Hello and welcome to the Download. I'm your host, Dave Richardson, and it's kind of a sad Stu’s days because this is our last Stu’s day of 2023. Stu, it's been a lovely year connecting with you most weeks, occasionally on Tuesday and sometimes on other days of the week. But we were relatively disciplined. Well, you were. I had a few slips. But we must have packed a good 40+ quality podcast in over the year.

Yeah, we had a good year. Dave, it's always fun talking to you every Tuesday, or thereabouts.

Wow, I'm honored. That's almost like a Christmas present for me, that praise. I'm not used to that.

I know we're going to talk about things that went right and things that didn't. But the one that got away on you was when I was on the subway, and you had the chance to say Stubway, but didn’t.

I know. Stubway. Yeah. I don't know, sometimes I'm just not that sharp. In fact, it's starting to feel like I'm not that sharp today. Probably the listeners are already going, Stu's carrying this one again, because the host is not at his best. Well, but are you feeling festuve?

Festuve, yeah, that's right.

That's a good one, eh? Maybe I'm not as dumb as I look. We talked about this on a couple of more recent episodes, but this year ended up not being as bad as it certainly looked at one point. And really, when you look back on the year, a pretty good year to be invested. I believe this will be the 100th year in a row that a particular investment strategy was the strategy of the year. We'll leave that for the exciting conclusion of the podcast. But it ended up being a fairly decent year, particularly this raging rally that we've been on since the end of October. But when you look at 2023— good year, bad year— maybe talk about some of the things that played out the way or in a different way than you expected?

Back on the year, first off, everyone would have to be honest with themselves in the sense that if you sat here on January 1 and you wrote this script, it would have looked a lot different in many respects. But in many respects, it would look similar. It's a line of my colleague’s, which is, I would rather be generally right and specifically wrong, than specifically right and generally wrong. When I look back on the year, inflation peaking, interest rates peaking; we generally had the rough time frame in play, probably excited about fixed income at the right time, still probably a little bit hesitant on pockets of the equity market, just worried about how the economy was going to exactly play out. And until a couple of weeks ago, the broader equity market hadn't really done anything. And then it kicked into gear on the notion that things might slow down. But the central bank's change in terminology gave people the confidence that they would be forward looking rather than data dependent if we had a slowdown. And that's probably one of the big reminders of the year. We always talk about it from a company standpoint, because great companies are always tinkering with their business. We've talked a lot about that. When things slow down, they do this. When things speed up, they do that. Just before the podcast we were with a great Canadian convenience store operator, and you just think about how that business has changed; car wash and in-store food, the business just has evolved in so many different ways. And that's always the free option that comes to you in the stock market. The first thing is good companies have got you through this year for sure. The second is that central banks function in a similar manner. The things that you worry about, they worry about. So as a result, you may not have to worry as much about them because they are also worried. That's one of the dynamics that has been a really useful reminder this year. The old adage says the market will panic until the central banks panic, and then they stop panicking. And we probably saw that on the upside on interest rates. And then the concern if the economy would slow down too much once the central banks acknowledged that they too were looking at that. Equity markets took off. Fixed income has been really strong basically since the summer. The other thing that I think is just the hallmark of any good investment process is scenario analysis and preparing your portfolio for all sorts of outcomes at the same time simultaneously. It's always interesting when we have a young analyst, and we go and ask him to simultaneously work on the bear case and the bull case. And it's not about always predicting what will happen. In fact, great portfolio management rarely involves predicting what will happen, but figuring out what is priced into markets and where are the opportunities. And that has definitely proven out this year. And also, we've seen this a number of times, money is made when perception shifts. And we've had bullish perception shifts, bearish perception shifts, volatility all over the place. And that type of scenario analysis really allows you to keep your wits about you during those periods of volatility. So those are age old lessons, but they definitely bore fruit this year.

Yeah. I want to come back on a couple of things that you said, particularly your example of the convenience store. We had our colleague Dave Lambert on a few times through the year, and one of the things that I find particularly interesting about the way that he thinks about Europe and European equities— but it applies everywhere—, we get so focused on technology or innovation being just technology— a new piece of software, a new app, some kind of fantastic new technology—, when innovation is happening all the time in every industry. And what's the hallmark of great companies and great management teams, as you highlight, is they are constantly on the lookout for ways to innovate their business, to drive value for shareholders. And it can come on a number of fronts. Like you say, I'm operating a gas station with a convenience store, and I start to offer a wider range of hot foods so that people come in in the morning to fill their tank of gas, get a coffee, get a snack, and off they go. And it's just a whole different stream of revenue. I know that doesn't sound radically innovative in any way, but again, you think 20 years ago, that wasn't the case, you didn't have that option. And there's just so many things, whether it's innovation in fashion, innovation in the way you manage the finances within your business, it can be on any number of fronts, that innovation spurs value and appreciation, the value of a company over time. And you've got to look for it. It's interesting that you brought that specific instance up. And then the other thing is, I love your piece on getting the young analysts to look at the bear case and the bull case. The best-case scenario and the worst-case scenario. And you got a path that's probably your most-likely scenario as well. But looking at the whole range. And I think if you think about coming into 2023. And how we were off a very difficult 2022, particularly how rapidly interest rates rose, how tough it was on fixed-income markets, and that bled through into the stock market, particularly in technology. If you started down a particular path and you were just rigid around your thinking that this is the way it's going to play out, you had a tough year in 2023. But if you were operating with a range and the flexibility to see and place your bets accordingly, it ended up being a very good year.

