CUNDILL VALUE & CUNDILL SECURITY FUND'S
PETER CUNDILL & TIM MCELVAINE
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OID: Albeit if the reinvestment opportunity were right, I suspect that you wouldn't mind capital expenditures well in excess of depreciation.
   McElvaine: True. But we trust these managers to make that judgement. And, quite frankly, Reitman's has been doing that by purchasing existing chains in distress as they've been available -- and doing it, I should add, in a very disciplined way.

OID: Aren't retail inventories another source of hidden liabilities because they lead to periodic inventory write-downs if they don't catch the latest fad or style just right or if too many competitors catch it, too -- especially in women's apparel.
   McElvaine: There's no question about it. There are a lot of negatives about the business. And, like I said, these are very fragile businesses.

OID: Fragile?
   McElvaine: Let me put it this way: I quoted Buffett at our annual meeting about how some businesses only require you to be smart once, whereas in retailing, you have to be smart every single day.

OID: But you can live with those negatives at 2-4 times earnings.
   McElvaine: That's part of it. But the other part is that both in the case of Chateau Stores and Reitman's, management owns a significant amount of stock. In the case of Chateau Stores, 2/3s of the stock is owned by Herschel Segal. And in the case of Reitman's, over 50% of the stock is owned by the Reitman family.
   So we have significant shareholders there that we're comfortable with who are concerned about things like making sure that inventory is cleared each year and other things like that. Their bonus isn't dependent on any single year's net income. And significant parts of their net worth are tied up in the entire enterprise.
   So, in my opinion, the key to Chateau and Reitman's earning above average returns is very, very simple. And that's their management.

OID: So it's in the execution, not the strategy.
   McElvaine: That's right. They're really focused -- first on their margins and second on their balance sheets. In both cases, these balance sheets are very, very clean. And managing them is one thing Reitman's management does especially well. They don't spend a penny on the stores -- whether it's in the decor, the finish or the inventory itself -- that they don't absolutely have to spend.
   So the returns associated with Reitman's and Chateau are due in no small part to the fact that they have significant shareholders involved in the business. And that's a very important point -- or at least it is to us.

OID: It's the swordsman more than the sword.
   McElvaine: Right. Because it's a retail business, someone has to be there all the time. I don't think it's based on franchise value. There are very few barriers to entry in the niche they're in. It's a mighty tough business. Certainly, it isn't a business that I would want to go into.
   But if I spend any time at night worrying about them, at least I know that Reitman's Jeremy and Stephen Reitman and Chateau's Herschel Segal spend far more time worrying about their solvency then I do -- because I'm a lot more diversified than they are.

OID: Misery loves company?
   McElvaine: I don't know about that. But I do know that it's comforting to me -- especially in this business.

OID: Have both companies' managements treated minority shareholders fairly over the years?
   McElvaine: There's been nothing that suggests they've treated people exceptionally, but nothing that would indicate they've been treating people poorly either. Neither one takes a horrendous amount of money out of the company. Most of their money comes via dividends.

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