Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s Days. A very special Stu’s day. I'm in Europe, Stu. I'm in Sardinia. What do you think of that? You ever been to Sardinia?

No, I've never had a plate of sardinias.

No, no, it's an island off the coast of Italy. It's beautiful. It's very tranquil, peaceful. It's fabulous. A little bit off the beaten track. I think you'd like it.

I bet it's spectacular, Dave. I think we should do a live one.

Well, if you want to hop on a plane and fly over, we can do it side by side instead of remote like this. But you were away too, right? Were you away somewhere over the last couple of weeks?

I was in Italy, too, actually. I was in Sicily, so we've got all the «s» covered. And also beautiful.

Oh, yeah, Sicily is fantastic. Where did you go in Sicily?

We were in the south, and then we were up by Mount Etna. So it was fantastic.

Did you climb Mount Etna?

We didn't, but we looked at it.

Yeah. It is nice. You should try to climb it, but I'm a bit of an athlete. Well, that’s great for Italian travel. You got any thoughts on the Italian stock market and bond market right now?

No good ones, actually. I was a fan of some of the Italian wine markets and coffee markets, which I know you like. But yeah, I loved it.

They call Etna wines the burgundy of Italy.

There you go.

There you go. So, you were in the right spot. Let's come back to the Canadian stock markets. Because we should sometimes remind people, Stu is the co-head of North American equities at RBC Global Asset Management. And Stu, we were just chatting before we started taping— and I wish we sometimes would record these conversations because they might be more interesting than some of the conversations we actually have once we start taping— but you were talking about some of the experiences you've had as a longtime professional investment manager, that really point to why you take a longer-term view as you're making investments. And out of the gate sometimes the investment you make doesn't necessarily work immediately, but there's reasons to stick with it. You stick with it and it wins. What were you talking about in that respect?

Well, I think it's interesting in this environment. We talked about this before, but when I started in the business, one of the senior people would say, when the market's time horizon shortens, you need to lengthen yours, and when the market's time horizon lengthens, you need to shorten yours. It's another way of saying that when people are really optimistic about the future, there's likely to be some bumps in the near term that delay that. And when people get very focused on the here-and-now, often there's that ability for what we call time arbitrage which is looking for financial results that may take 18 or 24 months to present themselves. It can be bumpy for a period of time, but then when those results present themselves, the stock market rewards them in a hurry. And in this environment where economies are slowing— you've had Eric on and the economists— economies are slowing, earnings have some headwinds. You think about the revenue environment being a little bit more challenging. You think about the cost structure of business where, whether or not it's labor or the interest expense or taxes, everyone wants a little bit more piece of the pie. And it's a little bit harder to come by. We do get some dislocation in some stock prices as people focus in on some of the very current challenges. And meanwhile, management is in the background working away on our behalf to solve many of those challenges. And when those challenges get solved and the old earnings power of the business represents itself, the share price reaction can be quite swift and quite significant sometimes. We've talked a lot about old stable businesses. Sometimes those old stable businesses get headed down the wrong track and the stock market prices them as if the current misadventure will continue forever. And you have to be careful that it's not like a newspaper stock or something where it's a long headwind to the revenue of the business for some time. But quite often in those situations, just by stopping that activity, the old business power can shine through. And we call these self-help stories. Sometimes it takes new management, sometimes it takes an investor to point these things out to the board and to current management. But once they set off to eliminate that activity that is bothering the stock market, it can take a bit of time, but as they demonstrate that, the share price reaction can be quite significant. It happens in old businesses and it happens in new businesses. Last week, Shopify, a very good Canadian company, announced that they were going to stop doing some of the logistics businesses that were maybe going to cost them a lot of money and had some uncertainty around them. And the share price reaction was very significant as people took that risk away from the stock market. This notion that when you price a stock, you have a set of cash flows and you have some risk identified with them, but you also have a bunch of negative options and a bunch of positive options, and if negative options get taken off the table, that can be positive for the share price. And as investors, as we look out in this environment, which is a little bit more challenging, we're more likely to have valuation that is the status quo rather than the big increases in valuation that we've seen in the past. We're always looking for businesses that are paying us dividends and growing those dividends over time, but if we can find some of those businesses that might be mispriced because of a worry that could go away, that can certainly be additive to portfolio returns over time. In the team, we call them the self-help bucket. We're always looking to fill our self-help bucket in the portfolio and there's a lot of big businesses that fall into that mix right now.

