Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s days on a Thursday, which is just par for the course, eh, Stuart?

It just shows our flexibility, Dave. We can go on any day.

I know I'm looking forward to this Sunday afternoon when we do one. Or maybe not. But at the very least we're flexible through the work week, which seems to be a somewhat shorter work week these days. It seems like most people work Tuesday to Thursday, in terms of their office time.

That has been the case. I would say it's changing at the margin, and I think in the fall it'll be back on a bit more. But you're definitely right; on Friday, it's pretty quiet.

Yeah. I don't know what's special about Friday in the summer, but I haven't figured it out why people don't come into the office on as much. But that's why we have you. You're the one who answers all the questions that I can't answer.

Yeah, well, you want to take Friday off because you like to work Saturday morning, Dave.

I'll watch for that when I'm sitting in the office on Saturday mornings myself. But you know what, we were going to go in a different direction, but why don't I just throw that in as a quick question? Do you ever use something like that, an observation? We've talked about corporate real estate on this podcast and commercial real estate. And do you ever look at the flow of people in the office? Or as you're walking down in downtown Toronto, in the underground, the traffic level there, does that give you a data point you might use to make a decision or ask a different question of a company you're investing in?

Yeah, for sure. Just looking around, no matter what we're doing on any given day, we're always trying to pay attention to some observable fact that might be out in front of us. And the other thing that's amazing too is that we have all these alternative data services these days as well. Not just what you see, but mobile phone data, how often cell towers ping, parking lot payments, all sorts of things. The ability to get a different view on some traditional measures is about 100 times better than it used to be.

So now I know you were the one who ratted me out to my boss for not being in the office last Friday.

Well, we do have «Find My iPhone» on each other's iPhones, Dave.

There we go. Yeah, that's interesting because I always watch when I'm traveling around; I'm always watching for what's happening at retail stores and such. So just to get feel for activity levels in that you've got obviously stronger data in your position, but you obviously do apply that kind of stuff. Stu, let's talk about maybe one of the bigger concerns that you and I share over the long haul with respect to investing, and that is people trying to time the market, but more importantly, just sitting and waiting on the sidelines for extended periods of time and missing important or good rallies in the market by just not being invested. And we look at the last year, we've seen a really nice move in the stock market and a fairly good move in the bond market as well. And there's probably more money sitting on the sidelines in Canada in cash and cash equivalents than we've ever seen. And even we, as we've talked on the podcast, we've been more proponents of dollar cost averaging instead of taking a big lump sum. And you can sit back now with 20/20 hindsight and a 30% rally in the S&P 500 and say, wow, I wish I'd been all in and jumped in with both feet last October at the bottom. How do you think about that in terms of going back and saying, hey, did I miss something? Should I have been more aggressive as an investment manager? Did I have the right assessment of risk versus return weighed out? Do you use that as a point of learning? For someone who's sat on the sidelines— and you haven't; you're mostly invested in the investment programs that you manage—, but for someone who's been sitting in cash and watched the S&P 500 gain 30% over the last nine months, how should they be thinking about it? How do you think about that?