Yeah, 100%. And mixing in behavioral finance. How you feel. You think back to those periods where your shoulders just feel a little tense. That's probably a good time to put money to work. Again, these are old adages, because they always work, but the worse something feels… Normally your best investments are made when things feel worse. And those things all held true this year.

Yeah, one thing that I like to think about, people who are in retirement. We got to the middle of the year and it really got to a nice spot for people who are in retirement. You could get a very high guaranteed rate if you wanted to go that route. You were in a fantastic position in fixed-income markets because rates were in the process of peaking. And when they come down the other side, that drives opportunities for you as a more conservative investor. And then you look back just two or three months ago, in the area of conservative and dividend paying stocks, there were some really fantastic opportunities as rates were peaking. If you came into 2023 and this was the year you were retiring, it ended up setting up for a pretty nice start to hopefully many years in retirement. And actually, where we finish and where we even likely end up as rates come down will still be a better environment for people who are in retirement than what we were working through for much of the last decade.

Yeah, the level of cash flow available from fixed income. We can get so affected by share price movement and having to remember that the volatility of the underlying earnings is not nearly as volatile as the share price itself. And a lot of these great businesses that pay dividends and have lots of cash flow and they have cash flow to reinvest, to keep your business growing. These things are all the long-term tenants that create portfolio returns, and we don't need lots of reminders of those. And we get the benefit of sitting down and really knowing the businesses that are in our portfolios and how all those calculations work and what have you. But just a set of good businesses that are generating free cash flow with good balance sheets. They have all the optionality to deal with the environment that goes through periods of worry and jubilation and compound on behalf of their shareholders over long periods of time. That still remains very much the case today.

Yeah, great leadership, innovative, a strong position in the market to begin with, a focus on shareholder value. You roll those things together and you put a portfolio of those companies together, it might look a lot like some of the portfolios you manage, wouldn't it?

I hope so.

But those are really the keys to what you're looking for. And again, I hope as we've been doing these podcasts now— I guess we're on three years doing these together, Stu, but again, we were really consistent in getting out most weeks this year—, that those messages continue to come across that you're looking for particular types of companies or you're trying to build a portfolio of stocks and bonds that look a particular way. And if you do that, it can be frustrating in the short term, but generally as things play out, you're going to be rewarded for that.

Yeah, that's bang on. I'm sure lots of people that are listening— hopefully there's lots of people—, but they probably run businesses themselves or they're at businesses themselves. And most of those businesses are constructed in a very forward-looking manner. How do we generate value over time? And sometimes the daily gyration divorces how we think about stocks as companies, but underneath the hood, that's all going on on our behalf.

And let's just finish off, because I think this might be one of the all-time classic years for dollar cost average. Again, you're looking at the front end of the year, a lot of uncertainty. So do you want to take a big lump sum of money, if you had new money, and roll it into the fixed-income market, roll it into equity markets? Well, probably not at the start of the year. But if you had taken that and rolled it in through the twelve months, it looks pretty good right now because both had the downside and then the strong finish. And those are the classic periods where a dollar cost averaging strategy works. It's just unfortunate that you weren't stressing that on pretty much every episode of the podcast this year, because if anybody listened to you, it would have worked out great for them and they might think that you're pretty smart.

We've talked about this: on my wall, I have all these quotes, and one of them is JP Morgan. When asked what stock prices will do, he says: they will fluctuate, young man, they will fluctuate. And that quote is almost 100 years ago. But knowing that quote, it's pretty hard to argue with dollar cost averaging, because in the short term they fluctuate, and in the long term they do a lot of heavy lifting. And that's what dollar cost averaging really attaches yourself to.

Yeah, and we had Dan Chornous on, and he's got a very important view in terms of where we are with fixed income, and that's really hit him over the last couple of months, and we've talked a lot about that on episodes with the various guests this year. As you say, there's still a little bit of uncertainty around equity markets as we figure out exactly what's going to happen with the economy. So I want to be in equity markets, if I had new money to put in, I'm going to go in fairly gradually. I don't think that view changes.

No, it's an excellent tool almost in any environment.

All right, Stu, well, again, I hope you enjoy your festuvities and you and the family have a great holiday season. We're going to miss the next couple of weeks, so actually it'll be a holiday season without Stu’s days. Can you use a break? My mom's a little upset, but we'll talk about that later. But we will be back fresh in the new year. And what we'll do to start the new year, instead of looking back as we did on this episode, we'll look forward, because the new year always starts with a different kind of feel and you start to look forward to what's going to happen in the new year, and we'll certainly do that together. And I'll be interested to see what you're thinking about coming back from the holidays and looking into what I hope is going to be a really great 2024. 2023? Not the best of years overall. Markets were okay, but hopefully 2024 is great for all the listeners. I hope you have a great holiday season and happy new year to everyone. And Stu, I'm sure you've got some wishes for the loyal listeners.

Well, all the best, everyone. And to you and yours, Dave, have a great holiday.

Thanks, Stu. See you in the new year.