- Donald Yacktman
- Peter Schiff
- Jeremy Grantham
- Charles Brandes
- James O’Shaughnessy
- Peter Thiel
- Satish Rai
- Jeremy Siegel
- Geraldine Weiss
- Bill Miller
- Gerry Schwartz
- Rob Arnott
By John Daly
What is the biggest risk that investors face right now?
The stock market is not cheap.
Is that why you’ve been holding a lot of cash lately?Yacktman Asset Management manages close to $30 billion. In 2007 and today, we’ve had a fair bit of cash. We were at about 20% at the end of the third quarter of 2013. Usually, as the market goes up, our cash tends to build. Because we’re investing from the bottom up, not the top down, the cash is a residual. That’s telling you how hard it is to find stocks to buy.
What about the argument that investors hire a manager to pick stocks, not to hold cash?
Our primary goal is to protect our clients’ money, and there are two sides to that. One is protecting it against bad decisions—buying things that are overpriced. The other is to protect against inflation. You have a tough period now, because cash doesn’t earn anything. If it earned something, our cash position would probably be even higher.
Your holdings aren’t little-known stocks. Are you just buying at the right price?
Yeah, price is critical. But the second thing is time horizon. We view every stock as if it were a long-term bond. And we’re looking at risk-adjusted forward returns. The Cokes, Pepsis and P&Gs become our triple-A bonds.
So how do you identify a bargain?
Companies that tend to have consistently high returns usually have low fixed assets and low cyclicality. You will rarely see things like airlines, automobiles or steel companies or, for that matter, banks in our holdings.
Your staff is very small, right?
We have about a dozen full-time people. Five are what I would call analytical staff. We aren’t into body count. When I organized the company, I had the goal of trying to farm out everything except for the judgment part. Basically, the only thing we do is make purchases and make analytical decisions. There are a few critical variables, and most of them can be figured out on the back of an envelope.
How do you decide when to buy?
The easiest is when the market comes down. By the end of 2008, we had all our money invested. I’d said, “If you can’t find bargains in this environment, there’s a disconnect.” Then the market went down another 20%. In this business, you’re wrong almost all the time. It’s just a matter of degree, because nobody buys at the bottom or sells at the top.
What are other good times to buy?
Another one is an industry thing. For instance, you have a lot of health care issues in the United States. Everybody gets nervous, and they knock down the price of companies in that industry.
Have you bought any health care stocks recently?
Things in that area were disruptive in 2012. We now have big positions in C.R. Bard, Stryker and Johnson & Johnson. So three of our top 12 are in the medical device area.
What about BlackBerry? You were a prominent investor recently.
That’s an example of something company-specific. We’ve had back-and-forth positions in BlackBerry within the last year or two. When it got creamed, we bought it. We ran the share price up into the teens and we eliminated probably 90% of it. We should have got rid of all of it.
And you made money on it?
So how do you get out of a dog like BlackBerry?
I think the secret is to be incredibly objective and patient. First of all, don’t buy more. Also, stocks tend to fluctuate about 50%, from low to high, over 12 months. You’ll usually have opportunities to re-evaluate and exit.
Schiff is chief executive officer and chief global strategist at Connecticut-based Euro Pacific Capital. He has authored many books, including Crash Proof: How to Profit from the Coming Economic Collapse, and The Real Crash: America’s Coming Bankruptcy. His nickname is, not surprisingly, Dr. Doom.
By Shirley Won
Where do you see opportunities?
The U.S. economy is a bubble that will burst. In contrast to prior monetary excesses, this time the U.S. Federal Reserve has inflated simultaneous bubbles in stocks, bonds and real estate. As the Fed prints more and more dollars to keep those bubbles from popping, the dollar will lose value and eventually precipitate a financial crisis larger than the one we experienced in 2008. The U.S. dollar is being propped up by foreign central banks. But when our creditors finally understand the box we are in, they will not be willing to hold as many dollars. You don’t want to own U.S.-dollar-denominated assets, and you certainly don’t want to own U.S. treasuries or corporate bonds. You’re better off owning equities outside the U.S. I like resource stocks like Franco-Nevada, Goldcorp, Yamana Gold, Agnico-Eagle Mines and Endeavour Silver. Many people don’t understand how much inflation is being created, and how that benefits gold. Gold is going to be several thousand dollars an ounce before the bull market ends.
