Welcome to The Download. I'm your host, Dave Richardson, and it is a super-stylish Stu's Day. Stu, you are looking fantastic today.

Well, I put the tie on for you, Dave. I thought you'd like that today.

I know. The only problem is I think that's my tie. I lost that tie on one of the conferences that we went to, and now I think I know where it ended up. That's maybe why you look so good.

Finders keepers, you know.

Well it looks better on you than me. So that's good. If not, I would have thrown a tie on myself. But hey, again, we continue to roll the record highs in markets, which, as we talked about last week—for me anyways, and maybe you'd agree or disagree—but this is one of the most phenomenal markets that I've ever seen, and it just continues to roll. But as always, you've got to keep an eye on what you're doing, even in a great market, because if we've learned anything, markets can turn on a dime. One of the things that you use, and we'll focus on it today, you're always listening to different analysts from different companies. Actually, if we're listening to the business news or we're reading online, we see analysts putting out projections and price targets and things of that nature. What is an analyst? Who are these analysts and what do they do? Where do they sit in different organizations? Who are these people? Are they all credible or are only some of them credible? What should people think about when they see an analyst say X?

Yeah, well, there's two types of analysts. We have a bunch of analysts that produce research, but we use it just internally. Then the analysts that you read about in the newspaper are working inside capital markets firms, what they call the sell-side of the business. So they are writing research, but they're also selling that research in return for trade flow and other types of banking business. Every analyst has interesting things to say. One of the lines that we've talked about before is opinions about facts, set prices. So quite often you'll get a series of facts in place and the company might be trending in one direction or the other. And what analysts often try and do is they try and size the impact of either what could be good or what could be bad. And so if a stock was going down and the main concern was X, and an analyst can do all this work and say, well, the size of the concern is so many dollars per share and the stock price is down that many dollars per share, I'm going to upgrade my recommendation with the idea that all the bad news is discounted. So then the stock market often do stocks focusing on that issue, and then they start to roll the movie forward and they say, well, after this issue, these types of things might happen to the business and that could actually be an improvement or that could change in a more positive manner. And so you get businesses that are trying to compound their value over time. And occasionally, sometimes they get a little bit ahead of themselves, in which case all the growth is factored in. And some analysts will say, I think this price is just too high relative to what this company might experience, or the price is too low relative to the concern that it currently presents itself. So analysts are trying their best to take this into consideration. But like all of us, they're humans. And so sometimes price targets get raised as stock prices go up because the enthusiasm starts to bubble. And also, sometimes the pessimism when a business is struggling, even if they're on the cusp of ending those struggles, people can often be frustrated and you can get valuation decline farther than might be warranted. So we're all looking at similar information. That's why there's a lot of behavioral psychology involved here. And the one thing that we try and do is we try and extend our time horizon a little bit farther out than the average investors. So if I were to give an example, this week we were at a large Canadian bank. We had an investor day on Monday. These investor days are filled with information, a couple of hundred slides, lots of detail on the business.

Good food? They put a good spread out for you?

They put a good spread out. That's the big draw. If you want to think clearly, you got to have a full stomach. Banks really lend themselves to financial analysis because most banks really like to make a return on equity. And the higher the return on equity, the better. And book value, they publish it every quarter with the financial statements. Sometimes you have banks that are currently earning a 13 or a 14% return on equity, and they'll put a target out to say, oh, boy, it'd be nice to get that to 16 or 16+% or something like that. As analysts on both sides, whether or not you're inside of an asset manager or you're inside of a sell-side shop, you can look at that book value and multiply it by the return on equity. Book value is how much equity you have. You multiply it by the percentage and you get an idea about the earnings power of the business. When management lays out this hockey stick of how it might improve, they come out and they say, well, it could be this in 2028 or 2029, that's a little bit farther out than the average investor can look at. 2029? Okay, wake me up in 2028. But the interesting thing about these days is if they laid out a credible plan about how they're going to get there, you can almost envision, okay, well, I can roll forward what book value might be, and I can use the return on equity that they're targeting and that gives you a stake that you can pound in the ground and say, well, that's interesting. So even though it's three or four years from now, the stock might be worth this in three or four years. And we all know there's going to be a ton of activity between now and then. And there'll be some type of credit cycle, I'm sure at some point, there'll be ups and downs and all sorts of things. But this is a great North Star to have in the back of your head, because on days that the stock market decides to go down for various reasons, you've got this North Star about what this business might be worth in three or four years in the back of your mind. Even when you own it today, you can sit there and say, well, if they hit their targets and I look at what the share price could be, I can see how it could compound, whatever it is, 10 to 12% or something like that. Plus, I'm collecting a dividend. So it's settling from a long-term standpoint, but it's also highly beneficial to helping you deal with the volatility because the volatility is normally focused on a short-term effort. And meanwhile, you know all these water on stone activities are taking place inside the business on your behalf.

