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About this podcast

This episode, Stu Kedwell, Co-Head of North American Equities, discusses how he is positioning portfolios for the long term, as inflation and geopolitical risks continue to pressure markets. Stu also talks about the importance of the three D’s – diversification, dividends and dollar-cost averaging – as part of an investor’s long-term plan, especially when there is a downturn in the markets. [12 minutes, 30 seconds] (Recorded March 3, 2022)
 

Transcript

Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a very late (S)Tuesdays day today. It is Thursday. I'm not going to be surprised if this podcast actually ends up being available to listeners on Friday. So Stridays might be the latest one we've done, Stu. And at a time when there's all kinds of stuff happening.

You got it, Dave. Definitely, it's a volatile period of time.

That is why we're a little bit late this week. There's a lot of stuff going on. I've been doing quite a bit of work recently with investors and advisors across the country. I don't know if I've ever been bombarded as much with questions as in the last few days, certainly driven by nervousness that relates to the terrible situation in Ukraine, the Russian invasion, the impact that that has economically, but also the human catastrophe that this may be, and all the impacts and the geopolitical ramifications of what Russia is doing now and what they could do next. Bank of Canada increased rates. The Fed is going to be there in a couple of weeks, likely increasing rates. Fed Chairman Powell’s testimony in front of Congress. And the way the markets interpret that. It seems one day the market is risk on, buying everything, market going up, next day risk off, market going down. Oil has been everywhere in the last two years, from minus $40 a barrel now to $115, with who knows what direction that's going. So, Stu, you wrap all this together. I guess that's why they pay you the big bucks.

Well, Dave, it's impossible not to be impacted by what we're seeing each day. What's going on in Ukraine, the pictures, the discussion, any human has no doubt been impacted by it. As a portfolio manager, what you try and do is redouble your conversations that you're having internally around different asset classes. You spend as much time as you can with management of businesses because it reminds you that what you own inside of portfolios is a collection of businesses, and there's a lot of scenarios that those businesses can prepare for. Just as you pointed out, to sit here and say in the last two years, we've had oil at a negative number and now at the highest number in 14 or 15 years. Trying to build your portfolio for just one outcome is an extremely difficult task. We have all these different levers at our disposal, and we try and move from assets where the odds of success might be lower to assets where the odds of success might be higher. When we look at the last couple of weeks, we've had fertilizer companies making all-time highs, because now the market is going to swing dramatically, likely in their favor. We've had energy companies making all-time highs. We have other businesses that maybe are just more pedestrian and they've been a little bit more neutral, and some businesses that have been pressured. In each of those cases, you want to be aware of embedding too much what is going on today as if it will go on forever. My partner Doug has great comments about letting the facts determine decisions. You get facts by going to talk to companies. You ask them well, what happens if this happens? What do you do if that happens? What happens if the economy slows? What do you do then? Well, we do this to expenses, we do this to the business so that we preserve, and still expand the profits in those situations. At the end of the day, the reason that we're comfortable with having our own money and people's money in the equity market, spread across a diverse group of what we think are very good businesses, is because we know that as the environment unfolds, those management teams are going to adjust the business in our behalf and keep that earnings pool growing over a long period of time. When we look at the last six days, I think the S&P has moved greater than 1% every one of those days. I could sit there on one hand and say, well, if I got each of those six moves correct, I would have gained more than 6%. But at the same time, if I got each one of those moves wrong, I would be that much farther back. When I think about the long-term notion of what we're doing here, it's about compounding capital over a very long period of time. We often talk about trying to rush the first doubling, and you miss the last doubling, and the last doubling is where you make all your money. Like Warren Buffett, 95% of his wealth came after the age of 50, those types of things. When I sit and think about the portfolio during periods of time like this, I think a lot about that last doubling. Then the other thing, too, because it's only natural to be somewhat emotional, is if I go to make a change that feels emotionally driven, I try and make a minor one. One of the lines that we use internally is keep your feet moving, and keeping your feet moving is acknowledging in advance that some of the things I do I may want to undo. I'll make little things at the margin, and I'll just constantly be recalculating the odds in my head about how to position us best for success going forward. And that's what's going on on a daily basis.