What would you do with a $100,000 windfall?
I am a 50-year-old guy with a family, but I would go with all equities, precious metals and little bonds. I’d buy more gold stocks and bullion because of how cheap they are. Also, buy dividend-paying foreign equities and get into emerging markets.
What are your best and worst investments?
Shorting subprime mortgages in 2006 was both my best and worst investment. There was a book written on it, called The Greatest Trade Ever. But it was also my worst trade, because I didn’t have it on big enough for me or my clients. At the time, I had a lot of money in gold stocks, which I didn’t want to sell because of a significant tax liability. I expected that the monetary policy that would result from the bursting of the housing bubble would send gold prices much higher. As well, my brokerage account was already highly leveraged, as I had just borrowed against it to settle a divorce. Of course, those gold stocks imploded in 2008, and I could have sold them, paid the taxes, and then bought them back for much less with the profits I would have made shorting subprime. I was also under-invested because I thought the performance fees from my hedge fund [which returned just over 1,000% after fees over one year] would provide me with ample upside. As it turned out, very few clients actually invested in the fund, so my fees were much smaller than anticipated. Sure, I made a few million dollars, but it wasn’t a lot of money compared to what others made. I just didn’t put enough money where my mouth was.
What keeps you awake at night?
I worry it’s going to be a long time before the economic collapse happens. The longer it takes, the worse it is going to be. I want the world to stop financing the growth of the U.S. government—that is, to stop buying treasuries so that our economy can restructure in a healthy way.
What was the best investment advice you ever received?
I have been given lots of advice over the years—most of it bad. That is why I try to invest for the long term.
What advice would you give average investors now?
Be skeptical of mainstream Wall Street firms. Analysts who have buys on stocks are often trying to get investment banking deals from those companies, or to help favoured institutional clients sell their shares at higher prices. They will be reluctant to tell you to sell those stocks, even if they see problems. Also, be skeptical of government numbers. The U.S. government says there is no inflation, because the Consumer Price Index says that. But they have specifically redesigned the CPI to conceal inflation. The Fed is creating a lot of money. That is the definition of inflation.
Do you have a mentor?
Jim Rogers, Marc Faber and Jim Grant are people I used to listen to before I became one of those people. I gravitated to them because they were pretty much saying what I was thinking on my own. And now a lot of people listen to me.
The chief investment strategist at global asset manager GMO has managed to dodge recent bubbles and scoop up opportunities on the cheap. But he’s getting increasingly worried about the environment, which bodes ill for Alberta. And don’t get him started on the Fed…
By David Berman
What’s your feeling about the state of the world?In the short term, we’re jogging along okay. In the longer term, I worry about the inability of many countries to come to terms with environmental issues. There is little sign that anyone gets the point that we can’t afford to go on burning coal unless we want to end up with a miserable, dystopian future.
Environmentalism crops up quite a bit in your thinking these days. To what extent are you arguing as an environmentalist versus an investor?
It’s very hard for me to separate them. It leads to some clear conclusions: Coal and tar sands will be stranded assets, in that they won’t get their money back. The coal industry is seen increasingly as dangerously polluting and contributing to global warming. The pollution in Chinese cities may be the single-biggest driving factor on that.
You’ve been critical of Canada’s oil sands in particular. Why?
The tar sands is a particularly dirty and expensive form of fossil fuel. It doesn’t bubble out of the ground like it does in Saudi Arabia. If we burn an appreciable chunk of your tar sands, we’re toast. We’re in this boat together, and the boat is leaking.
