The Value Proposition: Sionna's Common Sense Path to Investment Success

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Introduction

WHAT'S IN A NAME: WHY SIONNA?

There's a certain lore associated with the name chosen by well-known companies...

...Search Wikipedia for company name etymologies and you'll get links to fascinating individual entries under every letter of the alphabet. Some are prosaic and fairly obvious (the combined first names or surnames of the business partners), and some have evolved into globally known acronyms or abbreviations that are more memorable than their word-form origins. Others are creatively invented sound combinations that strike a chord with their intended audiences.

When it came time to give Sionna its name, I knew that naming the company after myself went against my preference for building a team culture. At the same time, there was the genuine challenge that every other conceivable name relating to investments appeared to have been taken – and those that weren't were probably not worth taking. It doesn't require an MBA to know that the name of a company is intrinsically important to securing its place in the market, to its positioning with its clients and prospects and, ultimately, to its success. A corporate identity is the brand that all other sub-brands rely upon for their foundation – even if the brand strategy keeps them separate, there's still a relationship. No matter what, you are known by your name. So, your selection had better be sound, and it should say something that creates a compelling connection between your organization and its audiences.

I faced a dilemma. After some thought, I decided to try to solve it by asking my father to check his Gaelic dictionary for equivalents to English words that meant something to me. I asked him to look up trustworthy, dependable, value and consistent – in other words, the very words that define the values I hold dear in both my professional and personal life. These words articulate the principles that have become the foundation for the company I built.

What my father found (and Wikipedia confirms) is that Sionna is closely associated with wisdom. The mythological origins of the word also capture the notion that we are transformed by the knowledge we gain in the pursuit of wisdom. And in a final discovery that was pure serendipity, I learned that Sionna is the Gaelic source for Shannon.

The name for Sionna Investment Managers was, in some sense, fated. It was original. It was free from branding conflicts that keep intellectual property lawyers preoccupied. It was associated with my belief in applying wisdom to investment decision-making, and it afforded me a cloak of privacy while honouring my family origins. My only hope is that everyone we encounter will agree that the name of the company is fitting and that we are truly worthy of it.

FOREWORD: BY DIAN COHEN

Warp speed and video-game wild: that's stock trading today. It's driven by computer programs, organized from server parks as big as football fields that power bots through so-called dark pools...

...These are places in cyberspace where investment banks such as UBS and Goldman trade huge stock lots (or whales), invisibly and without immediately roiling the markets, faster than you can say nanosecond. The only thing regular investors see are the final prices.

It's an open question whether this kind of market can allocate investors' capital to where entrepreneurs can use it to create new value. Arguably, equity markets have become a machine for chasing paper gains and bonuses for the button-pushing traders rather than the source of oxygen for a renewed industrial revolution.

Yet surprisingly, amidst all the high-tech, light-speed transacting and photon-thin margins that characterize digitally driven stock trading today, one reliable path to building a nest egg with equities remains accessible to the average investor. And it doesn't even require a computer. It only takes common sense and discipline. That's Kim Shannon's common sense investing secret, which, following an extensive apprenticeship and career in value investing, she has pursued with dedicated rigour for 10 years as head of Sionna Investment Managers in Toronto.

I first met Kim when I was national business editor at CTV. We were both young professionals (well, to be honest, I was 25 years older), both on our way up in a world that was almost exclusively dominated by men. Today that's no longer the case. We both felt we had to prove that women could do better – not just as well, but better – than the guys. And in our own way, I think we succeeded. Just as I spent more time than most of my male colleagues getting to know senior managers of Canada's leading companies and understanding how their businesses worked, Kim did the same from her vantage point as an investment analyst, investment officer, fund manager and finally CEO/CIO of her own firm.

Both of us had our male mentors and perhaps took their insightful messages to heart more than some of our male colleagues. I was finding ways to make executives feel more comfortable on TV, so they would tell us things they might not if they were too uptight. For Kim, it was diligent research and then confronting top management of her target companies for an explanation of the issues she uncovered. Sometimes these encounters got a bit tense. Some of the best pages in this valuable book are those in which Kim describes her meetings with some of the world's toughest and most prominent CEOs.

It's no secret that the last few years have been terrible for equities. As I write, it appears we're not yet out of the woods. The near future looks seriously accident prone. The best we can probably expect after years of recession and weak recovery is more low growth as western economies try to de-leverage their debts and Asian growth slows.

But the micro picture contains better stories than that: new companies with new technologies building whole new industries as they emerge from the rubble of the last few years. Some familiar names, too, with strong management teams, are reconstituting their business models and beginning to find streams of free cash as they reorganize and become more efficient. As growth slowly returns, more companies that are now just hoarding cash will reinvest and expand. Finding these companies takes research. Understanding their strengths and evaluating their new potential also takes experience. As their dividend payments grow, so will your portfolios if you happen to be foresighted enough to have placed them in Kim's hands. Kim is a strongly client-oriented value investor. The world needs firms like hers. For her firm doesn't speculate, it invests – first analyzing company performance along with the quality of the management team. This is a proven technique. But with all the hype about quants and their investing formulas and technical software, much of the general understanding about value investing has been lost on the general public. As Kim points out in this book, value investing's success is rooted in a reality that Einstein once called the most powerful force in the universe: compound interest.

