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Illustration of Paul Harris.The Globe and Mail

Portfolio manager Paul Harris believes the biggest mistake investors can make is to sell stocks when markets swoon. To him, the better move is to sit tight and ride out the volatility or – if you’re brave and have extra cash – start buying.

“This is an opportunity to look at the companies you really love and buy them,” said the partner at Harris Douglas Asset Management in Toronto, who oversees about $120-million in assets.

“Sometimes people are fearful of volatility, but I think it’s your friend because it allows you to be opportunistic. … I think the best strategy is to be in the stock market with good companies.”

For Mr. Harris, those include stocks behind iconic brands, such as Disney and Visa, and high-performing names, such as Constellation Software, with strong free cash flow that’s growing. His Harris Douglas Equity Portfolio, which includes about 30 securities based in North America, has had a one-year return of 18.5 per cent as of March 31.

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The Globe and Mail recently spoke to Mr. Harris about his favourite stocks and his take on the threat of a recession.

Describe your investing style.

We look for great businesses with consistently high returns on capital and strong free cash flow. We want them to be able to grow that free cash flow and reinvest it at higher rates of growth. I don’t care if a company pays me a dividend or not, as long as they can grow their free cash flow. I don’t think that a lot of companies can do that, so you have to be selective. A little-known fact is that, over many decades, just 4 per cent of stocks accounted for all the net wealth creation. We seek to own as many of these outliers and allow the magic of compounding to work.

What’s your take on the current market environment?

I think we’re in a period of extended volatility with the Ukraine-Russia crisis and the U.S. Federal Reserve’s rate increases due to rapidly rising inflation. The Fed is in a difficult situation as the spread between the two-year and 10-year treasury is quite flat and inverting, which indicates slowing growth. I have been in the fixed-income market long enough to know the yield curve matters as an indicator. I think we’ll have a recession sometime in the next several quarters, but that it will be mild. While inflation may remain at elevated levels in 2022, we expect supply chains will adjust over time. We continue to believe as the economy normalizes, we will see lower inflation.

What have you been buying?

The Walt Disney Co. is a name we’ve owned since our company started in 2019 and we’ve been adding to it on recent pullbacks. As most people know, it’s a diversified multinational mass media and entertainment conglomerate. We believe the purchase of the Fox assets, along with the new streaming services makes it one of the best competitors to Netflix. Disney’s film library is by far the best in the industry and spans all age groups; the parks business continues to show momentum as the pandemic starts to subside. It also has a few blockbuster movies coming out. I admire the management at Disney. When things got bad with COVID-19, it made the tough decision to cut the dividend and other costs. Disney also has great brand recognition around the world, which I think will drive its business in the coming years. Coming out of COVID will really help this business, too, I think.

Another name we’ve been adding to is Zoetis, the largest public animal-health company, after it fell from record highs late last year. Zoetis was spun off from Pfizer in 2013. Not only is there the trend of more people owning pets since the pandemic started, but health care for animals has a certain advantage over health for humans. The industry doesn’t have to contend with pricing pressure from the insurance industry since most medical expenses are paid out of pocket. Developing drugs for pets, compared with humans, is generally faster and less expensive since it requires fewer clinical studies involving fewer subjects. Generic drugs are also less of a threat. The company has a strong balance sheet and free cash flow growth.

What have you been selling or trimming in recent months?

We have not trimmed or sold anything in the last few months. The companies we like, we really like. However, we owned WPT Industrial REIT, which was bought by Blackstone REIT late last year. This added more cash to our portfolio, which helps in the current market environment. Now we can think about companies we want to buy here, like more Zoetis, for example.

What investing advice do you give family members when they ask?

Save. I think that most save the wrong way; they spend first and then try to save. I always tell people to save first. Get funds taken out of your paycheque or your bank account automatically and put them into an RRSP or TFSA right away. Those simple things will compound your wealth over time.

I also tell people to get financial planning done by a certified financial planner. Financial planning allows you to look at what you’re saving and spending in a detailed fashion and gives you a foundation. Also, when there’s volatility, you don’t get as worried as a person who has never thought about their financial picture because you have that plan.

Also, concern yourself with asset allocation. The right asset allocation can help with achieving investment goals. Most people try to get wealthy quickly, so they speculate and avoid this. I think the opposite works best: to get wealthy slowly by having the right strategy in place.

This interview has been edited and condensed

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