You’ve been warning of a potential stock bubble, followed by the third bust since 2000.
How do you play this sort of environment?
There is no easy answer, and anyone who thinks there is one is either ignorant or a crook. If you get out too soon, you’ll be victimized as an old fuddy-duddy. If you stay in too long, you’ll be just another trend-follower. But we know what the Fed does, and we know what [incoming Fed chair] Janet Yellen thinks. She says the market is not badly overpriced, which means she’s not going to get disturbed if it were 20% or 30% higher. Consequently, I don’t think that is unlikely.
Is this bubble-and-bust cycle one that can and should be avoided?
Of course it can and should be avoided. But by appointing Janet Yellen, you know there is no inclination on the part of officialdom to change the game. Bernanke and Yellen are guaranteed extensions of what I think of as the Greenspan experiment in stimulus and relatively lax regulation. It is a totally failed experiment, with enormous pain. Will they never learn?
You’re a big-picture strategist. How important is stock-picking when you get the central ideas right?
I would say that the big picture utterly overwhelms stock-picking if you get the big picture right. And if you only get it modestly right, it really would be a good idea to have some stock-picking skills up your sleeve.
Why has timber persisted year-in and year-out as a good investment?
When we first picked it up in the late 1990s, it was a totally mispriced asset. It was unacceptable to most institutional investors, except for a handful of mavericks, and it was notoriously illiquid. That resulted in a ludicrous mismatch with the rest of the market—and it provides wonderful diversification and has a long horizon suitable for pension funds.
What’s your favourite long-term resource?
Forestry and farmland, if you can find those properties that have the least overpricing. They would tend to be overseas, in reasonably stable countries. Unless I could get a share in the Moroccan government’s phosphate enterprise, in which case I would do it with a quarter of my net worth and feed it to my grandchildren.
Brandes, 70, has been spreading the gospel of disciplined investing in sound but undervalued companies since 1974. Like Warren Buffett, the San Diego billionaire counts Ben Graham as his mentor. The author of the widely read Value Investing Today, first published in 1989, regards investing as a long-term proposition. Anything else is just speculating.
By Brian Milner
What’s the best investment you’ve made?
The most recent example, believe it or not, is Microsoft. As deep-value guys, we generally don’t buy these high-flying technology companies when they’re trading at very high price-to-earnings and price-to-book ratios. But over the last three or four years, some of the premier technology companies had gotten to a value price. The feeling about Microsoft was that the PC era was over. But enterprise-wise, everybody around the world had Windows on their PCs, and we didn’t think that was going to go away immediately. Thinking long-term and of the basic fundamentals of the company, it was a very good bargain.
What’s the worst?
We bought stock in a brokerage firm in Japan called Yamaichi Securities, in 1997. It was the third-largest in Japan at the time. The stock price looked to be pretty cheap, compared to their earnings or cash flow, their dividend and that sort of thing. This was one of the rare cases of outright fraud. Yamaichi’s reporting was fraudulent. It went to zero. So that result was not satisfactory.
You say individual investors have a big advantage over institutions. How so?
The conventional wisdom is that the institutions always have an advantage over the little guy, and you can’t fight Wall Street. That is wrong. The institutions have the same behavioural handicaps as individuals. However, they can’t overcome them, because there is so much pressure in the short term for institutions to perform.
What are the biggest risks facing the average investor?
I don’t know if your readers would believe this, but if you have a period of time for your investments shorter than three to five years, you’re not an investor. You’re a speculator.
What risks should the long-term investor be paying attention to?
Obviously, one of those would be technological change in the business that you’re invested in. And technological change has speeded up a whole lot. That is such a fundamental potential risk that you have to be aware of it. An example would be Kodak and its film business. Digital just wiped them out.
Other risks to watch out for?
Potentially, balance-sheet risk, credit risk. Of course, we saw that big-time in the credit crisis of 2008. But historically, you always have to be careful with a company that is getting too much debt on its balance sheet to survive properly in a recessionary environment.