The doubling that I'm worried about after my 50s is I doubled my body fat percentage. That's not what you're talking about, right? We're talking about doubling assets, not food consumption. Stu, I've come up with a new acronym here. We've got Stu’s days. This is Stu’s Ds; or you got to get your studies in if you spelled it out. And for you, for those who have been listening, it comes back to discipline. Actually, I got a fourth D. I only had three initially, but the discipline would be a big part of it. But what you consistently talk about are diversification, dividends and dollar-cost averaging. Those are Stu’s Ds. Your studies as an investor. As you would say, it works most of the time anyways, but in this environment, that diversification has been critically important, as you just outlined in your comments. We've talked about dividends, and we're seeing the value of dividends, the value of getting that money passed to you, or whether that's shareholder value driven through share repurchases, and then the dollar-cost averaging, which allows you to navigate through those ups and downs and the incredible volatility that we're seeing in markets right now.

That's 100% correct. Businesses, by and large, the ones we own, have good balance sheets, which means already they're prepared for a variety of environments. Then they generate income and it fluctuates over time, but grows through the piece. They have that extra income. Sometimes they have investments, sometimes they give it back to us, sometimes they buy back shares. All of those things work to our benefit over time. And yes, that's one of the big keys to investing.

Then you wrap it up with a solid plan, financial and investment, and then, that discipline. That's what guides you through these periods of uncertainty. It allows you to see past them and focus on that long-term objective, that long-term goal you have. If you do that, you're much more likely to succeed. Like you said, the market is moving at least 1% every day, if we're looking at the S&P 500, and if you think you're going to get it right every time, versus, more likely, that you'll get it right a little bit, also the risk you could get it wrong every time, you're better to focus on that longer-term focus where again, you're seeing through what's happening now, you're drifting away from that volatility and the risk of the downside. That's what's going to get you to your ultimate goal, because wealth is built over time.

That’s right. When you buy a security, you buy a set of assumptions about the future. If the security is rising, then the assumptions about the future need to be better. If the security is falling, then all of a sudden, you're getting an easier future on your side. When we look at the volatility, if a stock goes up a lot, it's now embedding a rosier future, and we have to say, is that future even better, or is it more likely? If one of those two things isn't as true, then the stock has run too far. The same thing for stocks that have declined. But the thing that becomes so important in those assumptions is that it's a very dynamic game. Managements change things. If one company starts to do really well, other management start to copy it and then it makes it less likely that they'll continue to do as well. The same thing on the downside. So what we need to do right in this environment, as we do in all environments, is write down the four or five key assumptions to each investment and go back and revisit those.

Excellent. Well, great stuff, as always. It almost seems boring. For people who are coming and listening to the podcast regularly— more and more of them, by the way, Stu, every episode—, but it seems boring, it seems repetitive, but that is a lot about what you're doing from an investment perspective. You're sticking to the principles, you establish the way you're going to approach markets, the way you're going to approach investing, and then you're generally going to stick to it unless something's changing in your life or something is changing dramatically, big picture wise. It makes it less exciting than the back and forth, up and down, but likely a lot more fruitful over the long run.

We wrote a piece about ten years ago on our investment process and it hasn't really changed. When I sit here at home, actually I have a little stuffed animal that I pretend is a client and so I sit here saying, well, that client’s watching me all day long and I've told him what we're going to do. So I better be doing it.

I don't know what to say about that one, Stu.

That stuffed animal doesn't look like you, Dave.

Ok good. I was a little worried there. That's good to hear. A teddy bear? A unicorn? A dog?

A teddy bear. Maybe it is kind of like you.

Maybe it is. If it’s 35% body fat now, recent doubling. Okay, Stu, great stuff. And as always, thanks again for your thoughts in that relatively uncertain time for a lot of investors.

Great thanks, Dave.

Disclosure

Recorded: Mar 6, 2022

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