Vito Maida, founder of Toronto-based investment firm Patient Capital Management Inc. and one of Canada's most successful money managers of the past decade, explained his market outlook and answered your questions in a live one-hour discussion on Thursday, March 31.
Mr. Maida oversees $125-million in assets and a year ago began managing the Horizons AlphaPro North American Value ETF. He has a decidedly bearish view right now on the Canadian market, believing that valuations in Canada are at dangerous levels and has raised cash levels to 55 per cent in the portfolio he runs for wealthy individuals and foundations.
Over the past 10 years, his portfolio posted an annualized 8.3-per-cent return before fees, compared with 5.6 per cent for the S&P/TSX Total Return index.
The following is a transcript of the discussion:
10:59 Darcy Keith - Good morning everyone and welcome to this live discussion with Vito Maida, founder of Patient Capital Management Inc. I'm Darcy Keith, a web editor with the Globe and Mail.
10:59 Darcy Keith - Good morning Vito
11:01 [Comment From Vito Maida]/b>
Hi Darcy
11:02 Darcy Keith - Thanks very much for joining us today Vito. I'd like to start off just by asking your general view on the market right now. Your recent interview with our Shirley Won suggests you feel the market is overvalued now. Is it time to go heavily into cash?
11:06 [Comment From Vito Maida]/b>
Our view is that the vast majority of stocks that we look at are substantially above their intrinsic value. As a result, we are very cautious and would recommend staying on the sidelines.
11:06 [Comment From bradpoulos ]/b>
I read the article and understand why the move from equities to cash (danger of a mkt crash), but why not more gold then, or silver?
11:08 [Comment From Vito Maida]/b>
Our view is that the prices of gold and silver are substantially above their fair value and as a result are quite risky investments at this time.
11:08 [Comment From Guest ]/b>
Where do you see the price of gold and silver over the next year? Which is the best investment?
11:09 [Comment From Vito Maida]/b>
We cannot predict commodity prices over the short term or long term. What we can do is make a judgement about the current price in relation to its long term historical trends.
11:11 [Comment From Mark Kluepfel ]/b>
What are some of the signals, besides high evaluations, for the correction? Oil is at 105ish. Some say that around 120 to 140 we will have another economy reset
11:11 [Comment From Vito Maida]/b>
At current prices the prices of gold and silver are substantially over valued.
11:12 [Comment From Vito Maida]/b>
It is difficult to predict an exact signal. However, what is highly probable is that some event will cause high valuations to be readjusted downwards and result in a loss of capital.
11:14 Darcy Keith - Any suggestions on what events may be on the horizon that could spark such a correctioin Vito? Some of our users are wondering whether the European debt situation may be something in particular to monitor
11:15 [Comment From Vito Maida]/b>
A price of oil above $125 should be cause for serious concern as it may slow down consumer spending and in turm affect business and consumer confidence.
11:15 [Comment From Mihail Nedkov ]/b>
Hi, have you noticed a cyclical market decline between spring and fall in north american markets? I remember we had one in 2010 and an analyst from scotia capital had mentioned it's cyclical?
11:17 [Comment From Vito Maida]/b>
The European situation is certainly a concern that may spark a correction. Worries about inflation, a detrioration in the Middle East situation or further problems in Japan could also trigger a correction.
11:18 [Comment From Vito Maida]/b>
We do not analysize cyclical trends; our focus is strictly on valuations and the fundementals of the underlying business.
11:19 [Comment From germainb ]/b>
How do you evaluate intrinsic value for equities?
11:20 Darcy Keith - Here's another related question while we're on that topic:
11:20 [Comment From Jeff ]/b>
Vito, can you talk a bit about your investment process, your research process?
11:21 [Comment From Vito Maida]/b>
We use a discounted cash flow valuation to calculate intrindic value. We are very conservative in our assumptions and very careful in our analysis. Once we determine this value we purchase the investment at a 40 to 50 per cent discount.
11:23 [Comment From Vito Maida]/b>
Our reserach process is focused on finding high quality companies and purchasing them at attractive prices. When we identify a potential investment candidate we then carry out an exhaustive financial and fundemrntal anaylisis. ...
11:25 [Comment From Vito Maida]/b>
We look very closely at the company's financials, compare the company to its peers and talk to management, competitors and industry analysts. We then value the company and attempt to purchase the shares at a 40 to 50 per cent discount to estimated valuation.
11:21 [Comment From Guest ]/b>
Could you give us some examples of sectors that you considered overvalued?
11:27 [Comment From Vito Maida]/b>
We belive that the commodities and oil and gas sectors are over valued in Canada. In addition, Canadian banking shares are expensive.
11:28 Darcy Keith - Any specific sectors Vito that may be fairly valued - or even under valued at this juncture?
11:30 [Comment From Vito Maida]/b>
In the U.S. the health care and defense sectors show good value. As well, some large U.S blue chip companies like Johnson and Johnson or Cisco show good value.
11:31 [Comment From joanne ]/b>
Why would you choose cash over bonds and in what vehicle do you hold your cash?
11:32 [Comment From Vito Maida]/b>
At this point we would choose cash over bonds. We would choose T-Bills due to their safety.
11:32 [Comment From bradpoulos ]/b>
If you are able to get companies at half their intrinsic value that would obviously bode well for your investors. Why don't the "other side" understand what's happening? Do you focus on "motivated seller" situations?