What keeps you up at night?
Nothing, really. However, after 2008-’09, investors were scared about investing in equities—and it’s still going that way. The institutions used to have 60% in equities, 30% in bonds and 10% somewhere else. Now, they’re down to about 40% in equities. When you look at the long-term rates of return, equities are absolutely the superior place to be. If you’re a fundamental long-term investor, you just keep with equities because they always recover to new highs.
O’Shaughnessy, 53, is the author of the 1997 bestseller What Works on Wall Street and one of the most formidable crunchers of historical market data in the business. His Connecticut-based O’Shaughnessy Asset Management manages $6.4 billion (U.S.) and is a sub-adviser on seven Royal Bank of Canada O’Shaughnessy mutual funds.
By John Daly
Stocks have had a good run since 2009. Are they getting too expensive?
Stocks in the U.S. are about 150% higher than they were in 2009. At that time, we did a calculation based on 20-year averages: What would the market have to go through by 2019 to match the worst 20-year period ever? If memory serves me, it was 6% average annual gain after inflation. If we look back in 2019, I’m not saying that stocks will be giving huge double-digit returns, but I do think they will end up being one of the best-performing asset classes.
What are the biggest risks investors face right now?
Extrapolating the bond market’s fantastic performance since 1981 into the future. We think long-term bonds will be going into a multidecade bear market, and we’re urging investors to invest only in short-term bonds. My entire adult life has been lived in a bull market for bonds. But bonds can be very risky, especially over long periods. If you’d started investing in 20-year bonds in 1940, by 1981, you would have had about a 63% real total loss on the portfolio. I’m not saying don’t buy bonds; I’m saying be careful which bonds you buy.
What one piece of general advice would you give to investors right now?
Establish an asset allocation and then rebalance it when it gets 15% out of whack. Really, if investors could just do that, they could substantially improve their overall performance.
What about picking individual stocks? What numbers or ratios work best?
Our value composite consists of five elements: price-to-sales, price-to-earnings, EBITDA-to-enterprise value, free cash flow-to-enterprise value and shareholder yield. For all 10-year periods, the value composite has outperformed any one of its constituents 85% of the time.
What was your best investment?
The data our firm uses to conduct our research on investment strategies. It is our second-largest expense after people. The data includes Standard & Poor’s Compustat, Thomson’s Worldscope, MSCI and the University of Chicago securities data and prices that go back to 1926. It allows us to answer questions like, how often does a strategy beat its benchmark and by what magnitude?
What was your worst investment?
OEX put options, based on the Standard & Poor’s 100 [which investors use as insurance against a market downturn], just before the crash in 1987. I was trading on my own account, and I was doing a lot of work with the Black-Scholes formula for options pricing. The puts tend to go up in price if the market goes down, and they were really acting up, so I thought the market knew something I didn’t. I slowly began acquiring puts. But then the market had a great day just a few days before the crash. I lost my nerve and I emotionally sold the puts at a loss. I don’t even want to tell you what I would have made if I had held on through the crash. Shoulda, woulda, coulda.
Who is your investing hero?
Definitely Ben Graham. I’m just lucky he didn’t have computers; otherwise, he would have written What Works on Wall Street.
German-born Thiel left a New York securities law firm to move to Silicon Valley and start PayPal with his friend Elon Musk. Then he became Facebook’s first backer. He is also the chairman of Palantir, the data security firm that helps the CIA track the movements of miscreants (and the rest of us) on the Internet.
By Alec Scott
“We wanted flying cars—instead we got 140 characters.” Explain the motto of your investment company, Founders Fund.
We’ve lived through a period of relative technical stagnation. You can debate whether flying cars would be a great improvement, but if people wanted to make them work, it could be done. We are not trying as hard, not reaching as high.
As an investor, how do you choose which dreamers to back?