Yeah, as you highlighted through that, these are not businesses that are in long-term decline. These are businesses that you know. They're established and they have a very bright future, just not in the immediate future, and thus may have pulled back and even pulled back significantly. And I thought you made an interesting comment when we were talking earlier about the fact that you're not perfect. There are times where you're in a company and the first move in the stock price is actually down. But that creates a different strategy and approach that you can use as long as your initial research and forecast and analysis suggest that that recovery is going to come. Maybe you could share that with the listeners.

Well, not to get back to our favorite topic of dollar cost averaging, but I used to work for a woman who said you need to hear bad news three times for it to be in the stock. So once you hear it once, you probably get the lion's share of the down move, but as the market digests it, you'll bounce around a little bit. And sometimes you buy a stock and it goes down another 5% or 10%, even though you know that there's a reasonable likelihood of a very strong return over a couple of years. And that process can be daunting a little bit because you buy a stock and then it's down more and you're like, oh boy, am I missing something. But if you're dollar cost averaging your way in, you're able to use that additional weakness and build a position. And then, we're also very fortunate because we get to have a lot of conversations with management themselves and just retest the hypothesis of this is what the changes you're planning, this is when it'll come, these are the challenges to making it happen, but this is how we're going to work through it. And you can get a pretty good playbook in your mind so that even when that short term volatility is testing your mental fortitude, you've seen the playbook and you have a good idea that there's a pretty reasonable return on the other side.

Are you virtually always dollar cost averaging? Or is there something, as you say, when you're interviewing management or when you're continuing to analyze that particular holding, do you ever back off from that? Or once you've established that long term view, are you so confident in it that you just keep buying all the way down? What would sway you one way or the other?

Very case specific. Sometimes you learn something, you're like, oh, that's going to take a little bit longer than we thought, so the market might deal with that a little bit sooner. And sometimes you go in and you're like, boy, this recovery is going to happen a lot faster than we thought and we got to pick up the pace here. But generally speaking, on almost any position, we're not tinkering for tinkering's sake, but we're tinkering to try and improve the odds of the overall portfolio.

And then, important to say that when something has changed, when you definitively see it has changed in the leadership of the business, in the management, in the basic business fundamentals of that business or the industry, you can walk away. There are times where you buy something with all the best intent, but you walk away because it's no longer the right investment for you. Correct?

100%. When you go through the market environment like we have right now, you tend to plant more seeds. The market itself is at not a bad level. Underneath, there's a fair number of stocks that have declined and present some opportunity. When the market goes through a period like this, leadership often changes, but we don't know exactly where the new leadership will come from. So you tend to plant more seeds and then harvest as you go. And doing that process is good for a number of things. Any portfolio manager has to be honest with themselves and say, I know I'm going to make mistakes. So once you acknowledge that in advance, it's a lot easier to deal with them because you don't have all these bias in place. And we know that as time progresses, some of those investments are going to turn out better than we thought, so we're going to need to steer more towards them, and some may not live up to plan and we'll have to get rid of them. But that's just part of the process.

I ask you that question because I know myself, looking at one of the key flaws that I have as an investor, that I don't like to lose. I don't like to lose at anything. That's just my character. I do all my analysis. I buy something. It immediately goes down. I want to hold most of the time that works out, but there are sometimes when very clearly that was a loser and I need to admit that and walk away, take the loss and move on to better opportunities. And that's a big difference psychologically in the way that a professional investment manager manages money versus someone who's just managing their own portfolio.

My partner Doug would say, you don't water the weeds and pull the flowers. You let the flowers blossom, and you get rid of the weeds.

And regular listeners know how much you like to get rid of the weeds, Stu. You are the weed eater, whatever we want to call you. You have a weedless lawn, and I think most of the time, a weedless portfolio.

I do my best, Dave.

Well, words of wisdom from Stu today on Stu’s day. Stu, always great catching up with you. Thanks for sharing those insights into the way that you manage money, because I think that stuff is really helpful in terms of the way investors think, whether you're buying a lot of individual stocks or buying a fund that's being managed. The way to think about those time horizons at different points in time.

Fantastic. Well, thanks very much for your time today, Dave. And enjoy Sardinia.

You got to try it out, Stu. The wines here are good as well.

All right.

And climb the mountain next time. It's good for you.

If I had climbed Mountain Etna, I could have had a couple more cannoli.

That's exactly it. You earn your treats. Pasta, pizza, cannoli. There you go.

100%. Sounds pretty good, Dave.

All right, Stu. We’ll catch up with you next week.