And just a point of clarification, because not everyone knows the term «hockey stick», although in Canada we do better with that than most places. But this is a big inflection point in the business or it's growing at a certain rate, and then it starts to accelerate that growth. So it moves up and to the right, if you're tracking the growth—just for those who don't understand the terminology or aren't familiar with that term. So Stu, you're at this conference and you hear this information. Do you drop your sandwich and head back to the office and get your analyst to start crunching the numbers to validate it, or is this one that you might have already known, but this was more of a confirmation of what you were thinking before?

Well, it was in part confirmation, but thankfully, the analyst was there with me. So we were doing it on the fly. In this case, the bank is going to buy back shares. So you have to take into consideration what book value will be. You're going to have earnings, then you're going to have share buybacks. You make some estimate of what the book value might be and you have pros and cons come '28, '29, and then you apply these return on equities. It gives you an idea. My partner would say, you just want to hit the barn. You don't need to hit right on the door. This math gives you the general goalpost that the business is shooting for come that period of time. As I say, if that number on the share price is up 25 or 30%, it might happen in three years and the dividend is pretty adequate, that's not a bad return. It's not like you're running back to your desk to say, buy me more today, but you've got that number in mind for whatever might present itself in the next 12 months because you know what management's doing on your behalf.

Yeah, and not wanting to just over complement you, but everyone who listens to this podcast on a regular basis—and by the way, you can subscribe and follow, you can follow us on YouTube. Please give us some feedback on what we're doing. We’d love a five-star review, but we'll take the fours and threes, too, if it helps us get even better. But I get the great privilege of working with so many fantastic portfolio managers. Stu is one of them. He's the head of global equity at RBC Global Asset Management, the largest asset manager in Canada. You don't get to that position without being sharp. I've sat in meetings with Stu where someone's been talking about something and Stu, sometimes off the top of his head, or on the back of an envelope, does a calculation. This is the incredible nature of the professional portfolio manager. They are so sharp. They're so used to working with numbers. They can do these calculations, just boom, right off the top and identify opportunities. Now, you go back and validate it, obviously, when you're talking about investing billions of people's money. But it's amazing watching. I could just see where Stu would be sitting in that room and they'd be doing these and the wheels would be turning along with the analyst going, there's an opportunity here. You see this, and this is obviously a positive. You see a hockey stick move, do you come back and start adding to that position in that stock or adding a new position? Or do you create a plan of how you're going to attack it over the next several years?

All of the above. In this case, thankfully, we had a pretty good position in this company, so it validated what we thought. Sometimes it's brand-new information and you're like, wow, that's really different. This stock is going to move. And what can be helpful in doing that type of math is the hardest thing for a portfolio manager to do, to buy a stock that's up $5 or something, but you know it's a $30 move. So if you're very focused on the short term, you're like, the $5 move might fade back to a $3 move. But if you've done your math and you've done your scenario analysis and you're like, wow, this is big, then you can confidently go out and buy up $5 because you know there's another $25 on the table. Sometimes it confirms, sometimes it changes the opinion. We talked last time about the scenario analysis. It's very helpful because it gives you this roadmap about how a stock might unfold, notwithstanding the daily volatility.