How many leaps are required for your solution to work? Having to invent one or two major things, that’s doable. More? Doubtful. Also, we look for founders who are good at co-ordinating large teams and convincing them that something that seems impossible is doable. It’s been a decade-long effort for Elon Musk to start SpaceX to reconstruct the American space program—which seemed impossible at the outset.
You’ve invested in three of the biggest successes in the Internet’s short history. How do you decide which start-ups have legs?
Each great company is geared to capitalize on a particular moment in history. PayPal and Facebook each began by providing a big benefit to a small market. There are only 10,000 people at Harvard, but Facebook had a 60% market share in 10 days. PayPal’s initial market was eBay’s “power-sellers”—maybe 20,000 people. But within four months of launch, we had 25% of the market.
Is tech investing different from other sorts of investing?
It’s incredibly hard to get people to adopt new tech solutions, and you only get adoption of something if it’s 10 times as good as the next best thing. Amazon had 10 times as many books. PayPal was at least 10 times as fast as cashing a cheque.
What metric do you most rely on?
I’ve found a single question to be predictive of a start-up’s success: What is the CEO’s salary? If it’s less than $120,000, with equity a big component of the compensation, there’s alignment between the CEO and the investors. If it’s $150,000 or more, it almost never works.
How do your years of competitive chess-playing help you invest?
Chess champion José Raúl Capablanca said, “In order to improve your game, you must study the endgame before everything else.” Successful businesses have a very long arc. In 2001, we concluded that three-quarters of PayPal’s value would come from 2011 and beyond. The same thing applies to all the big tech companies currently—LinkedIn, Facebook, Twitter. Most of their value comes from the 2020s, 2030s and beyond. And so one of the critical questions is, what does the endgame look like, not how they will do in the next month.
What are your thoughts on the Canadian start-up scene?
We’ve been looking at Canada very carefully—a scene that is shockingly underfunded.
What’s your advice for investors?
We should never underestimate the degree to which investors act in herd-like ways. This leads to all these bubble-like phenomena. It’s difficult to time these things precisely, but understanding extreme irrationality is a good starting point. You need to understand just how far we are from an efficient market.
Rai, 50, joined TD as a management trainee in 1986 and began applying more analytical discipline to the bank’s investment decisions. He is now in charge of investments at TD’s $217-billion asset management division and runs the bank’s own pension plan.
By John Daly
What would you do with a $100,000 windfall?
The same thing today as I did five or 10 years ago: Buy shares in great companies, Canadian or foreign, with strong balance sheets. Some people say those companies should pay dividends. I don’t necessarily agree, so long as they are allocating capital properly—the ones that are consistently growing their businesses. Think about two questions: “Will a company find this or discover that, and therefore make a lot of money?” and “Is this company going to grow at 5% or 10% a year?” There’s a big difference between the two.
What was your best investment?
My 25 years of investing in TD Bank shares.
What was your worst investment?
Early in my career, with my personal portfolio, I bought speculative stocks with a short-term time horizon. I don’t have a name, but it was always a company that was rolling the dice on finding a product. I perceived those speculative stocks as a 50/50 bet that they would go up. In fact, it’s more like a 99% probability that they will go down.
What’s the biggest risk that investors face today?
People haven’t figured out that they need to take on a different risk profile. They believe that, as you get closer to retirement, you should shift money from equities to fixed income. That’s all based on the 30-year bull market in bonds we’ve been through, not looking forward. In this environment—in which interest rates are low—fixed income is going to give you 0% capital appreciation.
What about corporate bonds? Isn’t the market strong for them?
Spreads between the rates on government bonds and the traditionally higher rates on corporate bonds are thin, and they are going to stay thin. That’s why our team thinks that 2014 is going to be a strong year for mergers and acquisitions, because if you’re a good corporation, you can borrow large amounts at rates virtually flat to inflation. There will be a point in the cycle soon where people have confidence in economic activity. Once that happens, you will see an enormous amount of corporate development. The first stage will be for companies to acquire business using their easy access to capital.