First and foremost, it's only human to use hindsight. When you use hindsight and you look backwards, you either had too much risk or not enough return. It's pretty cut and dry. I think the thing that we always look at is trying to balance risk and reward on any given day, which in this environment has probably led us a little bit more towards dollar cost averaging. The general framework that we sit with is that long-term corporate earnings would grow around 7%, and we might collect a dividend depending on which country, of maybe 2% or something like that. Generally speaking, it'd be higher in Canada. So you have this long-term earnings growth, and then you have the multiple that stocks trade at. And if you go through a long period of time, the average is around 15 or maybe 16 times, or something like this. So when you're above it and you're a long-term investor, you might have to revisit that average at some point in your life. And when you're below it, you’re getting an incremental return because you’re going to get a valuation improvement and those earnings growth. So when you have below-average valuation, the job of an investment manager is a little bit easier because you have a lot of odds on your side. The risk return scale is heavily tilted in the favor of the long-term investor. And when you get up to a very high valuation, the reverse is true. And we've been in an environment where those two types of environments haven't really presented themselves. We've been maybe at the very lows of last year; we were right around 15-times earnings, maybe 16-times earnings. And today, if we didn't really have a recession, we might be around 19-times earnings. So we're elevated here. I don't think it's elevated in a manner that destroys the long-term value proposition of equities, but it is elevated. And that multiple, it moves around a lot more than the earnings themselves do, and it moves around on sentiment, and it moves around with interest rates, moves around with inflation, all sorts of things. So as inflation has come down, the multiple has expanded. It did so when a sentiment was poor, so there was money to flow in, and you get a move in the stock market that maybe went from 16 and a half times earning to 19. And if we were just on the street and I said 16 and 19, you're like, yeah, well, 16 and 19, they kind of sound the same. Well, it's almost 20% different. So we try and look for those extremes when we're going to make a big call, but they just don't present themselves as frequently as we might like. So then we try and use these tools around risk and return that tries to measure sentiment and the direction of interest rates and all sorts of things. And that's how you tweak the portfolio at the margin. But when you're in this short-term no man's land, which we've been in for some time, still reasonable, longer-term context, that's where dollar cost averaging becomes pretty important. And the other thing that's the major difference between now and where we've been for most of the decade was— I'm sure you've used the word «tina»; like in, there is no alternative—, so when ten-year bonds were 1.5% and you thought the equity market might rally at 10%, that was an 8.5% gap. There was this significant urgency; like, I cannot miss that. But when you can collect 5.5 or 6% on a portfolio of bonds and you think the equity market might do that same 10% or something like this, the risk return is not the same as it was. The sense of urgency is like, well, these things might come into play, or these things might come into play. So an investment manager is always trying to balance all these different forces at play and acknowledges in advance that in any given year stocks are going to go down 10% from top to bottom at some point in the year— they almost always do to some degree—, and they also rally sometimes. You can't totally explain it. That's just the world we live in.

Yeah. From an investment perspective, if I started dollar cost averaging a year ago, I would have spent the first three months watching the market drop significantly. In the first three months, you’d have been buying and bought down. And then the next nine months you'd be buying up, but you would now be fully invested. You would be up pretty significantly overall. Now you go forward from here with your holdings.

Yeah, that's right. It's part of a plan too. I'm big on roadmaps. I like to understand where we're going. There's lots of people that just sit there and say, listen, I'm going to be at this point. I'm going to save for 30 years. So today, tomorrow, I don't care. I'm putting it all in. And that's their mindset, and that's great in those instances, but a lot of us don't have that mindset. And dollar cost averaging is the catch all. Like if you buy someone, it goes down, you get a better price, and then it turns out longer term. And if you buy someone that goes up, at least you got started.

Yeah. With what you're doing with the different holdings in one of your funds is you're not going to establish a full position in that particular company immediately. You're going to wade your way in, even if you're really excited about the current price.

100%. Just to circle back to what we started with, something like real estate; there's pockets of real estate that are extremely buoyant right now. Industrial, some apartments, things like this. There are other pockets like office real estate that are struggling a little bit in the near term; a combination of how much people are working downtown and maybe a little bit of extra supply that has come on from prior years. But if you looked out and said three years ago, I'm pretty certain that no one's going to build another office building, so the absorption now starts to work in your favor. Today, you have so much new supply and you have so much absorption. Even if the absorption is not very high, but you just stop new supply, eventually you'll chew through it. And then maybe some businesses that do spend some time as a team in the office, they start to excel and management says, hey, we got to be back in the office. Or we get back to the office and we realize that during COVID we hired some people and space is tight. So you have this framework: three years from now, do I think office will look better than it does today? In all likelihood, yes. Is it going to happen tomorrow? No. So I got a game plan about how do we think about getting capital to work into that type of an idea. So I might have a stock that would favor that type of an investment. It might go down another 25% in the next six or nine months because people are very short term. But it also might double from this current level as eventually the recovery presents itself in two- or three-year’s time. So when you're managing a portfolio, you always have some things that are working now, but you have to also always be planting seeds that will come to fruition later.

