Hello and welcome to The Download. I’m your host Dave Richardson and it's Stuesdays. Once again, Stu, we're Stuwednesdays. We’ve got to get better at this.

It's not like the days of the week change that frequently, but we still seem to have trouble.

Yeah. I know how busy you are and we'll talk about that in a second. I'm in the B.C. interior, and talking to a lot of investors. It's actually beautiful out here. I don't know if you've ever been out in this area of the world?

I have and I would 100% agree with you. It is beautiful. It can be a little warm sometimes, in the middle of the summer, but beautiful nonetheless.

Absolutely. We’re sitting last night with a bunch of investors talking about what's going on in the global economy and markets. Someone asked what seems like a pretty simple, straightforward question. You're managing billions of dollars in different funds. Their question was that, you seem at least a little balanced - maybe somewhat even negative - on markets right now. Why, Stu, wouldn't you have your portfolio that you're managing for clients at 100% cash right now when you're feeling down about markets? And 100% when you're really excited, 0% when you maybe think that we're in for a bit of a volatile ride? Why don't you as a professional manager do that? Why isn't that what you do?

It's a great question, because when you look at the volatility that we experience sometimes within a day, let alone over a week or a month, you see all this price change, you say, “Oh boy. If we could capture all that price change, we'd be making a lot more money.” We do have tools that try and capture it to some degree. The other side to that is if you capture each one wrong, you end up with a lot less money. This is the way that I think about it and I can give some examples of different spots in my career. When I first started, I remember running spreadsheet after spreadsheet of, if you bought and sold the S&P 500 on the eight-day average, the 10-day average and the 12-day average. There was certainly periods of time when those types of trading strategies created this kind of near-term benefit, but none of them really created any long-term benefit. I tried it early in my career. The computer that I had was a smoke show. I had so many trades going on early in my career. And it just didn't really pay off at the end of the day for all the activity relative to what the index or the markets were doing over time. So, I kind of changed my investment philosophy. This is 25 years ago, I looked around at some accounts that I thought were really successful. The things that used to blow me away were a lot of accounts where after 25 or 30 years, the dividends they would be receiving would be greater than the cost base. The notion of compounding your money after tax became really important. If I can find a good business that would compound the money through thick and thin, and I could avoid paying capital gains or a significant amount of capital gains in any given year, then I would have more money working for me through and through. As I began to study different businesses, there's just a lot of confidence in their abilities to perform in a variety of environments. The next thing that I noticed, and I think we've talked about this in the past, but two of the articles that had a significant impact on my investing career was Warren Buffett's article in 2000 when he said the stock market's not going to go anywhere. That was when the stock market traded at north of 25 times earnings. Like 28 times earnings. One thing we always talk about is this notion of an average valuation. I made a note to myself, if we got to points where the 10- year return potential of the stock market was basically flat because valuation was so high, even if we got the normal earnings growth that we might get, then I would make a more significant adjustment in the portfolio. The same thing when the second article he wrote, which was in honour of a tribute to Wayne Gretzky, “go to where the puck will be, not where it is.” That was when stocks at the bottom of the financial crisis traded at 10 times earnings. In that instance you were getting cheap stocks plus the benefit of valuation recovery. We have not really seen, since the tech bubble, a period of time where valuations pulled forward that much return. We've had periods where it's been below average, but still not unreasonable relative to fixed income. So I thought about those two things. The first being these quality companies find ways to grow their business over time, and the benefits of doing that. Avoiding capital gains tax for as long as you can was a real benefit to me anyways, in my head. Then the second thing was this notion of longer-term valuation. That’s when you would make a much more significant movement in your portfolio. The other thing that I do recall is in the financial crisis, we had raised a fair amount of cash going into the financial crisis. The second thing that you have to think about is, are we going to have the potential for a recession that sees earnings decline temporarily? Which I think would possibly be in the cards right now. That's very different than a recession where companies need capital at the bottom of the market. I remember running the dividend fund and we were pretty certain that everyone was going to need capital. That fall of 2008 we had call it 15% of the fund in cash which was around $1,000,000,000 at the time. We managed to get about $500 million to work, which felt pretty good at the time. As the market declined, you made money on that cash position but we just never got it all to work. And the market ripped – it just absolutely ripped. Once credit spreads started to narrow and the Fed started to add liquidity to the market, it just absolutely ripped and it never really gave you a chance to get back in. The two hardest things in investing are to sell a stock that's down. You come in, the news has changed and you’re like, that stock is going to go down and we have to get rid of it. The second hardest one is to buy a stock that's up. Even though it's changed, you're like this is fantastic. That tends to happen a lot around turning points in the market where you have this topping process which at the benefit of hindsight was taking place since last summer. Then the bottoming process can be far more violent than the topping process. The topping process is one where the narrative changes, concern grows and then markets decline. The bottom of the stock market – again, we have tools that help us, but it will normally come in a very significant manner which is around the easing of liquidity. Liquidity will ease and markets will respond quite favorably. Sometimes it's very difficult to put money in once markets have been strong. Maybe you take some money out, they go down and then it goes back up and it goes back through the price that you took the money out. You find yourself kind of tormenting yourself on both sides of the coin. I don't know if I was fully organized in my thoughts there, but it's a long way of saying that the benefits of tax-advantaged compounding over long periods of time with stocks that are paying dividends, where we can reallocate that capital to businesses that we think are undervalued when the dividends came. That became my preferred way to manage my account from a long-term standpoint. That's how I go about it. You can always look at situations and say if we’ve done that, if we've done this, we could have done more. That’s always true, but the reverse done this and done that is we could have had less. That's how I've thought about it.