So, should individuals invest in those bonds?
No. They should be buying equities in strong companies.
Will interest rates go up any time soon?
Our view is that it will be surprising how long rates stay low—short-term rates controlled by central banks, that is. The reason is not what people think: slow economic activity. It’s that governments can’t afford to pay higher interest costs on their debt. The U.S. has $12 trillion in debt. If rates go up 1%, that’s $120 billion a year in added interest.
Won’t those low rates prolong the crisis in traditional defined-benefit pension plans?
Pension plans can’t get higher returns without taking on more risk, and most are not willing or not allowed to do that. So the individual or the corporation, or other plan sponsor, has to make higher contributions—that’s it. But if you’re living paycheque to paycheque, what right do I have to tell you that you need to save 12%, 13%, 14% of your income? Society needs to find tools.
What can a boomer approaching retirement do?
I have a simple piece of advice for boomers: Live off the dividend income, not capital gains from stocks or bonds. If you need the capital gains, you have to try to time the market when you buy and sell. But if you’re able to sustain your lifestyle with dividend income—plus OAS, CPP and your pension plan—you won’t have to worry about fluctuations in the value of your portfolio. You’ll have a very good retirement, because there’s enormous opportunity around this.
Siegel teaches finance at the University of Pennsylvania’s Wharton School and is an investment strategy adviser with WisdomTree Investments. He’s also the author of Stocks for the Long Run.
By Shirley Won
What’s your outlook on the U.S. market, and where do you see opportunities?
I am still very bullish. I think the Dow Jones will pass 17,000 points in 2014, a gain of 10% to 15%. In a low interest rate environment, stocks often trade at 18 to 20 times earnings. But they are now trading at about 15 to 16 times, and I think earnings are going to continue to rise in 2014. Internationally, I think emerging markets are the most undervalued and represent good opportunities.
What would you do with a $100,000 windfall?
I don’t see another asset class that is going to beat stocks over three to five years. I would buy a broadly diversified global index fund with a higher weight toward emerging markets. While I think the U.S. market will do better than Europe in 2014, I think all stock markets will rise.
What keeps you up at night?
I sleep pretty well. However, there is always a possibility of a terrorist attack. Such an event, involving nuclear materials or something of that nature, is very unlikely, but would have a devastating impact on the market. I don’t think that a financial crisis like the one we had in 2008 is going to happen for many, many years.
What’s the best investing advice you ever got?
The late Paul Samuelson, who was my PhD thesis adviser at MIT, talked about low-cost indexed investments. That stuck with me, and I was one of the very first people in the Vanguard S&P 500 Index Fund. Low-cost investing is still the way to go, but I now prefer fundamental indexing, which weights stocks by earnings or dividends instead of by market capitalization. The bulk of my equity holdings are in funds that are fundamentally indexed, covering different regions of the world.
What advice would you give to investors now?
I would advise investors to move toward fundamentally weighted index investments, and have a generous allocation to stocks. I think equities are going to do very well over the next three to five years. I know a lot of people are afraid of stocks because of memories of the 2008 market crash. But people who think they have missed the whole bull market, haven’t. There are more gains to be had.
Weiss, 88, began publishing “Investment Quality Trends” in 1966 (under the name G. Weiss, to hide her gender), and has won accolades from, among others, “Hulbert Financial Digest,” which has been tracking more than 160 newsletters since 1980.
By David Berman
You’ve been following dividends for decades. How have things changed?The Dow has changed a bit: In the 1970s and ’80s, it used to travel between yield extremes, where 3% was overvalued and 6% was undervalued. Now, it seems to travel between yield extremes where 2% is overvalued and 4% is undervalued. I think it has changed because of the tech stocks that have entered the index.
What about the way investors approach dividend stocks?
