profits, all of which allows the company to often be the only insurer capable of and willing to insure extremely large and/or unusual bespoke insurance policies.”

The beauty behind Berkshire’s property/casualty (P/C) business is the “collect-now, pay-later” model which leaves P/C companies such as Berkshire holding large sums of money called “float” – that will eventually be paid out to others. Meanwhile, Berkshire gets to invest this float for its own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. As the business grows, so does this “float”. In 2019, Berkshire’s float was $129 billion.


Berkshire also owns a collection of (nonpublic) high-quality, non-insurance businesses. This includes market-leading industrial businesses such as Lubrizol, Iscar, Burlington Northern Rail and Precision Castparts, an aerospace manufacturer. In addition, Berkshire Energy has become a significant part of the company and consists of a number of well-managed, highly efficient energy utilities that are relatively insulated from economic downturns.


Berkshire’s current earnings are meaningfully understated in the current low interest rate environment as the company is earning a minimal return on its approximately $125 billion of cash.


We feel the downside on Berkshire Hathaway stock is limited due to the company’s huge cash position, highly diversified portfolio of quality operating businesses and significant earnings contribution from recession – resistant businesses such as insurance and regulated utilities.


There are a few simple levers that Buffett could pull to increase shareholder value. In today’s correction environment, a major stock buyback would be the easiest and most efficient use of Berkshire’s cash.


Buffett’s eventual demise would actually be a positive for the stock. As a parting gift we would not be surprised to see Buffett sprinkle a bit of love on Berkshire shareholders through the institution of a regular dividend. In addition, we would expect that Berkshire management would, with Buffett out of the way, hold its operating companies to a higher accountability and improved performance. In essence, a more profitable Berkshire Hathaway.


In the end, Buffett has clearly designed the company to succeed decades after he is no longer running Berkshire. This is a “sleep well at night” stock for turbulent times like today.

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2016 Value Contrarian Asset Management



…. There’s no way to tell whether [the coronavirus] pessimism is appropriate, inadequate or excessive…But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’ [and very quickly].”


Howard Marks

Oaktree Capital Management

March 3, 2020


Let me again suggest two points: (1) the future has never been clear to me (give us a call when the next few months are obvious to you – or, for that matter the next few hours); and, (2) no one ever seems to call after the market has gone up one hundred points to focus my attention on how unclear everything is.


Jeremy Miller

Warren Buffet Ground Rules:  

Words of Wisdom from the Partnership

Letters of the World’s Greatest Investor


History has shown that you need a “monumental” geopolitical/ financial event (or a period of significant rising rates) as a catalyst for a bear market decline.  It has often been wars and invasions involving the U.S. that have driven major stock market shifts in the past.


Ben Horwood

Value Contrarian Asset Management

February 2020


Some Food for Though Going Into 2020:

  1. Falling interest rates will not be the panacea to overpower a business recession.

  2. Stocks don’t rollover and correct just because they are expensive or overvalued, you also need a catalyst. Think CORONA!

  3. “Monumental” events (think wars/ banking crisis) bring down bull markets, not “serious” events. Markets don’t correct by going sideways – they go up or down. Don’t believe in “soft landing fairy tales”.

  4. 2009-2010 was the start of the business/stock market cycle. 2020 is many years long           into the cycle. Stock markets are more vulnerable to shocks/crisis when they are expensive.

  5. Always remember the ill-advised 2007 comments of Chuck Prince – the former and now disgraced CEO of Citi group. According to Mr. Prince:“As long as the music is playing you’ve got to get up and dance. We’re are still dancing.” (until Citi group almost went bust!)Despite the comments of Chuck Prince, companies or investors don’t “got to” dance or do anything. Companies must have the discipline to not engage in the same foolish business /investing activities just because their competitors are doing so. Most importantly, the same rules apply to investors and their FOMO – (Fear Of Missing Out).

  6. In the words of Martin Indyk, the former U.S. Ambassador to Israeli; “Preventing a nuclear arms race in the Middle East does remain a vital U.S. interest – the one current case where the U.S. might need to resort to war.”

  7. The Corona crisis will likely translate into muted global economic growth, especially in both China and commodity-based economies such as Canada. This slowdown may well prolong the bull market run. But in reality, any opinion we offer concerning the coronavirus and its effects, are mere “guesstimates”.Should the virus become a “monumental” event, then all is up in the air. The danger, in our opinion, lies if a weakened economy to create a “monumental” meltdown. As Buffett clearly warns, late in the business cycle don’t be shocked by major (50%) bear market drops.


History has shown, time and time again, that these but severe declines are , as long as one has the cash. Thankfully, we have our large “teddy bear” position - cash.


In our line of work, there are times we feel like an outlier politician being questioned on whether it will be necessary to raise taxes. The easy political answer is to deflect any tax rumours, get elected, and then raise taxes! We are presently experiencing the longest bull market in history. Yet, it pays to remember that trees don’t grow to the sky forever.


Let’s be honest, offering unpopular news/opinions often makes no friends in politics or in frothy speculative markets. It’s often easier, and career rewarding, to just fudge, hide or ignore financial excesses and just go with the momentum (in both politics and investing).


Expect significant volatility in 2020. The January, early February “melt-up “in stock prices has resulted from FOMO (fear of missing out), TINA (there is no alternative to stocks), and P/E multiple expansion (whereby investors are willing to pay more for each $ dollar of earnings). Todays ultralow interest rates can have a corrosive effect. Especially as many investors are taking additional risks in their quest for higher yields.


I have no idea what the markets will do in the coming year. However, it’s always fun to attempt a forecast. Our guess, the good news is that the major markets will produce single digit returns in 2020. The bad news, single digits could mean either +5% or -5%. Until then, enjoy the ride and buckle up!



Respectfully yours, **  


Benjamin D. Horwood

Portfolio Manager

March 9th, 2020



Year - End Management Note


It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.


Warren Buffett

Berkshire Hathaway


As we have always stated, we cannot promise any particular results, only that investments for your Fund will be selected based on value not popularity. We view our Fund shareholders as our partners, and we assure you that the protection and growth of your capital will continue to be paramount in our thinking.


We aim not to be the biggest but to ensure consistent performance, even if that means limiting the Fund’s size or closing it to new investors in the future. We want to enjoy coming to work every day and view the Value Contrarian Fund more as a private partnership, where “membership has its privileges”.


Secular or disruptive technological changes to an industry or company is what truly destroys shareholder wealth and keeps us up at night (think Nortel, Blackberry, Kodak or Blockbuster). Conversely, stock-market volatility, including fear and panic of a bear market, are merely temporary but opportunistic events for the rational buyer. At the end of the day, “price paid” is what matters most when investing for the long-term.


Being the second largest shareholder and the Manager of your Fund is certainly no guarantee of superior long-term results. But I do think your comfort level is enhanced by having my financial interests aligned with yours. Simply stated, your returns are my returns.


Finally, Chiraz is now back from maternity leave, plus one, a beautiful baby boy – Aidan. Mazel Tov. Special kudos to Anna for keeping the VC shop audit compliant and in tip top shape this past year. During the year many clients experienced and were appreciative of the “Anna touch” – specifically her patience and warmth. Yes, Anna has also been giving me ongoing tutoring in that department. Hope runs eternal!


We would like to thank our shareholders for the trust you have placed in us during the past year.

And again, thanks for your referrals – much appreciated, keep them coming!

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