Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s days on a wintery Wednesday, as we tape this, Stu. Boy, it's tough to connect these days, isn't it?

It is tough. And to have a day when you're out there with the shovel, end of November, that's been unique for recent times. Although it is winter.

Based on your weeding in the summer, with your lawn, I'm guessing that you're pretty active on the shovel. You're out there a couple of times, keeping the driveway very clean all the time.

I'm a fastidious shoveler. It's always the debate in our family. Does the path need to be wide enough just for the boots, or do you do the whole stones? And I like to really clean the whole path. I like it to be nice and sharp.

Wow. Now, my mother-in-law gets out with a broom, and she actually dusts any additional flakes of snow off just to make sure there's absolutely no chance that you're going to get any moisture on your shoes at all. You get down to that level?

Well, that's next level. I could go broom. Maybe I could get the Shop-vac, too, and really tidy it up.

I made a joke and I told her she should use the Shop-vac. But she likes her broom. She hit me with it a couple of times, too. That's what mother-in-laws do. But one of the benefits, as I said many times as we taped these, that I get from knowing you, is you'll flip me an email with something interesting. And you flipped me something the other day on the performance of three strategies. So let's just go through them. The first is, you buy the S&P 500 when the VIX— and the VIX is a measure of volatility of the market, with 30 days out, to be precise— when it closes above 30, which would be a fairly high level of volatility in the market. You're typically seeing 30s through September, for example, when we've seen the market drop quite rapidly. So you buy the S&P 500 when the VIX closes above 30. I guess that’s a signal of panic, Stu, what's behind this emotionally? So when everyone else is running and panicking, you buy that. You buy above 30 and you sell when the VIX goes down below 20. Below 20, things have calmed down quite a bit. Well, your rate of return this year would be 26.7%. That's pretty good, because, buy and hold, the S&P 500 return this year was minus 15.1%. And then if you do it the opposite way. You see, in terms of investor behavior, that investors are more likely to do this, which is buy when the VIX closes below 20 (when things appear calm and normal), and sell when the VIX closes above 30% (when things get volatile, that's when you bail). You do that, you're down 33% on the year. So just a classic highlight of investor behavior that you should be buying when everyone else is selling and selling when everyone else is buying. Since we're in the winter season, think of It's A Wonderful Life. Mr. Potter was buying, and George was buying. Everyone else was selling, and they all run to the bank. Watch the movie. It's a good classic. This is what went through my mind as I was reading your email, but when you saw this, what were your thoughts?

Well, it just totally puts the math around the old Warren Buffett comment, which is: buy fear and sell cheer. The notion of putting money to work when concern is high and not putting in as much money to work when it's low. You gave three great statistics. The latter one, buying when things are good and selling when things are bad, that is kind of the chase-your-tail strategy and that doesn't lead to long-term prosperity. As an investor, we're always trying to attach our wagon to long-term earnings growth and dividend payment, but then along the way, we try and augment our returns by putting money to work at opportune times. And normally those opportune times are when fear is present in the marketplace. That VIX reading, over 30, can go all the way to over 40 in the real midst of concern. But putting money to work in those time periods normally is quite additive to long term returns. And one of the things that we always try and do here is reverse the question. When things are really bad, you have to sit there and say, well, how can they get a lot worse? When someone says that the sky might fall, you're thinking: it might! I can't prove that it won't. But if we're talking about that, then we're worried about a lot of things. And just as when waters are calm, to your point, there's always the odd risk lurking below the surface, which may or may not present itself. And we know in the stock market that risk doesn't always have to present itself for people to worry about it. So when things are calm, there's always risks underneath that might bubble to the surface and cause some discomfort. And we need to be prepared for all this as long term investors. But that notion of really trying to put some money to work when fear is high can be quite additive, and I thought those statistics really helped display that.

Yes, and you need to keep looking at numbers like this and statistics, over and over again, because it is so hard as an investor when that panic sets in and it looks like the world is crumbling around you, to step forward and put money to work. But as this particular example shows, that's exactly when you need to be there to get more value and to drive better results. And so, as you would say, you're looking for these opportunities all the time. And one of the edges of a professional investor, one of the things that you're essentially trained to do, is to take that emotion out, to use that analytics and understand when you should be going forward, even though it seems really frightening to do it. You know, because you've done the work and you've got the experience, that that's exactly what you have to do. And that's how you can drive value for investors over time, as a professional investor.

