Where did you grow up in Canada?
In Toronto.
Downtown Toronto?
Yes, I have always been a downtown brat.
How did you first get interested in the markets?
There were two reasons. The first was that in the summer of 1955 I got a summer job as a lowly rookie assisting some geologists who were conducting magnetometer surveys on several mining properties near Val d’Or, Quebec. One of my jobs was to transcribe the survey numbers onto a grid map. As the shares of the company whose site we were surveying were listed on the TSX, it was fun to see the impact of those numbers on the share price. However, the main reason I became interested in the markets was a reflection of the times. Life was pre-ordained. At university, you met your wife, married after graduation, had the requisite number of children, and started to work for a major company, which you expected to be with possibly for life. For example, working for P&G, learning how to flog cake mixes and toothpaste. Being very independent-minded and even then an out-of-the-box thinker, I wanted something I thought would be more interesting. I thought the investment business would provide that.
Did you immediately start up your own firm?
No, but after university and after about 10 years in the business I started dreaming about it. Upon graduation from the Richard Ivey School of Business at Western, my first position was as an analyst-in-training. The opening salary for an honours business graduate in June 1962 was three thousand dollars a year. It was a struggle, but nevertheless, from day one my expectations about the investment business were fully met. Initially as an analyst I talked to interesting people at the corporate level. I wasn’t allowed to interface with individual investors until I had been in the business about 10 years. But during the first 10 years I wondered if I could do better than the way things were being done.
What was the market like in the fifties and sixties?
After the Korean War, which ended in 1952, there was the fear of a recession or possibly a depression. Eisenhower was in the White House. During the fifties, economic growth was sluggish. While corporate profits rose from 1952 to the mid-fifties, by the end of the decade they were back to 1952 levels. But because inflation was relatively stable, the market’s price earnings ratio had expanded from seven times in ’52 to twenty-two times by the end of the decade. That proved to be the high point until the dot-com period. In the early sixties with JFK’s election there were great hopes for an economic recovery. But fate played a cruel hand and we all know the mess that LBJ’s “Guns and Butter” policies got us into. That said, the stock markets in Canada and the U.S. did quite well until 1970.
What were some of your early wins in that era?
What traditionally happened when you started as an analyst is that the research bosses gave you the simple industries and companies to follow. For example, soft drink companies, retail chains, food chains, and beer companies. My big win was a result of going out to look at companies which banded small independent grocery stores into the IGA chains. One of those companies was Oshawa Wholesale. In my view it was the best of the bunch and investors did very well.
So you pick the market leaders in an industry?
Essentially. Once I had decided that I liked an industry, I focused on the leaders.
Going back to where we left off, what about the seventies?
Inflation started to ramp up in 1974 when the price of oil took off. Inflation exploded until Paul Volker took a firm stand in 1980 and broke its back. Until 1974, I didn’t think about it, but my parents’ worries about inflation were always with me. They were of German extraction and had lived there during the Weimar Inflation. My father, who was a struggling young professor, was paid twice a day — at nine a.m. and again at noon. His mother met him at the pay office, took the German marks, and ran out to buy something. Had she waited even an hour or so the mark’s decline in purchasing power made the pay worth far less. After I started in the investment business full time, they would always ask, “What is inflation doing?”
What’s the sentiment like in the market today? Fear of inflation or deflation?
The unwarranted sentiment today relates to the fear of deflation. While the reported Consumer Price Index (CPI) in the U.S. has been low, more recently, as of July of 2015, 80% of the components showed a 2.14% rate. However, once the negative impact of the recent decline in energy prices passes, it will cease to be a drag. Then I expect CPI to be in the 2.0% to 2.5% range later this year and next. I look for a fairly stable inflation rate going forward. I don’t want to bore you with history; however, in my view the fear of deflation or even disinflation is misplaced. If you look back to 1870 and the period from then until the start of World War I, it was a period of virtually no inflation and economies showed positive growth. That period has been referred to historically as the Gilded Age. I think we’re back to that same type of environment today because of a reverse of what happened in the early seventies. As mentioned, oil prices skyrocketed and changed the world as we then knew it. It took years for the economy, corporate managements, and consumers to adjust to the shock. Today, some 41 years later, we have the same thing happening but in reverse. Now what do I mean by that? Thanks to fracking and the development of other non-conventional sources, I think we could be entering a long period of relatively stable energy prices. The short-, medium-, and long-term benefits could be substantial for world economies and stock markets.