History shows that investing dividends back into the market is one of the best guarantees that a portfolio will continue to grow and that its long-term results will outperform other forms of investment.

Strong companies making products that people need and can pay for generate profits that they share with investors as dividends. History shows that investing dividends back into the market is one of the best guarantees that a portfolio will continue to grow and that its long-term results will outperform other forms of investment (e.g., real estate or fixed-income instruments such as bonds). Accumulated dividends from a portfolio are equivalent to compound interest payments that add wealth every quarter.

Kim has grown from being a skilled practitioner of value-based investment management skills to achieving mature mastery of her art. If she were the kind to boast – which she is not – she might share with you the professional secret that gives her the greatest satisfaction: she has never lost any investor money. Like all master practitioners, Kim has adapted and evolved her methods to ensure they are more than a match for today's new hyper-driven trading environment.

In this book, Kim describes the skills and judgment of a master fund manager and how she acquired them. Her credo, common sense investing, is laid out as clearly as possible. The techniques she sets out have allowed her clients to come through a devastating global financial crisis with their wealth intact.

In a world in which super fast computers and high-frequency traders using algos are turning the stock market into a casino of one-arm bandits, it's exciting to think that Kim's tried and tested investment skills will add new wealth to our portfolios as we experience the prosperity that will mark the recovery and post-recovery period ahead.

THE VALUE PROPOSITION: MAKING A CASE

Whenever I walk around the streets of, say, Guelph or Regina, White Rock or Sainte-Foy, and see Canadians going about their lives, I am reminded that these are our clients...

...Whether at the pension level or the retail mutual fund level, we're managing money for people who have worked hard for it and will need to live off it or use it someday. If they're going to pay for a professional manager, clients need to get value for their money, which means preserving their money first and building wealth from there. We remain ever mindful of our enormous responsibility to them. The Value Proposition: Sionna's Common Sense Path to Investment Success is a record of how we invest our clients' money. We know of no better way to serve our investors than to use the time-tested value approach pioneered by Benjamin Graham and David L. Dodd.

Graham and Dodd are, hands down, the Shakespearean duo of the financial industry. For a couple of financial guys, they left an enduring canon of wisdom dedicated to value investing. Exchanging value has been inherent in all forms of transaction since the beginning of time, but assessing value and paying the right price for it has always been tricky. Graham and Dodd codified the principles of assessing value for investment purposes in their classic book Security Analysis; their profound insights remain as relevant today as when they were written in 1934 – in the midst of the Great Depression.¹ At Sionna, we have such reverence for this body of knowledge that we keep a signed, first-edition copy of Security Analysis in a glass case in our office lobby. It serves as a constant reminder of the classic principles and techniques we use every day as we manage investments on behalf of our clients.

The Value Proposition: Sionna's Common Sense Path to Investment Success is our effort to make a contribution to the value investing literature. We have not flattered ourselves into thinking that we are remotely close in stature to the likes of Graham, Dodd or any of the other value investor greats. However, we have a particular take on value investing principles and have had success with our methods. This book is our value proposition: Sionna's interpretation of these principles and how we've adapted them to the idiosyncrasies of the Canadian equity markets. After all, principles should not be dogma, instead they should be open to interpretation according to context and circumstance. Canadian equity markets are heavily concentrated in the resource and financial sectors and value investing requires some adjustment in order to work within these skews. To remain diversified, we often need to take a relative value approach, whereby we select the least expensive stock in a sector, even if the entire sector appears overvalued. In this book, we offer up our relative value methodology and rationale for scrutiny in the hopes that our learning will provide insight into how value can work in skewed markets.

We chose the first part of the book's name – The Value Proposition – because it speaks to several layers of meaning. First, to make a proposition is to take a stance and make a case. Second, a value proposition is a business term that relates to a company's or product's promise of benefit to a customer, client or consumer. In writing this book, we make a case that the value approach can benefit investors by preserving capital and building their wealth over the long term. Our stance is one of solid commitment to the value style of investing, despite the fact that value is often considered to be passé or out of step with the industry. We find this happening now with the sharp increase in passive investing strategies and a plethora of synthetic products. At a time like this, we believe it is even more critical to make a rational case for the value approach. All of the evidence tells us that value will prevail as an important investment strategy because it proves itself consistently over the long term.

The second part of the book's title – Sionna's Common Sense Path to Investment Success – reflects our belief that investing is largely psychological and influenced by the human factor. When it comes to money, human beings can be volatile and emotional and can behave quite illogically, particularly when in a group. Stock markets can be fraught with irrational behaviour. Knowing this, Sionna takes a practical, common sense approach with a rational process to filter out emotion. We use judgment and make sure it's grounded in evidence and experience, taking into account history and the larger issues at play. All of this means that, while we are part of the investment industry, we must also maintain a healthy skeptical attitude. We do so by remaining perpetual students of the industry – of investment history and current events – and by recognizing that we must remain separate and independent of the industry. English poet Lord Byron captured this insider/outsider position extremely well in verse:

"I STOOD / Among them, but not of them – in a shroud / Of thoughts which were not their thoughts, and still could, / Had