100%. You know, experience helps a lot. Seeing different management teams over and over again in different environments and seeing their level of comfort in dealing with adversity, studying businesses about how their margins and their revenue change over time and understanding how their valuations change over time. As a long-term investor, when you're saying, I'm going to have exposure to the equity market because I believe in it long term, then I always want to put as much positive optionality into our portfolio as possible. And the ways to do that are to own good businesses and own them when their potential is above average. Just before the podcast started, we were talking about Walmart, which reported their results yesterday and was quite strong. A very simple exercise that we do is that we put all the stocks that we own on this grid. So imagine you have a nine box grid, and on the left hand side, you have three different scenarios for the businesses earnings power. The top box is: what happens when it's firing on all cylinders? The middle box is: what is more normal? And the bottom box might be: when is that business struggling and what does it look like? And the way that normally shows up is in different margin profiles. A business like Walmart, where the revenue is somewhat predictable, your margin profile might go up and down by 100 basis points in those three different scenarios. And then across the top of the box, you have different valuation scenarios. Sometimes the valuation is low, sometimes it is average, sometimes it's high. The thing that's interesting about the stock market is that when the current earnings are reflecting the struggling scenario, the valuation is often low. And, you know, because it's a good business, that management will work a way on your behalf and fix what ails the business. You may have low margins, you have to clean out inventory. You need to restore pricing, maybe make some changes to your cost structure. The margin of the business will then revert back towards normal. And as it reverts back towards normal, the valuation may also improve towards normal. And as an investor or an owner of that business, I get two things. One: that business alone will compound its earnings over long periods of time. But if I can put money to work during that period of time of struggle, I got two additives to my investment; I got the margin recovery and I got the valuation recovery. And the same thing goes for trying to avoid stocks that might be at a very high valuation on a very optimistic case of earnings. That could be a good business and over time, they will compound their way through those challenges. But if the valuation is high and the business is temporarily over earning, while the margins might revert back towards normal and the valuation corrects, I have two sources of risk in the short term, even though they may not impact my long-term prognosis. So marrying the financial analysis, look at the valuation and understanding financial behavior, that's a great tool box for an investor to add to their long-term return potential.

And then on top of that, as you mentioned in the Walmart situation, that belief in the management team. You get the opportunity to talk to those people and they have a track record too, but you know what teams you're willing to bet on in that situation, that you know are going to pull through it. And then there's others where you might be a little bit more skeptical and you might sit back and wait. In this case, we're talking about a team that has got a great track record, so you were confident that they were going to make that difference, as you say.

Yes, you need to think about management as sitting in front of this big control tower and they have levers that they can pull at all different points of the cycle. And just like an investor, management knows that they're going to have hard times. They know that they're likely to make mistakes. But how you deal with those hard times and how you recover from those mistakes usually determines your long-term success. So sitting down with management and saying, well, how do you turn the levers during different periods of the cycle? You have that management meeting, then you go to the next management meeting. But how do you turn the levers? And you get to listen. You're like, well, that's interesting. That company said they would do this, that company said they would do that. I wonder how that might turn out. So then, you go to the third company and ask them, and you get this big bucket of information that allows you to tilt the portfolio in a way that tries to drive that positive optionality. And we know there's a lot of good businesses. Going back to Warren Buffett, you always want that big moat because that's the first protection for the business longer term, but the second one is management quality and management that's always trying to turn those levers on your behalf and has a pretty good track record of doing it. That normally persists, so those are the ones that we want to stick with as well.

Wow. Some amazing Stu’s days lessons. Get your grid in place, put together tools that help you do that analysis. Get to know the companies, know the management, know who's capable of shifting those levers and who isn't. And when it snows, get out there and clean your driveway, particularly the sidewalk. You got to be courteous to your neighbors, and there's no one more courteous than Stu Kedwell when it comes to snowfall in Toronto.

I'm going to add the broom to the mix, Dave, because I got to take it up a notch, after your earlier comments.

I still like your idea on the vacuum. I think that would be epic. And I'm going to come by and check it out. The other thing though is, we can't leave the broadcast without a dollar cost averaging analogy. That's the idea behind going and shoveling the snow regularly through a heavy snowfall, because you never get that big snowfall, that heavy lifting that you've got to do at the end. It's all easy cleaning two or three times, get out, boom, boom, boom, and away you go. So a dollar cost average and snow removal as well.

You got it, Dave.

Excellent. Well, thanks, Stu. We'll catch up with you next week.

Thanks very much.