Hayley Carr

The Double-Edged Sword of Investing

On November 27th, Morningstar Inc. held its annual Canadian Investment Awards, and Burgundy was proud to walk away with four awards in the pooled fund category.

Morningstar Awards Listing 2013 - Burgundy Asset Management

Quality investments have been under a spotlight in the marketplace, and I’m reminded of the double-edged sword that we frequently face as active investors. Let me step back for a moment to explain.

Trends come and go in the markets, so when you are a long-term investor like Burgundy that ignores the trends, disregards investing based on emotional responses and sticks to a time-tested philosophy and process, in the short term you can frequently look either very right or very wrong. In the instances when we look totally off the mark, the spotlight is on anything but quality. If money is generally flowing away from quality and into the fad of the day, the markets tend to be strong and Burgundy’s relative returns may lag in the short term. However, the good news for us is that mispriced quality abounds. The flow of money to one trend or another has no effect on the underlying fundamentals of the companies in which we choose to invest, just the price at which we pay for them. Our team is able to invest in quality companies at discounts that provide both high margins of safety to help protect our clients’ capital and long runways for future growth.

As with all trends, the tide turns. The markets eventually recognize quality and those companies that we purchased at discounted share prices become more fully valued. Therefore, our returns tend to exceed those of the markets, which has been our recent experience. However, the spotlight now makes it increasingly difficult for our team to locate underappreciated quality investments at the desired discounted prices. In times like these, we continue our research, upgrading as we find the odd opportunity, and prepare for that next shift in the tide and ensuing sell-off. We build upon our Dream Team, a list of those quality companies that are not yet offering an adequate margin of safety to warrant an investment. When the next sell-off occurs, we will be ready to pounce.

When markets trend away from quality, we relish the opportunity to upgrade the quality of our portfolios, but we tend to lag the markets. And when quality is recognized, we tend to outperform the markets but our investment opportunities dwindle. It’s never a win-win situation with the double-edged sword – unless you change the perspective.

At Burgundy, we measure success not by short-term market comparisons, but rather by long-term absolute performance, which is a culmination of our ability to protect our clients’ capital and continue to build it over time, regardless of the fads and trends of the day. The key is to minimize losses over time, which in turn maximizes the opportunity for growth.

So, rather than attempting to sit on either edge of the sword, we change the perspective and spin it to the safer, dull side of the blade where our clients can make themselves comfortable and settle in with us for the long haul. Over time, our philosophy – ignoring the trends, focusing company-by-company on the underlying fundamentals and investing with a margin of safety – should lead our clients to their ultimate objectives. They may miss out on some excitement along the way, but chances are they’ll avoid the bloodshed as well.




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