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Despite all the chaos and speculation in markets, there may be a silver lining to the frenzy. Increasing participation in financial markets, for one. This episode, Scott Lysakowski, Head of Canadian Equities, Phillips, Hager & North Investment Management, discusses this and other key lessons investors can take away from these events. [9 minutes, 03 seconds] (Recorded January 28, 2021)


Hello and welcome to the Download. I’m your host, Dave Richardson, and I am joined — it’s becoming a Thursday routine — by Scott Lysakowski, head of Canadian equities at Phillips, Hager & North, in Vancouver. Scott, welcome.

Thanks, Dave. Thanks for having me back. If we do this every week, I might run out of intelligent things to say

Well no. And that’s why we’ve got you back, particularly for this issue, because I know you’re very modest, but I know from spending a lot of time with you over the years and just talking about random issues in the market, that you’re a deep thinker on some of these issues in terms of thinking of the broader implications of things we’re seeing in the structure of indices, the way you’re seeing different trades go through, different things that are moving around the market. We’ve got to touch on it with Stu Kedwell on Stu’s days, a couple of days ago on the podcast, but we didn’t get into any depth. And of course, the stories move forward. And that’s what’s going on with these Reddit blogs and GameStop, AMC — we could go down a list of different stocks and some of the incredible moves that we’re seeing. And that’s certainly not what you do. It’s pure speculation, even gambling. So, it’s not anything that we recommend to people who are listening to this podcast, which is targeted at investors. Those are very different things. But just the big picture, what are some of the things you’re thinking about when you watch this crazy activity happening in a handful of stocks led by bloggers?

Yes, well, you’re right Dave, it certainly has been quite the week. Trying to wrap our heads around some of these movements is quite spectacular. I guess the way that affects us is to try to bring it back to how we think about things in our process. Aside from providing some pretty interesting entertainment value, there are some pretty real implications here. And maybe thinking bigger picture is thinking about a broadening set of market participants. This is an evolution that’s been taking place for a number of years. If you think back over history, stock markets were mostly institutional participants, pension funds, and then as finance evolved, it got more involved. And the introduction of CNBC and day trading really took hold during the early 2000s in the dotcom era. And we’ve continued to evolve the participation in the stock market. And a couple of the bigger drivers recently would be the removal of trading fees on some of these trading platforms and the introduction of fractionalized share ownership, which really opened up the floodgates and really broadened the participation of the stock market. And then, of course, we’re in an era of pretty cheap capital and lots of liquidity in the markets. And so that’s a pretty potent combination from what we’ve learned. And then if you add to that, continued advancements in the Internet and people at home with nothing to do. So that’s led to some pretty interesting activity culminating with this week’s events. So, while it doesn’t really affect us directly, these are some nichier stocks and some pretty narrow parts of the market that we’re not directly involved in at all, it does bring a couple of things to our attention. And when we think about our fundamental research process, we lean a lot on scenario analysis. When that speculative behavior comes into the market, the one thing that we can lean on is the price discovery that’s happening in the market where stock is trading at any given point in time. We understand through our research what the fundamental drivers of that business are and what is the current share price implying in terms of the outcome for that business. And do we think that’s likely or not? So that’s a really important aspect of our process. And when we’re buying stocks and we’re selling stocks or when we’re choosing not to own stocks, when they’re discounting prices that we think are unreasonable. The second concept that it makes me think about is this idea of who is on the other side of the trade. Any time you’re buying or selling a stock, there is somebody on the other side. And typically, we would ask that question in the context of another institutional investor. Why is somebody selling us that stock? What’s their view of the company? What are we missing? It’s this idea of intellectual honesty and curiosity and humility, but we don’t know everything. And the person who’s selling that stock has a different view than us. And so, what could we be missing and how could we be wrong? So, we add to that, who’s on the other side of the trade. It’s not just institutional investors anymore. We’ve broadened from a chat room or a stock board, or it could be a part of an options trade with the participation of financial markets, or the people on the other side might be a speculator caught up in some of this fervent activity, or the options counterparty is hedging some of their exposure. There’s a number of different participants in the market. So, understanding who’s on the other side of the trade. We might not be disagreeing on purely fundamental reasons. There could be other aspects.

Yes. You’ve been in the business for a long time now, but you’re still a young man, so you sit in that zone where you’ve got a good feel for what some of these younger folks are doing along with having that deep experience in the business. Is this ultimately a good sign? Is this an even greater democratization of markets? And does it create even more efficiency in markets ultimately? Maybe not specifically in some of these examples, but more broadly, does it create a more efficient market which is ultimately good for everyone?

Yes, it’s a good question. You’re acknowledging I’m a young man, but I feel markets like this age me rapidly. I would say directionally it’s a good thing. Increasing participation in financial markets is a good thing. It broadens the investor base. I think the danger is in how people are accessing the market and how they’re expressing some of their interest in the stock market. So, I think it’s an opportunity for us. It’s a challenge because it’s a completely different cohort than the majority of our client base today. But I think it’s a challenge that we should be more than happy to take up.

Yes, well, I can tell you from my seat and Scott, as you know, and perhaps the listeners don’t, my passion, my whole career has been around the education of investors and advisors who ultimately give advice to investors. And one thing is, this is a great opportunity — and we’ve spent a couple of podcasts on it — for people to learn about markets. Again, there’s going to be winners and losers on this, just like in the tech bubble back in the late 1990’s, there were winners and there were some big losers. That’s the downside to this. But I also love the fact that, out of this, the upside of having something like this all over the front pages of newspapers all over the world today, it brings more attention to markets and hopefully brings young people into investment markets to learn about them, to learn the right way to invest and to start to build wealth earlier so that they can benefit from what markets can deliver and what investing properly can do for you over the long haul.

That’s right. Teaching people how to get rich slowly.

Yes. Well, we would argue this is the right way to do it, as opposed to gambling, although I bet a couple of people that you know would have something smart to say about this topic. And I’m up, so I just want with a little bit of gambling. Scott, thanks. Thanks again for joining us. Look forward to seeing you again in the near future.

Thanks, Dave.


Recorded January 28, 2021

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