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Mutual Fund News


Special to The Globe and Mail


Occupation Engineer

The portfolio Includes shares in Clarke Inc., Advent Wireless Inc., preferred shares in Hyundai Motor Co. and debentures of Lakeview Hotel Investment Corp.

The investor Value investing comes naturally to Michael Bumstead. Engineering school is big on the safety-ofmargin concept: If a bridge needs to support 100 tons, build it for 130 tons. Similarly, if a company's shares are priced at $20, invest only if the company's breakup value is above $20 per share to protect against a loss of principal.

How he finds value When Mr. Bumstead began investing during the recession of 2008, it was like shooting fish in a barrel. Now, he has to work harder.

This means poking around "in odd corners of the market" - typically, the segments with low volumes, small market caps and little analyst coverage. In these nooks and crannies, there is little competition from big or institutional investors for undervalued companies with margins of safety.

He keeps an eye out for companies so beaten up that their shares trade below net cash (cash minus all liabilities). He'll also look for companies trading at low price-to-earnings ratios or less than "conservatively calculated book value."

Advent Wireless, a retailer of Rogers' wireless products, is trading for slightly more than the value of its cash and real estate. The market is valuing its profitable operating business for a song.

Mr. Bumstead recently purchased shares in investment company Clarke Inc. after it announced a sale of their largest division. "The shares were trading well below pro-forma book value [balance sheet adjusted for the sold division]."

Best move

He bought preferred shares in Strategic Hotels & Resorts Inc. at $2 (U.S.) during the 2008 recession and they eventually recovered to their $25 par value. "The company's hotels had significant franchise value that the market wasn't recognizing."

Worst move

Yellow Pages Income Fund's dividend seemed safe based on the income fund's trailing results. "But I did not put enough emphasis on the future prospects of the business."


When you have a strong conviction about a stock, see whether smart people can find holes in your logic. If they can't, bet big. "The best ideas are what will drive returns."

Want to share your strategies? E-mail

© 2007 The Globe and Mail. All rights reserved.

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