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 Chairman's Message - 2001 Annual Report
 2001 was another difficult year for many investors. Fallout from the end of the speculative tech bubble continued. The September 11th attack in New York contributed greater volatility to already weak markets. Adding to this, issues of corporate governance and disclosure surfaced with Enron to further unnerve investors. I have just travelled across the country speaking to thousands of Canadians who attended our annual AIC Investor Summit and clearly the issues that came forward in those forums were evidence of the concerns facing today's investors. In this year's annual report, I'm sharing with you a sample of the questions that I have received. Question: Why have I not made any money on my investments in the last few years? Answer: In the short term, the stock market is a voting machine, reflecting the emotions of the day and not a very accurate valuator of stocks. Over the long run however, the stock market is a weighing machine accurately reflecting the intrinsic value of stocks, in a non-emotional, objective manner. Over the past few years we have experienced an emotional roller-coaster swinging from wreckless abandon with the speculative bubble, to the fear and despair that is pervasive today. Additionally, in its short-term emotional state, the stock market does not distinguish between good, bad or indifferent companies, hence opportunities are presented to buy great businesses at inexpensive prices. The sad events of September 11 caused the stock market to have sold off presenting us with the opportunity to increase our positions in some of our holdings that have a great future. We were buying Amvescap and Merrill Lynch, for example at £5.9 and US$34.5 respectively. Today, Amvescap is £10 and Merrill is US$55. So although it has been many years since investors have seen consistent appreciation, and we certainly empathize with the impatience, unitholders of the AIC Funds should have the comfort in knowing that our high-quality portfolios today represent better value than anytime over the last four years, as stock prices have come down while the underlying businesses continued to strengthen. Eventually, the stock market will reflect this reality. We are confident that given the central banks aggressive reduction of interest rates over the past year, and the current historically low levels of interest rates, our patience will be rewarded. Recoveries always follow recessions. Now is therefore the time to be fully invested and optimistic. Given our confidence and optimism; our portfolios being concentrated; and with a financial services bias, we are well positioned to reward unitholders. Question: Have the rules of investing changed? Answer: Absolutely not. Investors still have a need to:
When Warren Buffett was asked "What is Law #1 in Investing?", his reply was "Don't lose your principal!" How about Law #2? He responded: "Don't forget Law #1." His reasoning is illustrated in the following example. Let's assume you started with $20,000 and lost 50% of your investment in year 1. To get back to your initial principal of $20,000 will take nine years if you compounded at 10% per year.
Having lost time (9 years in this case), what does this mean to your eventual nest egg? It means $20,000 will be worth $317,000 after 29 years compounded at 10% per annum, but only $134,000 if compounded for 20 years - this is more than one-third less. Hence, the importance of not losing time. At AIC our focal concern to preserve capital is reflected in the high-quality nature of the businesses comprising our portfolios. As you read this report, please pay particular attention to the quality of the stocks in your Funds. This should give you solace that your future is secure. Question: Why are the AIC Funds so volatile? Answer: Recently this friend of mine pointed out to me that there are two types of people in the stock market:
The behaviour of both are totally different and governed by their time horizon. Those "in the Game" (ie. speculators) see volatility as synonymous with risk. Their approach is to try to minimize volatility either by diversifying, trading or both-methodologies that have no lineage of creating wealth. Investors on the other hand do not equate volatility to risk. Risk to investors is a function of anything that threatens the long-term success of the business. Remember, as Warren Buffett once said: "I am a better investor because I am a businessman." Messrs. Thomson, Buffett or Weston, the true wealth creators in our society are focused on issues that would threaten the long-term viability of their businesses, and are not at all perturbed by the short-term fluctuation of their stocks-a factor that is outside of their control and in the hands of the emotional crowd behaviour reflected in the stock market. Remember: Worry about only those factors that are within your control. At AIC, our portfolios are managed to achieve investors three needs, which can only be done by owning concentrated portfolios of high-quality businesses that we intend to hold for the long run. It is our concentration that causes the volatility of our portfolios. It is also our concentration that has allowed us to achieve your goals over the long term. Therefore, volatility is a given to the true investor; the key is to take advantage of it when it presents opportunities as was the case in 1987, 1990, 1994, 1998, 2000, and post-September 11, 2001. Question: Why should I continue to invest with AIC? Answer: "To be successful over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information. What's needed is a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework." -Warren Buffett AIC has for more than 15 years been consistent in adhering to the framework of buying excellent companies domiciled in strong, long-term growth industries and holding for the long term. By being committed to this philosophy, AIC's long-term unitholders have prospered by preserving and growing their principal and minimizing their taxes. While it is true that any company can possess or duplicate a framework, it is the discipline to maintain the adherence to that framework over the long run that will determine success. AIC has clearly demonstrated discipline. In recent years, despite market pressures and volatility, AIC has never deviated from its philosophy and principles. Remember: If you stand for nothing, you will fall for everything. Our demonstrated commitment, focus, loyalty, and discipline towards a framework that has a long tradition of success is why you should feel very confident about your future with AIC. 