What others indicators, besides CPI, do you periodically review to inform your investment decisions?
There is a host of factors. Aside from any macro-economic inflation or disinflation indicators, I focus on micro-economic factors. Those would include a review of a company’s past earnings growth rate, estimated future growth rate, actual and relative price earnings ratios — to itself and the main markets in which the shares trade — and current and forward ratios relative to the market and its outlook. I also look at the level of and the rate of change in interest rates and most importantly the shape of the yield curve. Nothing will kill an economy and stock market faster than a flat or inverted yield curve because they are usually the forerunner of a recession. There are many others, but at GlobeInvest we are deep-value buyers and an industry’s and company’s fundamentals are the most important in the investment decision process.
You said that we are entering a new gilded age. How does an investor capitalize on this new era?
There are two sources of investment returns: income and capital gains. Traditionally, investors chose bonds and preferred shares for the income component. But that has changed. On a macro market basis one has to evaluate the long-term outlook for bonds versus equities. Given the current levels of interest rates and yields on bonds compared to the yields on many equities, equities are the clear winner. We have recently completed a huge bull market in bonds and now that bond yields are likely to rise, bond prices will decline, reducing any nominal returns and even potentially creating losses.
Given the likelihood of some equities’ future earnings and dividend growth and the decline in bonds’ real returns because of inflation and the potential for losses, which would you rather own today, Johnson & Johnson or a 10-year U.S. Treasury? On a global macro-economic basis, if you take a look at world demographics, we like emerging markets long-term. Why? Because, with the exception of China and a few others, the emerging economies have the same demographic trends we had in North America in the fifties and sixties. We were all young, starting families, and buying houses. But now in North America we’re a generation of older people, and that will have a major impact on North American economic dynamics. In my view the main driver of world economic growth will come from outside North America. One can gain exposure by investing in major international companies that have at least 50% of their business in emerging markets.
Procter & Gamble?
Our clients own similar companies but they also own global industrial companies.
So you invest in North American companies that have a higher-than-50% exposure to emerging markets, but not directly in companies that operate in emerging markets.
That’s correct. We think that investing directly in the shares of a company which is located in emerging markets is one risk too many for most of GlobeInvest’s clients.
Before you get into your investment strategy, can you share more experiences from your extensive involvement in the markets?
Okay. So, the first craze that I experienced was in the sixties with what was referred to as the “Nifty Fifty.” They were stocks whose growth extended as far as the eye could see. The masses felt that they could buy them regardless of their price earnings ratios and could hold them forever. They collapsed in 1970 mainly because their reported results no longer supported their outrageous price earnings ratios.
What about the impact that the formation of the Organization of the Petroleum Exporting Countries (OPEC) had on markets? Did that rock the market, too?
By way of a confession, had I been smarter I would have caught on to OPEC’s game earlier. I had been transferred to London, England, in late 1969. My then–bank manager at Royal Bank of Canada told me, “You’ve got to get down to Riyadh in Saudi Arabia — there’s a lot of stuff going on.” I spoke with someone else who had just returned. He said he didn’t meet any sheiks but did meet lots of retired members of the Texas Railroad Commission. The TRC was the model on which OPEC was built. By ’73, ’74, the Saudis and other cartel members had done their homework on demand/supply factors. The price of oil skyrocketed from about $3 to $3.50 a barrel to about $39.50 in 1980. The world changed completely. I mean everything one had learned in school and subsequently had no more relevance to economies and markets after that.
