The Value Proposition: Sionna’s Common Sense Path to Investment Success, by well-known Canadian practitioner Kim Shannon, CFA, covers a wide range of aspects of value investing. It constitutes a valuable education in this field, addressing numerous topics that are either seldom discussed or usually touched on only briefly. The book is an informative guide for those striving to gain a deeper understanding of and improve their skills in value investing.
Shannon has more than 25 years of experience as a value investor and is currently chief investment officer of the firm she founded in 2002, Sionna Investment Managers. She has been very active in the investment community, often speaking at conferences, and has served as a board member and as president of CFA Society Toronto. Although she focuses largely on the Canadian market, which is fairly concentrated and resource oriented, the concepts she discusses apply to all value stocks and all markets.
The book’s topics range across the spectrum of value investing, and three of its major themes are dealt with only lightly in most other value investing books and rarely from the viewpoint of an experienced practitioner.
The first theme pertains to the ways in which a value manager shifts gears as market conditions change. No single approach is best for bull markets, bear markets, and sideways markets. Market cycles may include bubbles and bursts, as well as sector-specific bull markets, particularly in technology, commodities, and gold. During prolonged upturns, value managers may sit on the sidelines for long periods, underperforming and having their strategies questioned by their clients. They survive these ordeals because they believe that value eventually comes to the fore. Shannon examines how different management styles fare in different types of markets and what their strengths and weaknesses are in comparison to value. Specific style-related topics include speculation versus investing, top down, sector rotation, technical analysis, story or trend anticipation, growth, growth at a reasonable price, and momentum.
Among the most interesting and less frequently discussed aspects of the adaptation-to-conditions theme is a discussion of sideways markets. This phenomenon occurs surprisingly frequently, as detailed by Vitaly Katsenelson in Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2011). Shannon documents that markets have been “range bound” for some 100 of the past 140 years. Sideways markets can be deceptive and are often misinterpreted; misvaluations tend to be corrected eventually, however, as assets revert to more normal levels. Shannon’s exploration of sideways markets leads to a discussion of dividends and dividend growth—a key aspect of investment returns and one from which value investors of all types tend to benefit.
A second major theme involves the definition and calculation of intrinsic value. Shannon extensively quotes Benjamin Graham, David Dodd, and Philip Fisher about how difficult it is to be confident in one’s assessment of intrinsic value. According to Graham and Dodd in Security Analysis (McGraw-Hill, 2009, 6th ed.), “In general terms, it is understood to be that intrinsic value is justified by the facts (e.g., the assets, earnings, dividends, definite prospects as distinct, let us say, from market quotations established by artificial manipulation or distorted by psychological excesses). But, it is a great mistake to imagine that intrinsic value is as definite and as determinable as is the market price” (p. 68). The material on intrinsic value is accompanied by a wide-ranging and useful discussion of what constitutes normal economic equilibrium, reversion to the mean, and value traps.
A third theme concerns portfolio construction and rebalancing. Although abundant portfolio theory on diversification exists, this practitioner’s viewpoint is well worth reading. Shannon shows how various asset classes perform under different regimes, such as inflationary and deflationary environments, and demonstrates that the value technique of buying low and selling high stands up well over the long term.
The author gives the example of a very wealthy European family, the descendants of Jakob Fugger (1459–1525), whose wealth has survived for 25 generations to date. She addresses performance at the portfolio, sector, and individual stock levels. Additional topics include the ability to move away from the crowd in such episodes as the tech bubble, the importance of recognizing and avoiding investment fads, and the wisdom of taking a cautious approach to merger activity.
The Value Proposition includes, in addition to these major themes, a discussion of analyzing financial reports and conducting management interviews. Financial statement analysis can be extremely difficult because numbers can lie, accounting treatments can change, and statements can be marketing oriented and overlook often unattractive realities. The bottom line is that an analyst must be something of a Sherlock Holmes. A management interview includes such activities as viewing the company’s offices and touring its production facilities, the benefit of which is that the whole picture of the company being analyzed becomes much clearer. There is a “gut” aspect to the experience; the analyst not only gets an opportunity to ask questions about the financial numbers but also gains exposure to the firm’s culture. Interpreting this additional information is no simple matter, though. “If you think looking at financial statements can be challenging,” writes Shannon, “try looking into the eyes of the people responsible for those financial statements.”
Overall, The Value Proposition is a highly worthwhile contribution to our current understanding of the value investing style. The book is well researched, well written, and very enjoyable to read. It addresses quite a range of topics not often covered in other literature on the subject.