Stu, I was out last night with a group of about 30 people who were all fans of the podcast. One of the things they said they love is your chain of thought or train of thought that you roam through. It's not necessarily something that's strictly prepared or scripted. But it comes across as you've got a very clear idea and a defined idea, which I know from working with you for so long, exactly the way you think about managing money, and how you place your bets and take money off the table. They were also asking what you're actually like in real life. I lied and said you're not really that nice, but I was just joking. I said you're actually probably nicer than you come across in the podcast because you're being smart on this.

We pride ourselves on unvarnished opinions, Dave, so I appreciate you telling the truth.

Well, not exactly. One of the things we talked about when I was answering the same question last night with certainly not the same degree of expertise that you just answered it. But it did come down to that whole idea of two of the most violent moves in the market is when it bounces out of a bottom and in that last stage right before it rolls over. We saw that last year with that big steep climb and strong returns at the tail end. Then you went back to 2009, as I said, go back and look at headlines. The first week of March 2009, the market bottomed on March 9th, 2009 after going down over a nine-year period in a secular bear market. There is nothing in those headlines that would suggest that the market was about to bounce the way it did. As you said, it ripped. And to generate the above average rates of return that you generate in stocks over the long run, you've got to be there for that rip out of the bottom and you’ve got to be there at that rip in the top. If you're too careful when you're steering a ship, it's one thing when you're in a sports car and going around the bend, when you're running the Titanic, as you're often doing when you're managing money. It’s not so easy to veer around the iceberg that's in front of you. You’ve got to manage things very carefully and you've got to think out those moves. Going zero to 100 cash fully invested is not really what you're trying to accomplish. You're trying to get an above average rate of return over the long haul at a given level of risk. It’s not like you're not going to move around that iceberg. You're going to go around the iceberg. But you're not going to zip and veer and go 0% equities to 100% equities on an ongoing basis. That's just not the way, as you say your terminology around it, you build value in a portfolio over time.

First of all, I prefer Battleship over Titanic. The second thing is I remember in the financial crisis talking to an old bank analyst and he said these types of things will happen and these stocks will double in two weeks. That's exactly what happened. I also remember very clearly being at a meeting with a bank CEO, I remember thinking the crisis is over. We got more to work. We never got right back to 100 cents in the dollar. That's one thing. The second thing is we have a list of criteria where we think selling is extinguished and we have another list of criteria when you're going to get that big move off the bottom. One of the things on that list is the number of stocks that are having two standard deviation moves on one day. That's what they call a breadth thrust and when you see it, it's really something. The second thing is it's very difficult to buy afterwards because you have memories of old prices yet it likely is the type of action that seals the bottom. I remember I used to use the analogy of driving by a used car lot and you see the cars out there and they're putting the soap on of the prices – $12,000, $11,000, $10,000, $9000. Each day you drive by you're like oh baby, I'm going to get a great deal here. Then one day you drive by and there's no cars there. There’s none at nine, there's none at 10, there's none at 11. Now they're offered at 15. That's just the way markets function sometimes. It's just a long way of saying I tend to focus on those long doubling periods. I tend to focus on the benefit of the last doubling period to my portfolio. If I missed the first doubling period and I don't get the last doubling period that is a big consequence in my portfolio.

Stu, anyone can go look at a lot of the work that you've done over the years, people can go online and take a look at how it's worked. I don't think anyone can argue with the success you've had over time with the philosophy. I think the one thing you'd say is you're not rigid. You're still disciplined, but you're not rigid to the point where you don't make subtle adjustments in what you do as you get much older than when I first met you. That contributes to the way you think about each different economic downturn, market pullback and market top. Experience comes to the fore in what you're doing for investors every day.

100%. You’re always moving a little bit at the margins on things because it keeps everything fresh in your head and you're reacting to things. But the prize is, the number of doublings longer term. That's the big prize.

That's right. So as I say from all your fans in the B.C. interior.

The Weather Channel or cable must have been broken or something.

It's hard to believe that a lot of people listen to the two of us yipping away. But it's always nice to hear from people who listen and enjoy the podcasts. We’d probably keep doing it whether people are listening or not. But it's nice to know that they are. And Stu, I think it's a big credit to you. Thank you as always for taking the time.

Thanks, Dave.