This history lessons is fascinating. Can you share more?
The next trend in the seventies involved what I will call “hidden inflation beneficiaries.” These were companies whose assets were reported on a depreciated historical book value basis and not replacement value. If a company wanted to expand, it was cheaper for it to buy a listed company than to expand through capex [capital expenditures]. So everyone ran out to buy companies which had those undervalued assets. In the eighties, markets had to adjust to Paul Volker’s successful battle against inflation. Also markets had really not done much for a long time and investors were discouraged. Then we had the “flash crash” in 1987, which further spooked investors. However, by then Japan’s stock market became the flavour of the month until it, too, became extraordinarily overvalued and collapsed. It went into a long-term funk until several years ago. Then came the dot-com frenzy and eventual collapse from 2000 to 2003. Then came the U.S. housing bubble and the markets’ eventual collapse in ’07–’08. And now, as of late July 2015, it will be interesting to see just how the share buy-back and M&A [mergers and acquisitions] activity, both of which have shrunk the available supply of stocks substantially, turn out.
Okay, thanks for all of those history lessons. Now, what’s your investment strategy?
GlobeInvest’s and my strategy is to purchase fundamentally sound stocks at prices we think represent long-term value to our clients. For some stocks, current and future dividend growth is important. I believe it was Professor Jeremy Siegel of the Wharton School who pointed out that long-term stock returns were between 6% and 8% but half of that return came from dividends and their growth. So dividends are important. But they are not always necessary. When I see a company with superior growth prospects, I like to see it use its capital to fund future growth rather than paying dividends.
But with your macro lens, do you also overlay themes in your security selection process?
We do pick themes. The anticipated emerging market growth is clearly a theme. My biggest theme now is water. I think water’s the next oil, and fortunately we’ve had good luck with water companies that have been taken over. We are looking at five right now but they are a bit too pricey for us because to some extent they’re tied into U.S. capital spending. The rise in the U.S. dollar has impacted the growth in capex but I think that the growth in U.S. capex will resume sooner than later.
What other themes do you have your eye on?
I think that it’s pretty obvious that if you believe the emerging market story, their populations will demand a higher standard of living, especially with better quality foods. So we review fertilizer, seed, and agriculture equipment stocks. Also, given the world’s geopolitical situation we should be sharpening our pencils on defense stocks. Another theme that I think is unfolding is the renaissance of U.S. manufacturing, a future bright spot for U.S. markets, through the increased use of 3D printing and robotics. Another question we have for some management is, “To what extent can you replace some of your manufacturing process with the 3D and/or the use of robots?” I think one or both are going to revolutionize North American manufacturing.
What does your investment decision-making process finally come down to before you actually add a position to the portfolio?
I want to point out the merits of conducting one’s own research. While we think there’s some great research on Bay Street and Wall Street, where possible we try to go to talk to companies before we invest in them. We do not look for inside information. We simply want to hear directly from a company’s management what their plans are.
How do you gauge management and assess their plans?
First I look at the person’s body language, their tonality, and the level of eye contact when responding to my questions. I always send a list of questions beforehand and assess how they answer them. You get an impression not available from reading a research report.
What are some standard questions that you ask management?
“If we were having this conversation five years from now, what are some of the things that you’d be doing that you aren’t doing today and what are you doing now that you might not be doing then? How are you going to reach your objectives in terms of strategic planning, existing management talent, and finances? What is the worst nightmare that keeps you awake at night?”
Sometimes the answers are nonsense and sometimes they make sense. That to me is invaluable in making the investment decision.
Do you believe the Efficient Market Theory, though? The idea that all of your additional independent research, including interviews with management, are already readily available and priced into the stock?
Not in the least. The basic truth is that if you give 10 different money managers the same information, you may see 10 different reactions.
To identify inefficiencies in securities, can you simply compare a company’s book value to its market capitalization?
I don’t. I’ve been criticized for that. I think book value matters less, though. It’s what the assets produce that actually matters.