Yeah. The side that a lot of investors forget. What you're talking about, in what you're doing, the key word is you're managing risk. You're not just thinking, oh, I've got to get this at the exact bottom, so I get 100% upside on this. I'm looking at a broader portfolio and the overall risk of that portfolio and how I want to be positioned over time, what level of risk I want to have, which I adjust here and there. But it's the risk management that a lot of people who are buying their own individual stocks and bonds or even moving around within asset classes, sometimes forget.

100%. I used to have a colleague that said: how thick is the ice, how deep is the water, in terms of risk? Which is still one of the best analogies I've ever heard for risk. And just because you thought about risk and you maybe positioned the portfolio to avoid something, if it never takes place, it doesn't mean it was necessarily a bad idea. It's because some of the alternatives might have better risk-adjusted returns in your eyes at that particular point in time. Any investment manager is always thinking about risk. You're always trying to think about what type of return am I trying to generate, what type of characteristics does the investor want on that return? How can I best do it? What are the alternatives? I'm not necessarily minimizing volatility of the actual price moving on a given day, but how can I minimize the longer-term volatility? By putting money to work in something where the odds are in our favor.

Exactly. And then you've talked a lot about sentiment. I know that's something that you like to think about. If people get too excited, that gives you pause or cause for concern. If people are too pessimistic, that says that's interesting. You look at what's happening around the forecast of the recession. And you've since seen that people have been a little bit more skeptical that we may have a recession at some point in the future and exactly when that's going to happen. That's where you saw markets start to rally. But we've now gotten to a point where I almost get worried. We've seen some pretty significant analysts and bodies around the world— like the IMF— who have taken the recession risk down a lot. I think Chairman Powell of the Federal Reserve even said he doesn't think we're going to have a recession now. After you had some people who were 100% sure we're having a recession, it seems like a pretty big move in sentiment and that almost scares me the other way. When everyone's 100% sure we're going to have a recession and we're not, you get back to 0 to 20%, those kind of things. Maybe we just haven't noticed that the risks are building for that ultimate pullback.

Well, it's a great point. Longer-term returns are generated by earnings growth and dividends. Shorter-term returns are generated when perception changes. It's the major cause of short-term returns. So when you look back to the experience we've had since middle of May, no question it is the perception that the odds of recession are lower than the stock market predicted at that time. So if you have a range of outcomes and one of them is negative, and you remove the negative outcome, the rest of it rises. It's not that the positive outcome is necessarily any better, it's just you took the negative one off the table. Time will tell. There are some very good indicators and there are some very good lessons about monetary policy working with a lag. And we go back, and we look at those indicators, and there has been lots of times, unfortunately, where we've had big rallies just to see them end as the recession was a little bit farther away than we thought it was. So we've studied those cases. We were studying them this morning, and that's something that we have to be wary of when stock markets have done well. Now, if you're sitting there saying it's unlikely there's going to be a recession, in May, that didn't need to be true to make money in the stock market; today, that needs to be true to make money in the stock market, or it has to be more likely. So that's the way, as price changes. Price goes down, your long-term odds have improved. Price goes up, they haven't improved. And that's what we're always trying to balance. And you raise great points about how this sentiment has shifted on the likelihood of a recession. Yet we still don't know because there's lots of indicators that suggest that eventually there'll be some concern.

Wow. Overall, that's a fantastic synopsis of a lot of the ground we've covered over the last three years doing this podcast on an almost weekly basis, except when one of us goes away. You're going on vacation next week, but you're working the whole week. Again, regular listeners will know that that's just kind of par for the course for you.

Par for the course. That's a good one for me, yes.

And you're going to go into some meetings and have probably some really interesting things to share when we do get back. We'll skip next week, and we'll come back in a couple of weeks and catch up with you and see where things are because I'll be on vacation, working as well. We'll catch you then. So Stu, thanks for this. Really love that last bit around the pricing move and how that changes, and then particularly around the whole idea of this move in May, which could very well be a valid move if we don't have a recession. But that's the scenario that the markets are betting on right now. So we'll see if the markets are right again or wrong again.

Well, thanks very much, Dave, and have a good break yourself and we'll catch up shortly.

Same to you, Stu. Take care.

Thanks, Dave.