11:35 [Comment From Vito Maida]/b>
What we find is that most sellers react to short term information about the market, the industry or the company. Because we have a long time frame and are able to patiently wait for the investment to earn a substantial return we can purchase when others are selling due to short term concerns.
11:35 [Comment From Ken ]/b>
How large a market correction are you looking for before you become a buyer again?
11:37 [Comment From Vito Maida]/b>
We don't really look for market corrections. What we look for a substantial declines in indiviual share prices that meet our criteria for high quality businesses. If one of these companies falls into our buy range we purchase the shares irrespective of overall market conditions.
11:38 [Comment From michael ]/b>
What sectors & which stocks do you have 45% invested ?
11:39 [Comment From Vito Maida]/b>
We have invested in shares of U,S. healthcare compaies, some consumer product compaies and some finacial companies.
11:39 [Comment From Mark ]/b>
What do you think a fair value for the S&P and TSX are?
11:41 [Comment From Vito Maida]/b>
Predicting fair value for overall indexes is difficult. We would estimate that fair value for the S & P 500 is in the 750 to 900 range while fair value for the TSX would be in the range of 7500 to 8500.
11:42 [Comment From Josh ]/b>
Will you look for value outside western countries like Japan?
11:43 [Comment From Vito Maida]/b>
We tend to look in areas where there has been some difficulties so Japan may prove to be an excellent opportunity for long term investors.
11:45 [Comment From Guest ]/b>
By what criteria are you saying gold is over valued since it can not be judged like a stock?
11:47 [Comment From Vito Maida]/b>
We tend to look at the long term historical price and calculate the average long term price. We also look at the cost of production. By these measures we believe that the price of gold is over valued.
11:47 [Comment From Will ]/b>
Most of your investment is non-domestic (ie US) - and you have lost 3-4% this year on teh Foreign Exchange. Do you hedge the FX exposure and if so how can the average CND investor accomplish the same thing?
11:48 Darcy Keith - We also have users wondering Vito where you see the Canadian dollar heading
11:49 [Comment From Vito Maida]/b>
We do not hedge the Canadian dollar. Investors concerned about their exposure to the U.S. can buy funds that explicitly hedge their exposure to the dollar.
11:50 Darcy Keith - It sounds like you don't see the loonie climbing too much further. Would that be fair to say?
11:50 [Comment From Vito Maida]/b>
We believe that purchasing power parity or the fair value of the Canadian dollar vs. the U.S. dollar is in the 0.85 to 0.95 cents.
11:50 [Comment From John Mikkelsen ]/b>
Are you suggesting one to sell stocks where gains have been made, regardless of which stock to accumulate cash. Banks, oil/gas, telecom et al...?
11:51 [Comment From Vito Maida]/b>
It's hard to predict what the loomie will do in the short term however in the long term we believe that it will fall back below par.
11:54 [Comment From Vito Maida]/b>
One has to look at their individual situation from an income perspective and a tax perspective. If the objective is only to realize gains then securities that are expensive should be sold and the proceeds placed in undervalued securities or held in cash untill undervalued securities can be purchased.
11:54 [Comment From Guest ]/b>
How about the insurance sector with their exposure to the equity markets and sensitivity to low interest rates?
11:55 [Comment From Vito Maida]/b>
Insurance stocks show decent valuation. However, one has to be very comfortable with the companies exposure to equities and the fixed income investments that they hold.
11:56 Darcy Keith - Vito, we have some questions on your feelings about the bond market. Here's one:
11:56 [Comment From joanne ]/b>
Do you expect bonds to crash as well?
11:59 [Comment From Vito Maida]/b>
Bonds react inversley to interest rates. When interest rates go up bomd prices go down. With interest rates near zero we would be very cautious investing in bonds as interest rates are very likely to increase at some point in the future. Bonds are also very vulnerable to inflation and we believe that there is a strong possibility of inflation returning at some point. We would recommend very short term fixed income instruments at this time.
12:01 Darcy Keith - Thanks Vito. We're running out of time but I'd like to ask you about your feelings on commodities. Several of our readers are wondering where the opportunities may reside right now - and your feelings on uranium and energy.
12:01 Darcy Keith - Any commodity sector recommendations?
12:04 [Comment From Vito Maida]/b>
Our view on commodity stocks is that they are expensive. We believe that despite the recent correction in the uranium sector that the shares of Cameco are still expensive. As well energy shares are expensive and trading above our estimated net asset values. Gas prices are low and for long term investors this sector may provide an opprtunity.
12:05 Darcy Keith - Thanks Vito. We have many more questions but I'm afraid we're out of time for today's chat with Vito. Sorry to all those we haven't had time for! Vito, any final thoughts you'd like to leave us with?
12:09 [Comment From Vito Maida]/b>
Building wealth takes time and patience. I would hope that investors purcahse high quality companies at very reasonable prices and hold onto them until they become expensive. Using this slow and steady approach will help to meet long term ionvestment objectives.
12:10 Darcy Keith - Thanks Vito. Just before we wrap up, here are a few comments from our readers
12:10 [Comment From Will ]/b>
Based on your comment at 11:41 you believe the TSX is overvallued by 43% That's a BIG call.
12:10 [Comment From G. Jensen ]/b>
I'm not going through another tanking with my pension assets in equities - I think it is time to think about moving into bonds. It took 2 years for my funds to recover from the 2008 tanking and I only have about 10 to 12 years left to work.
12:10 [Comment From Guest ]/b>
Thank you Vito. That was good insight!
12:11 Darcy Keith - Thanks very much to all. it's been an interesting discussion!