So how exactly do you identify mispricings in the market?
That’s a tough one. In one set of circumstances it may involve a company we like but haven’t bought because the price was too high or we own and want to buy more but haven’t for the same reason. If the price takes a hit, we quickly determine whether that hit was a one-off or something more serious. If it is the former, we buy. If we think it is the latter, we don’t buy. A recent example involves SNC-Lavalin. It is a truism that when something in a company’s operations goes wrong there seldom is a single bedbug or cockroach in the story. In SNC’s case, several opined that following the initial weakness because of corporate misbehaviour, one should buy the stock. I chose not to.
There were more bedbugs to be found in SNC’s sheets [laughs].
Exactly [laughs].
Is it harder now to find value in the market today?
Yes, it is. Mainly because of interest rate levels and the shrinkage in the supply of stocks, values have become extended. There is a variety of ways of measuring value. For example, one states that the appropriate multiple is 20 minus the rate of inflation. As some see inflation continuing at close to zero, they say stock market multiples can expand to close to 20 times. I take a different view. Based on my expectation that inflation (the U.S. CPI) could reach 2.5% next year, the best multiple on forward earnings one can expect is 17.5 times relative to 16.8 today. In my view going forward, earnings’ growth must be what powers markets upward. The same is true for many individual equities.
Has high-frequency trading changed the game, making it more difficult to find and invest in value in the market?
Yes, people’s time horizons have drastically shrunk. They want instant gratification through returns. That’s not investing — it is sheer speculation. A slow and steady approach such as our value approach is GlobeInvest’s style. “Slow and steady wins the day.” If you think of our themes and you think of their duration, water is not the next three-month, six-month, or one-year story — it’s a twenty- to thirty-year story. Feeding the population in emerging markets is the same. The pipeline business in Canada is a 30-year story. We do not trade frequently. I’ll give you an example. Some years ago we started buying a pipeline at $7, and we bought it all the way up to the current price. People still ask, “Why do you still hold it?” Because for many clients the yield at book is double-digit. If I was to sell, it would be difficult to find a comparable return, especially if the stock was held outside a registered account and the sale proceeds were subject to capital gains tax.
Do you think that it’s the new generation today that seeks instant gratification in the market?
I think there’s some segment of market players who will always be looking for instant returns. After a while they will hopefully learn that the long-term view is the best view. Another story I tell to young people who are concerned about how to start an investment program is about the “gift of time” or really the magic of compounding returns. For example, if when a young person in his or her twenties starts investing and puts aside $100 a month for 40 years, the total investment will have turned into $48,000. If he or she waits 20 years and then starts investing $200 a month for 20 years he or she will have invested the same $48,000. But the dollar value of their account would be, even after saving the same $48,000, a third of the former, assuming a 6% average annual compound return. The spread widens the higher the long-term total return.
Do you think that being a successful investor in the market is innate or rather learned through experience?
I think it’s a little of both, but more learned. Staying with a discipline is key. From time to time it may seem not to be working, but assuming it has been well thought out, it will serve you well in the long run. I think people could observe, learn from their mistakes, and hopefully become successful investors.
What do you read on a daily basis to stay current on the markets?
The morning starts off with the Wall Street Journal, the Financial Times of London, the Globe and Mail, the National Post, the Washington Post, and, on the weekends, Barron’s.
What are some other sources that you use to base your investment decisions?
Yardeni Research. Ed Yardeni, whom I have known for 40 years, is in my view one of the finest economists and strategists alive. Don Coxe, whom I have known for about the same time, has had a major influence on my long-term investment thinking. Robert Krembil, a co-founder of the Trimark Funds, also had a major impact on my approach to security selection. For geopolitical information, Stratfor is first-class. They give you information and interpretations you don’t always get in the regular news.
Who are some of the people who have had a major influence on your investment thinking?