I look at dividends not necessarily as an income factor, but as the only true measure of value in the stock market. Anything that doesn’t pay a dividend or some kind of return is a speculation—so dividends will always be a big factor in the stock market.
Has there been any change in the way companies approach dividends?
Blue-chip stocks have always paid dividends, and they should—they should share their good fortune with their stockholders. And income is really the main reason why an investor would go into the stock market—to get a return on his investment dollar. We all hope for capital gains, but the only thing we can really count on is the dividend.
So what is the Dow Jones industrial average signalling in terms of its dividend yield?
When the Dow reaches a point where the yield is 2.1%, then it is considered overvalued. But I don’t advocate buying the Dow. There are many good-quality individual stocks that are not overvalued.
What do you think about Apple’s decision to pay a dividend?
A company that has been around as long as Apple and has been as innovative as Apple is a selfish company if it doesn’t want to share some of its good fortune with its stockholders.
You’re a competitive bridge player. There are many famous business and investing personalities who are also into bridge, including Warren Buffett…
I’ve played bridge with Warren Buffett. Once, when he called my office to arrange a game, my office manager announced, “There’s a character on the phone who says he’s Warren Buffett.” When I told her it really was him, she dropped the phone.
Miller is chairman and chief investment officer of Legg Mason Capital Management and currently oversees the Legg Mason Opportunity Trust Fund. He formerly ran the Legg Mason Value Trust, which beat the S&P 500 Index for 15 consecutive years, from 1991 to 2005.
By Shirley Won
What’s your outlook for the U.S. market?
We expect the U.S. stock market to be up between 6% and 12% this year, so a very nice return. One of four areas of opportunity is housing. The U.S. housing market went through a five-year slump and has just come out of it. I expect housing stocks like PulteGroup and Lennar to do very well. Another area is financials, in part because many of them are related to housing through issuing mortgages. That would be everything from JPMorgan Chase to Genworth Financial. The airline industry has been dramatically restructured and significantly consolidated. I think the airlines have a long way to go, and our favourite is United Continental Holdings. Lastly, stocks in the technology sector, especially larger names, are very cheap by historic standards and have very high free cash-flow yields. We like Apple and Microsoft.
What would you do with a $100,000 windfall?
I would put it in a diversified portfolio of U.S. or global stocks. Part of the reason why the stock market has done so well is because it got too cheap after the 2008 financial crisis. The market has gone up, but it is still nowhere near where it is likely to go in the next several years.
What was your worst investment?
The worst among individual stocks is an investment we made in Eastman Kodak in 1999-2000. At the time, it was trading very cheaply, with a good dividend yield. Our mistake was staying with it year after year, despite the fact it continued to miss its own targets, and the business continued to deteriorate. For a broader category, we lost more total money in financials in 2008, mainly from misreading the credit crisis.
What keeps you awake at night?
A repeat of our mistake in 2008. We did not recognize soon enough the seriousness of a change in the macro environment.
What’s the best advice you ever received?
The late American stock trader Jesse Livermore once said that the big money is made in the big moves in prices. There were big moves in the stock market from March, 2009, to now, and from 1982 to 2000. It’s the same with bonds for the past 30 years. Most people are obsessed with the short term. Is the market going to correct? What is the stock going to do in the next quarter? All of that is pretty much irrelevant for most people.
What advice would you give investors now?
Think long-term, be patient and ignore the day-to-day news. In this kind of environment, people should have a maximum of 75% of their assets in stocks. People are too underinvested in equities because of the 2008 crisis, and that is because they are looking backward, not forward.
What is the most important investment metric?
We tend to first look at free cash-flow yield. A high cash-flow yield tells you that you’re getting a high current cash return on your investment. There is good evidence that that metric gets you into companies that are going to do well.
Do you have a favourite investment motto?
“Be fearful when others are greedy, and be greedy when others are fearful.” That comes from Warren Buffett. You are not going to make money doing what everybody else does at the same time.
