Hello and welcome to The Download. I'm your host, Dave Richardson. And Stu Kedwell is with us, the co-head of North American Equities at RBC Global Asset Management. A popular guest. So popular that we even named a day after him. Do you know what that day is, Stu?

Swednesday?

Well, that's when we're taping this week. You're right. That's a shot at me because I had a full day yesterday and we couldn't get the taping in. We are a day late for (S)Tuesdays. I hear there are some big retailers across the country that might pile on this (S)Tuesdays. Have you heard that?

The news has not reached me yet, but I'm sure it's bubbling.

Maybe a bit of an exaggeration, but it is a popular day for the podcast. Stu, one of the other things that seems to be a developing trend in markets, at least a lot of analysts have speculated that we're in the midst of seeing a real rotation in the market— we talked about it on previous podcasts—, away from growth-oriented stocks towards value-oriented stocks. If we look at the early part of this year, we saw a couple of weeks where there was a big move in that direction. Now, it's sort of settled down. But let's start by explaining what in your view represents a value stock versus what's more of a growth stock?

Okay. Well, that is an interesting place to start because we have seen a tremendous rotation. There's a lot of growth stocks that become value stocks. I think about it more as an approach to the market. A value investor started off in the Graham and Dodd days, finding cigar butts (Warren Buffett), and those value investing really morphed to how much cash was available in the business and how might it be reinvested and what type of growth could that produce. It really evolved to not just buying the assets of the company today, but its future value at a discount. A value investor tends to ask questions like: how much cash is going to come out? When is it going to come out? How risky is it? How much capital does it take to get at that cash? Those are four questions that a value investor is asking over and over again. A growth investor tends to focus on total addressable market and the revenue that could come from the business in a number of years down the road. It's often associated with very big themes— and they're very exciting themes, the themes that change the world— and the businesses that are successful often are spectacular stocks. The value investor is not just focused on the quality of the company, but also on what do I have to pay for that? Versus growth investor is certainly focused on getting that equation right, but it's also focused on the absolute level of the growth that the business might generate. Because in the early phases of a big theme, that growth almost always blows past people's expectations, which generates a lot of enthusiasm. The rotation we've seen and why we've seen a rotation is that for a growth stock, the cash flow is usually quite far into the future. You value something that's a number of years down the road and you bring it back to the present. When you change the discount rate, say you have $5 of cash flow 10 years from now, and you discount it at 7%, that would be worth around $2.5 today. If I go and discount it at 10%, it's going to be worth somewhere in the high $1 or $2. It's not that you really changed what you think the future is worth; you change the discount rate because of higher interest rates. Sometimes in those stocks, both the future and the interest rate changes at the same time, which is why you see these remarkable moves in the stock market. Conversely, some of the value stocks that had been not receiving quite the same attention generate a lot of cash flow today. You can see the reward sooner, and it's not as impacted as much by changes in interest rates. In fact, what's causing higher interest rates might be a better economy, which is going to generate even more cash flow for those businesses sooner. That's the dynamic that takes place. When you talk about value to growth, it's not like people have woken up and said, these businesses are no good or these businesses are now great. It's the cash that comes from them and how the stock market is dealing with how it might value them. That's really what takes place. Last week I was down— or I wish I was down; it was online— some of my partners and I, we listened to this year’s Columbia Value Investing Conference (normally it's a couple of days in New York). But it's always a great refresher with a number of really well-known investors. An old Warren Buffett line: How much cash? When does it come? How risky is it? How much capital does it take to generate that cash? Those are four questions we're always thinking about. Probably the most interesting keynote was Howard Marks’, although there were lots of different investors, and I would say the key to each investors success who was there is they're highly disciplined. However you approach the stock market, you approach it in a very consistent manner, whatever your discipline might be. But Howard Marks was second to last on Friday, and he really summed up much of what we've talked about over time, which is this notion that the price that you see in the market today is a function of the fundamentals and it's a function of the psychology. He had this interesting way of saying, the fundamentals go from pretty good to not-so good, but the psychology goes from flawless to helpless. It's that psychology that really whips the price around rather than the fundamentals. We've talked about that, how over long periods of time, earnings growth tends to be around 7%. If you give it time, it's actually not that volatile. But the psychology around how you might value that can really change a lot. He did use one of my favourites— because we're scenario-based investors—, which is Yogi Berra’s: in theory, practice and theory are the same; in practice, they're not. Which is another way of reminding yourself that you need to envision a variety of outcomes which allows you to turn the psychological ups and downs that you know are going to become your friend for your portfolio, and that's dollar-cost averaging and doing your best to take advantage of volatility rather than being a victim of volatility. Anyway, that's some of the things we were doing in the last week. I just thought I'd pass them on.

The other thing I would add to that— and it goes for those of you who are listening regularly to this podcast and particularly (S)Tuesdays—, our objective here is to help you learn, give you some ideas, some things to think about that you can employ in your own investment management; or if you're working with an advisor, put you in a position to have a better discussion with that investment advisor, to come to better decision making. Part of what you get out of listening to a podcast like this, Stu is always sharpening his tools. Obviously, Stu has been investing for many decades, but still is taking time to go and listen to other investment experts from different parts of the world, conferences, now via Webex or FaceTime or Zoom, whatever it may be, to make sure that you're listening to ideas that other investors have, so that you can test it against your own process or maybe even look at different ways to evolve what you're doing from an investment process perspective. It's a good lesson. As you suggested, you pick up just a couple of little things, and it just helps guide you around those key decisions that you have to make around your investment portfolio.

100%. You know, my partner Doug says there's no monopoly on good ideas. It's just a great reminder that you can always learn something and it's really important.

The good thing is, as always, this is an audio podcast, because if people could see my sweater, they’d know the type of investor I am: deep value. Here we go. Stu, thanks again. Another really interesting discussion and we will see you back hopefully next Tuesday, on schedule. I think we'll start to see some more earnings, particularly some of the Canadian banks coming up, and we'll take a look at that. Thanks and we'll talk to you soon.

Great. Thanks, Dave.