Yeah. I really like your point around the idea—and I think we try to stress this with investors when we're talking to them—to have that longer-term mindset in place around how you're investing, and you express it exactly right. There's a larger gain that's going to come, and in this case, maybe not even over a long period of time, maybe even over a fairly condensed, moderate period of time. The stock's already made a bit of a move, and if you're focused short term, you're reluctant to take that. I'll just wait for it to fall back. But again, if you're taking that longer view, always stepping back, you can see the broader opportunity. A professional investment manager will generally take that opportunity, knowing the risk return trade-off that they're entering into. Whereas a lot of individual investors are focused on, I missed that, it's up $5 and I'm going to pass on that. It's such an important lesson to learn in investing. I'm doing a series of videos for someone and just talking about the idea of starting early. One of the big things I've learned from you in terms of the perspectives, we always come back to these things. We want to continue to reinforce the best thinking of how you're successful investing. The idea that you think about when you started investing, say at 18, and you're going to live till 88, so you've got 70 years. We get a recession, a big pullback in the market every 7 years. So you're going to go through 10 up cycles with the down. And then the most important cycle is the last cycle. And the earlier you start, the more cycles you have, the more you accumulate through the power of compounding. I don't know if you know the story. I know you worked washing windows and doing all kinds of stuff. I used to mow lawns. And there's the old story about people's lawns and gardens. The kid comes up and says, I want $5 to mow your lawn. This is way back. So maybe I should modernize it. Say, I want $40 to mow your lawn. And the owner says, well, you know what? I'm going to pay you a penny the first day, and I'm going to double your salary every day till the end of the month. But I'm only paying a penny the first day. Are you in? And the kid says, no, I'm not going to mow your lawn for a penny today. Missing the idea that if you take that and you double, let's say, with 30-day month, you double it 29 times. Again, it’s that compounding in the number of cycles. The kid will make $5.3 million on the 30th day of the month. We're talking about September. It's that same idea, that when you're thinking long term, you're thinking about the number of cycles. Maybe I'm not buying it. Another thing you've talked about is how often you time it exactly right at the bottom. I buy it a little bit off the bottom. In the example you gave, I'm up five bucks already. But again, I know the long term is better. I'm not worried about nailing it right at the exact bottom. I'm going to get it at a value where my returns for the risk I'm taking will be above average. I want a piece of that. And you do it. I know I'm weaving a lot of concepts in there that are all core to what we talk about every week on Stu's days. But it's such an important point because of some of these basics. And you think, oh, well, hey, a professional portfolio manager is not involved in doing these basic things. Again, like I said, you guys are smart. You run these numbers in your head like a supercomputer, almost. But you're still doing some of this basic blocking and tackling stuff that every investor should be doing. And you just do it more often than they do, probably.

Well, if I turned around, I could show you the calculator I use. It's just a simple Casio with a little solar panel. It's always just a combination of the amount of cash we're going to get from the business, how capital intensive it is, divided by the amount of capital that we're putting in, and how is that going to grow over time. Financial math is not that complicated, relatively speaking. You can certainly make it very complicated, but generally speaking, to get returns, it's just a percentage times the amount of capital involved. I also think that sometimes when you do this as well, it helps. We talk a lot about entering a position or buying into something. In the long haul, whether or not you're in a balanced fund or whatever it might be, sometimes things get a little bit ahead of themselves as well. You see a set of behaviors in the market and you're like, boy, that's the type of behavior that sometimes means we're a little bit elevated relative to that longer-term trend. I think your analogy is a great one. Spending time in the market, be very disciplined about how you purchase things and maybe how you rebalance if necessary. That's why I said we go to an analysts day and we get a North Star about what the business could be worth in two or three years. But we also had a very large bankruptcy in the United States, a large auto parts company, and we had a very big takeover of a video game maker. Sometimes when you just see this type of behavior, some people will say mergers and acquisitions happen at tops and bottoms. So when you see this type of activity—and we're clearly not at the bottom right now—it might suggest that there's a bit too much confidence in the marketplace. Even in a balanced account, you've participated, but we would cut that back down towards targets on strength. And it's just this process of saying, I'm going to be in capital markets for a long period of time, I know that the businesses I own are going to compound over time. And there'll be times when there's a little bit more angst, which is normally a great time to try and add to stocks. And then there'll be time when there's a little bit too much ebullience, and that'll be some time to take from them. But that is different than establishing your financial plan and going along on the planning process. It's like the icing on the cake of the financial plan.

I don't know if we've ever covered this before on the podcast, on Stu's days, but if I was a little bit worried about the level of the market—so there's some signs that maybe too much optimism has crept in, but I've got some money to invest, and I'm deciding whether I'm going to put it all in at once—is there another option I could use to put that money in in those circumstances? I know some of the new listeners would probably value what you have to say on this.

Well, I do have a cape that matches my tie, the dollar cost average boy. But it's just a great way to negotiate capital markets in general, whether or not you're taking from them or adding new money. We talk about employing it in your financial plan. We employ it inside the funds. All it is about doing is putting the odds in your favor over the long term. And that's really the key.

Yeah. The dollar cost averaging. A few consistent themes from the podcast over almost five years we've been doing this, if you can imagine that. And it really does come down oftentimes as some of the fundamentals. There's usually a strategy that you can employ, given what you're looking at, what you're thinking about, and dollar cost averaging, like you say, is just a nice way to get money into the market. If things turn the wrong way, you get a little bit of protection and then you're buying more at a lower price. And if things continue to go up, well, that's great, you're still buying, too. So it's, like you say, just a way to improve your odds.

Great. Well, thanks very much, Dave. I enjoyed that.

Oh, I wanted to carry on the conversation. Didn’t you?

I'll give you your tie back.

Okay, Stu. Thanks again. And we'll talk to you next week.

Great. Thanks, Dave.