Michael A. Lee-Chin
Chairman's Message – 2001 Semi-Annual Report "The most important quality for an investor is temperament, not intellect. You don’t need tons of IQ in this business. You don’t have to be able to play nthree-dimensional chess or duplicate bridge. You need a temperament that derives great pleasure neither from being with the crowd nor against the crowd. You know you’re right, not because of the positions of others but because your facts and reasoning are right." Warren Buffett Since present management took control of AIC in January 1, 1987, we embarked on the philosophy of "Buy. Hold. And Prosper.™" This philosophy governs all our Funds and investment decisions. Our product array does not comprise or is not comprised of different philosophies and styles (as in momentum investing, growth investing, value investing, sector rotation, etc.). At first glance, we may seem to be limited in the choices given to unitholders (a heretical business strategy). Our belief and conviction (supported by history) is that all three primary investors’ needs:
can only be achieved by: owning excellent businesses, in strong long-term growth industries, and holding these businesses for the long run ("Buy. Hold. And Prosper."). All other philosophies are sub-optimal in terms of achieving investors’ needs because invariably they are not tax efficient, due to portfolio turnover (hence the issuance of taxable T3s). Our commitment and adherence to our philosophy is rooted in our observation of how the wealthy in our society became wealthy. Their formula can be distilled to a recipe which if practiced will lead to similar results. At AIC, we recognized early in our history that there was a total disconnect between how wealth is created and how portfolios are managed. This disconnect explains why more than 80% of all money managers (over the medium to long run) under-perform their relevant market index. How is Wealth Created? A study of those listed within the Forbes article titled "The World’s Richest People" indicates that the wealthy share some common factors.
(1) They understand their businesses As business owners, these successful business people understand the issues that are relevant to the success of their businesses:
(2) Quality of the Human Capital
(3) Growth of Cash Flow
(4) Hold for the Long Term This process or methodology is what we refer to as the “golden yardstick” of investing. It would stand to reason that if this “golden yardstick” represents the recipe for wealth creation, then investors including portfolio managers would apply this formula consistently. In reality, this is not the case. Hence, our observation that there is a disconnect between how money is managed(pension funds, mutual funds, etc.) versus how wealth is created.
How are portfolios typically managed?
Furthermore, if you are overseeing 120 different businesses every two years, is it possible to really understand each one? Unlikely! Is it possible to really know the character traits of the people comprising each business (i.e. The Human Capital, the "fire in the belly" of the business)? Unlikely! Therefore, if by virtue of the large number of businesses in a typical portfolio it is difficult to understand each business, and to assess the human capital, how is it then possible to have confidence in the future cash-flow generating ability of the business, and to be able to put a value on the business? Hence, portfolios that are too diversified and have high turnover rates are fundamentally flawed vis-à-vis how wealth is created, and will therefore not achieve the three primary needs of investors. Given the foregoing discussion, all AIC Funds are managed in a way that is congruent with how wealth is created. We take concentrated positions in businesses that we:
Maintaining this discipline over time is how we will assist our unitholders to achieve their three primary investment needs. Charles Mungar summarized the preceding very articulately when he said: "You do better to make a few large bets and sit back and wait...there are huge mathematical advantages to doing nothing."
Where are the opportunities today? The news today is certainly most negative. In fact, in certain sectors it is of crisis proportion. We are using this period of volatility to add to our position at prices that we find irresistible. We, therefore, view this short-term gloom in the markets as presenting an opportunity to eventually improve our long-term performance. In summary, despite the fact that our unitholders who came on board in early 1998 are still at break even, we implore you to be patient and optimistic as your portfolios are well positioned over the long term to:
Michael A. Lee-Chin Chairman & Chief Executive Officer AIC Limited |
Portfolio Team |
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Buy. Hold. And Prosper.®
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