Patient Capital Management’s defining investment principles: Patience, diligence, temperament

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Patient Capital Management Inc. was founded in 2000 on a foundation of disciplined value investing in companies around the world. CFO spoke to co-founder, president and portfolio manager Vito Maida, and vice president, research Mansur Khan, about their focus on value investing through numerous business cycles.

Prior to founding Patient Capital, Maida held portfolio management positions at Trimark Financial Corp., Hamblin Watsa Investment Counsel and the Ontario Municipal Employee Retirement System. He’s developed a reputation as a leading proponent of value investing.

Khan joined Patient Capital in 2015 following six years in equity research with Dundee Securities as an associate and analyst, performing fundamental analysis on companies in sectors ranging from aerospace to mining.

CFO: What was the strategy behind the founding of Patient Capital Management?

VM: Our objective was to create an investment counsel where we could practice value investing at its purest. Our view was to focus on absolute value, which for us meant purchasing a maximum of 20 high quality securities that were trading at a 40 to 50 per cent discount from their intrinsic value  with an aim to preserve and protect capital. In the entire history of Patient Capital, we have only invested in a total of approximately 50 companies for our high net worth clients.

MK: The traditional view is that you have to be fully invested at all times. What has differentiated us from the very beginning was that if we can’t find companies that meet our criteria, for both quality and value, we hold T-bills and fixed-income securities until we find those companies.

CFO: How did you choose the name for the firm?

VM: Our process lends itself to being patient. We’re diligent and spend a lot of time understanding businesses and developing a thorough understanding of their intrinsic value. On the other side, our average holding period is about five years, though we’ve held some investments for 20 years. We can be patient because we’re very confident in our knowledge of those businesses.

CFO: What does your investment screening process look like?

MK: We’re looking for sound, high-quality businesses, which others do. But I think where we differ is that we make it a point to focus on the valuation part as well. The quality of the underlying business can be great, but if you overpaid for it you can either earn a substandard rate of return or worse, lose money. A combination of high quality and purchasing these businesses at a substantial discount to their intrinsic value is fundamental to how we go about it.

CFO: How important are dividends to your considerations? 

VM: We are indifferent as to whether we see returns through capital appreciation or a combination of capital appreciation and income. However, most stocks we purchase do pay dividends and because we’re buying these stocks when they’re out of favour, the dividend yield in our portfolio is typically substantially above that of major indices.

CFO: What’s your exit strategy for the equities you hold?

VM: At the time we buy, we have a very good idea of the price at which we want to exit. When the stock reaches its intrinsic value, we sell. We price growth into that target price, and although we continuously  monitor our investments, our target price rarely changes.

CFO: How did the market react to your value proposition initially?

VM: We launched in 2000 at the height of the tech bubble, when Nortel represented 40 per cent of the index. We were meeting lots of clients, but when we told them we would not invest in those high-tech flyers of the day we didn’t get much traction. When the Internet bubble burst, we got some attention because clients and prospective clients appreciated our focus on the preservation of capital, and then our business started to grow from there.

CFO: Do you like any sectors better than any others?

VM: No. We will only own businesses that have had a long operating history, that we understand and that offer real products and services. We will not buy new or emerging technologies that depend on either product innovation or substantial market growth to generate profit.

CFO: If value investing is a successful strategy over the long term, why aren’t more investment firms offering that approach?

VM: Value investing is simple, but not easy, and it’s got to do with temperament. You’ve got to go against the crowd and you’ve got to have the patience to wait it out for a long period of time and develop a thick skin to take the criticism while you’re temporarily underperforming, or you’re buying something that is totally misunderstood while ignoring the popular companies of the day.

CFO: If a client asked you why you weren’t investing in a popular tech stock, how would you explain your strategy to them?

VM:  Some high-flying tech stocks represent companies that have never made money. Value investing looks at these companies and says there is no “right price” at which to buy. Guessing at the right price, in such cases, is pure speculation.

CFO: Who is the ideal Patient Capital client?

VM: We try to screen out people who we believe don’t understand and accept our investment philosophy and we are willing say “no” to prospective clients. Having said that, human nature being what it is, a lot of people have great intentions of following through. But when the markets get into speculative bubbles, FOMO overtakes them and their emotions get the better of them. Just as the investment team has to have the proper temperament to practice value investing, so do our clients.

Lysander Funds offers the Lysander-Patient Capital Equity Fund, Series A and Series F, managed by Patient Capital.

For more information on Patient Capital Management, visit: https://patientcapital.com.

For more information on Lysander Funds, visit: www.lysanderfunds.com

The views and information expressed in this article are for informational purposes only. They are not intended as investment, financial, legal, accounting, tax or other advice and should not be relied upon in that regard. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

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