A Comment -- General Comments From an Expert (A Commentary)

We just had such a bad year last year. Bonds going down and stocks going down was a once-in-a-century event. Statistically, it's highly unlikely that will happen again. We're having a bounce off of that. He's in the camp that's saying this is a relief rally. He wants to see earnings move through the economy. Last year, we had a really expensive market with low interest rates, and that stuffing has come out of valuations. Next move is all of this cost pressure and the economy slowing has to go through earnings, and that's going to take 12 months to see. Will take a couple of years to play through profit margins across North America. Almost like a slow motion correction. He's still invested, but very particular about what he owns. He's being cautious, patient. 

There have been no big credit events yet. Corporations don't have to pay the higher interest payments right away. They have to wait for a bond to mature and see what rate it's going to roll over to, and that takes time. Interest rates have gotten into the mid-zone of 4-5%, and we have to see how that affects profit margins in all these different industries. Each market has its own dynamics. What's different this time is the incredibly low unemployment rate. We're just coming off Covid, our largest economic and social experiment in human history, as the last time this happened we had 1B people, but now we have 8B.

Do I wait for a low probability of that? It doesn't mean it doesn't happen, and it would be nice not to own things on that day. He's trying to structure the portfolio right now to solve that problem. Maybe we do have a real recession and they can't lower interest rates for all sorts of reasons and the stock market suffers again. If we have this slow motion correction over 2-3 years, can you own the stocks in your portfolio? You need to focus on how much income is a company producing? With a stable, income-producing business, you can capture that income and compound it through this market. Whereas with a biotech company, if the stock goes down, you just have less money. This year, he's building defensiveness into his strategy.

Since everyone now has a cell phone, the options industry has exploded. He doesn't do it. He runs a long-only, pension-type strategy. His focus is bringing stability to investments.

Half his portfolio is comprised of growers. But the other half is made up of more static businesses. Just as you own the corner store and it's profitable, it doesn't mean you need to open more stores. If it makes money, you can go do something extra with that free cashflow. And it always depends on what you're paying. If you're paying for growth, and you don't get growth, like AAPL or MSFT whose earnings have come off but are still expensive, that's not good. Whereas with other companies that are not pursuing growth, he can double his money very simply over the years without taking on that risk.

The long-term investor wants to own equities. It's well-established that equities outperform fixed income over the long term for the simple reason that equities have the unique ability to increase their earnings. Invest in equities for at least, by default, 5-10 years. The value of equities can fluctuate wildly in the short term. Have the mindset that this is a 5-10 year proposition. High-quality leaders and management of companies are not thinking next week, month, or quarter. They should be thinking 5-10 years down the road. Think as if you own the entire company, or at least a portion of it, which you do. Short-term things that are beyond your control are secondary to the operating and functioning of the business.

He groups the 29 business that he owns into a weighted grouping. Then he does a report twice a year to show the average ROC, growth in earnings, or debt/equity. It's difficult at the granular level to appreciate one business, so an aggregate assessment can help. Focus first on ROIC. Growth in earnings should be strong. You want debt/equity to be low.

Tech stocks are, by definition, long-duration investments. That is, investors are looking to receive cashflows 5-10-15 years down the road. Versus, for example, resource companies where the visibility might be only 5-10 years down the road. For long-duration assets, the present value is more at the whim of interest rates. Rates are probably close to plateauing. With rapidly rising rates, tech stocks were punished by short-term thinking. Flipside has happened. Rates might start going down later this year, and this benefits companies that rely on debt to finance. These stocks probably went too far to the downside, and now the rebound is due to the perception of where rates are headed.

He favours founder-run, founder-owned. Management has skin in the game. High, consistent ROIC of over 20%. Ability to reinvest cashflows and earn a high rate of return. Looks for the "hockey stick" true compounding of value. The conviction levels for stock weightings in his portfolio are 1, 3, 5, or 10%.

Doesn't own any Canadian banks. Banks and financials aren't what he wants to include in his stable. Banks don't really have a lot of opportunities for excess capital. Some have done acquisitions with varying degrees of success, but mostly just pay out a large chunk of earnings in dividends. Scale advantage, favourable regulatory environment. Further competition in the space erodes their moat. If he were to own any banks, the two that stood out when he reviewed them 3 years ago were TD and RY.

The world is in more debt than ever. As you increase debt, you're borrowing from future consumption, and recent growth rates start to drop. A famous study shows that once debt to GDP gets greater than 90%, adding more debt starts to inhibit growth. Debt is worse than before the pandemic. Demographics aren't favourable for growth going forward, nor is productivity. His best guess is that we'll be in a fairly low interest rate environment for quite some time. If you feel that interest rates and inflation are likely to stay low for the next 5-10-15 years, absolutely long-dated government debt will provide you with the best bang for your buck. 

What’s the difference between Mutual funds and ETFs? The most distinctive difference is that most mutual funds are actively managed whereas most ETFs are passively managed. This results in a simpler structure for ETFs and in turn, lower overall fees. Fewer internal transactions, less management and the lack trailing and commission fees all contribute to making ETFs a very low-cost way of getting specific investment exposures. It is not uncommon to find mutual funds with fees over 2% of assets, while the majority of ETFs are below 0.5% on fees. That difference can really add up a lot over time! 
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He's watching inflation and interest rates like everyone else. Maybe we're moving toward a more normalized world. Rates are doing their best to stem inflation, which is not demand-led by a supply-shortage-driven inflation. This will take time. Rates won't go down quickly and would be surprised there are any cuts by year's end. Fundamentals will remain very important--good earnings and balance sheets. Will be a volatile period, so be prepared.... Western markets don't want to be so dependent on China, but that will lead to inflation, because the west will buy fewer, cheaper Chinese goods.

Tips for beginners

Buy a long-term ETF like from Vanguard, then overlay with a bank stock for stability. If you have more risk tolerance, consider TFII or Couche-Tard with a long-term growth horizon. Consider the PE you're paying.

Performance Metrics when Evaluating a Fund: Benchmark Holdings indicate the overlap between the portfolio holdings and the benchmark set for the portfolio. The ‘active’ measure in the third column measures the percentage of the portfolio, as position weight, that differs from the benchmark index. It is a metric quantifying the level of active management within a portfolio. While this metric might not give a whole lot to an investor, investors allocating to investments with a higher portion of ‘active’ holdings typically expect a differentiated return profile relative to a passive or a benchmark-driven portfolio. 
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