There are far too many to list here but of those whom I knew personally, Russell J. Morrison, a name whom many today would remember, played a key role in mentoring me in my early years in the business. Jim Moltz, a partner at an old-line NYSE form, and C.J. Lawrence (Ed Yardeni’s former boss) also played a key role, including stressing the importance of historical perspective. Of those of my vintage, certainly Ed and Don mentioned above and Gary Shilling of A. Gary Shilling & Co. Inc., and Robert Krembil played important parts in my investment thinking.
What are some of the books you’ve read that stand the test of time?
Once again, there are too many to list, but a few stand out mainly because they provided historical perspective. The first is A History of Interest Rates by Sidney Homer, the dean of bond market history. It takes you back to 1800 BC and, while it may sound dull, I found it absolutely fascinating. Equally fascinating is The Great Wave: Price Revolutions and the Rhythm of History by David Hackett Fischer. It describes in great detail the role of inflation from 1180 up to today. Another is The Rise of Financial Capital: Integration of Capital Markets During the Age of Reason by Larry Neal. It describes the increasing integration of London and Amsterdam securities from 1700 to 1800 and includes vignettes about certain misbehaviours which show that misbehaviour is certainly not a modern invention. Finally, for a perspective on equities, Stocks for the Long Run by Professor Jeremy J. Siegel will add to any reader’s perspective.
Anything else to add before we wrap up?
Block out the random noise. We all get too much information. Learn what information you really need to make your investment decisions. Take a look at long-term themes that make sense. Finally, stay with your discipline.
Peter focused in on a multitude of trends — past, present, and future — that influence the market. In my opinion, the most impactful trend that he mentioned is that of significant future demographic changes around the world. Peter officially calls this favourable demographic trend the “Seismic Shift,” a change that will involve the population bases in many developing nations, larger and younger when compared to those in developed nations, and their faster projected growth rates. In these developing nations this change has and will lead to a dramatic increase in their middle classes and industrial bases. These areas are expected to be the main drivers of world growth for the next several decades. And as Peter said, “One can gain exposure [to this seismic shift] by investing in major international companies that have at least 50% of their business in emerging markets.”
MASTER KEYS
PETER BRIEGER
1) “Once I’ve decided that I like an industry, I focus on the leaders.”
2) “Aside from any macro-economic inflation or disinflation indicators, I focus on micro-economic factors.”
3) “I … look at … the shape of the yield curve. Nothing will kill an economy and stock market faster than a flat or inverted yield curve because they are usually the forerunner of a recession.”
4) “There are two sources of investment returns: income and capital gains.”
5) “On a global macro-economic basis, if you take a look at the world demographics, we like emerging markets long-term. Why? Because, with the exception of China and a few others, the emerging economies have the same demographic trends we had in North America in the fifties and sixties.”
6) “One can gain exposure by investing in major international companies that have at least 50% of their business in emerging markets.”
7) “I believe it was Professor Jeremy Siegel of the Wharton School who pointed out that long-term stock returns were between 6% and 8% but half of that return came from dividends and their growth.”
8) “My biggest theme now is water. I think water’s the next oil, and fortunately we’ve had good luck with water companies that have been taken over. [However], water is not the next three-month, six-month, or one-year story — it’s a twenty- to thirty-year story.”
9) “If you believe the emerging market story, their populations will demand a higher standard of living, especially with better quality foods. So we review fertilizer, seed, and agriculture equipment stocks.”
10) “The basic truth is that if you give 10 different money managers the same information, you may see 10 different reactions.”
11) “I think book value matters less.… It’s what the assets produce that actually matters.”
12) “If the price takes a hit, we quickly determine whether that hit was a one-off or something more serious. If it is the former, we buy. If we think it is the latter, we don’t buy.”
13) “Earnings’ growth must be what powers markets upward.”
14) “People’s time horizons have drastically shrunk. They want instant gratification through returns. That’s not investing — it is sheer speculation. ‘Slow and steady wins the day.’”
15) “Staying with a discipline is key. From time to time it may seem not to be working but, assuming it has been well thought out, it will serve you well in the long run.”