The 72-year-old founder and chairman of Onex Corp. has long been one of Canada’s most successful investors. While building the country’s most influential buyout firm, the billionaire has stuck resolutely to the long-term view, ignoring quarterly numbers, market fluctuations and economic data to focus on the essential health and prospects of businesses he likes.
By Brian Milner
What’s your assessment of the current state of North American markets?
I have said many times that it’s a mistake to bet against the long-term health of the U.S. equity markets, because it’s a mistake to bet against the long-term health of the U.S. economy. It will have ups and downs, some of them big downs, like
2008-’09. But if you look at it over a long period of time, it is a very strong economy.
So do you ignore the economic news, quarterly earnings and day-to-day market gyrations?
Totally. I have almost no interest in quarterly reports. Running a business or investing in a business based on quarterly earnings doesn’t make any sense at all to me. There are many, many things that can happen during the course of a year. Good decisions can have bad short-term outcomes but be great for the business long-term.
What’s your worst investing decision?
A lot of what I do is running businesses, rather than buying stocks. My worst decision is probably when I know I have the wrong chief executive running the business and I keep on waiting to make the difficult decision of replacing him. First of all, I’m probably friends with the person, so I don’t want to fire him. I made the decision to have him as chief executive, so I don’t want to admit that I was wrong. And above all, there’s the human dimension. It’s tough on the person. It’s tough on his family. It’s tough on the organization that he’s leaving. So I have too many times delayed, delayed, delayed. And lots of damage has been done by waiting too long.
Is there anything about the economy, the markets or business conditions that keeps you up at night?
The answer is no. But I believe that in running any business, you fundamentally need a very strong balance sheet. Fortunately, we’ve been able to create a fortress balance sheet at Onex. We have no debt whatsoever and a billion and a half in cash on hand. So I don’t lose any sleep at night.
Were there times in the past when you did lose sleep?
Sure, in 2008, when the markets all turned desperately bad. We had roughly a couple hundred million in cash on hand and worried that wasn’t enough, and made some decisions to sell some businesses to get a stronger balance sheet. In retrospect, I wish we hadn’t done that.
Why is that?
It was the right thing to strengthen the balance sheet. But I’m sorry that we sold some very good businesses.
What would you do with a windfall?
Buy Onex shares.
By David Berman
Fundamental indexing has been attracting a lot of attention for outperforming traditional indexes. Is it also attracting more criticism?
Actually, I think it has been silencing the critics. The idea has been live for close to nine years, and it has worked. It has added 1.5% to 2% per year, compounded annually, across a whole array of markets. The simple fact is, fundamental indexing wins because of contra trading against the market’s most extreme bets. Whatever the market is chasing most aggressively as a fad, that’s what we’re trading against. Whatever the market is shunning, that’s what we’re buying.
Is fundamental indexing supposed to replace traditional indexing?
They are highly complementary. I can’t imagine ever investing in a cap-weighted strategy again, but there are times when growth is in favour and fundamental indexing will struggle. So for most investors, having a bit of both probably does make sense.
As an indexer, do you have views of the year ahead?
Absolutely. We think value in emerging markets, perhaps best illustrated by fundamental indexing, is really, really cheap. So to the extent that investors want equity investments, we think this is a wonderful time to fade their exposure in the U.S. and developed economies, and to rebalance into the deeply out-of-favour and unloved emerging markets. Emerging market debt has also fallen out of favour and is priced way out of proportion to the default risks. And we think that high-yield bonds still represent a modest opportunity.
Where do you stand on whether U.S. equities are heading into a bubble?
I think the word “bubble” is overused. I would characterize the U.S. stock market as expensive. Could it become a bubble? Yes, but buyers today are basically betting on two things. One, that it goes from expensive to bubble; and two, that they’ll recognize the difference and will sell after the bubble has matured. Those are two very aggressive assumptions. I’d much rather sell out of an expensive market and buy into attractively priced markets, rather than playing the game of picking up nickels
in front of a steamroller.