This video was conducted in English.
Subtitles and transcripts are available in both English and French, by clicking directly on the CC icon. Click on the settings gear icon or the YouTube icon for more language and subtitle options.
Transcript:
John: I’m here with David Fingold of Dynamic Mutual Funds and I am going to talk to him today about some of the important thoughts that he has about how he’s doing his business. How long have you been with Dynamic, David?
David: I guess that it’s over 23 years. I started in 2002 in January.
John: And why did you pick Dynamic?
David: It’s an odd story because what ended up happening was before doing this, I was Canada’s least successful private equity investor. I had spent the first six years after business school working in a manufacturing business and it was a portfolio company of a merchant bank and when that business was sold I came up to the parent company level and it was a very rich market at that time for private equity.
You probably remember that back then Mario Gabelli would be talking about private market value and there would be that you’d know he’s buying public companies that could be worth a premium in the private markets.
John: Yes.
David: I got involved in the private markets and saw the same premia he was talking about and I don’t know how to make money buying something that’s trading above value. So we actually ended up selling the portfolio. And what happened was that one of our directors was friends with David Goodman and David had been promoted to president of Dynamic and needed an assistant. I met with him several times and with other senior people at Dynamics Investment Council division, Goodman and Company investment council which this week is called 1832 Asset Management.
I met with Noah and Jonathan and Ray Benzinger and Ned and David. I guess that we determined that we could work together so that’s how it ended up happening. It was actually very interesting because my late father was a tremendous admirer of Warren Buffett and literally raised me with Buffett style investing as a kind of a value and belief.
And then I encountered Ned and David and Jonathan and our senior team together with clients went every year to the Bergkshire Hathway annual meeting. So literally in some senses it felt like an incredible match because not only did they believe in the same things, they’re going to Omaha every year to find out what Mr. Buffett, Mr. Munger had to say. So I guess I was very very fortunate to have met the Goodmans and for David to have had a need. I started in 2002, assisting David and by 2004 he let me start my first fund.
John: Wow. And so now how many different funds do you manage at Dynamic?
David: I never counted them all up because it’s a little bit complicated because as you know, there can be a class version and a mutual fund trust version. We also have some very similar mandates in active ETF which are run separately where I’m co-manager with Peter Rosenberg. But broadly everything comes from approximately five model portfolios. We have an American fund. I’m the longest tenure manager of the dynamic American fund. So we have to have a model that only invests in the United States.
We have a model that only invests in international markets. So it literally does not invest in the United States. Then we have a global balance model and two global equity models. One of them is more conservative than the other. But it all comes off of – it sounds complicated, but it isn’t – it comes off of one recommended list where Peter Rosenberg and Raymond Lie and myself are all working together looking globally for good investment ideas. And if we like a company, it goes on the recommended list.
So, if I had to explain that to a client, I’d say those are literally the ingredients we put into the refrigerator and into the cupboard. But if we’re going to cook a meal that is appropriate for a client, we then are looking at what the mandate is of a particular fund and then we go to the recommended list for the securities and make sure that it combines into a recipe that makes sense. And I think part of it and the reason why I’m mentioning the cooking analogy is not just, you know, you can see from my belly that I enjoy food, but also that Mr. Buffett says that we should eat our own cooking. So, you know, it’s an apt analogy.
There are, to my left off camera, six Berkshire Hathaway meeting credentials there on the notice board. And eating one’s own cooking is an important part of what we do. And this is, you know, it also wraps back into what I said about the Goodmans. We would never make an investment recommendation, never make an investment we wouldn’t make ourselves. I’m not going to speak for others, but I’ll tell you that I have no long-term investments other than in the funds that I manage. So, I am eating my own cooking. I take a large part of my compensation in units of my own funds. It doesn’t make me right. It doesn’t make me smart, but there’s no such thing as other people’s money.
And that’s the philosophy.
John: Well, it’s funny you’re jumping into it. So talk to me a little bit more about some of how recent market trends can affect your strategy.
David: It’s an important question because Mr. Buffett said one time to look to the market for opportunity and not for direction. But a lot of people said that means that he’s not a trend follower. The reality is if you look at Berkshire Hathaway and its history of success, they have averaged down on only one position that I can find and that’s Wells Fargo and I think that it is finally working out. But Buffett is willing to own up to his mistakes. There’s a line in the book “The Snowball” where I think that he is quoted as saying what you want to do ideally is to get on a train as it is leaving the station. So the trends are very important. The key is to identify them at an early stage and then to get involved with an appropriate valuation. So to be blunt there’s really only a couple ways to invest. One of them is if there is a business that is not cyclical but they’re having a bad year and it creates an entry point you know what will happen: the valuation will be depressed.
The best example of that with Buffett was with Coca-Cola where they introduced a new Coke formulation back in the 1980s and any of us who are old enough to remember probably didn’t like the new Coke and it was a reparable problem. They brought out Coke Classic and the company reasserted itself and retook market share. So what happened was that the valuation multiple on Coca-Cola fell, created an entry point and they fixed the problem, the valuation rose and also they got back on the trend in terms of earnings growth. So that’s an idiosyncratic problem. Sometimes they’re self-made. They give you an entry point.
Similarly, Buffett made an investment in the distressed debt of Philip Morris and RJ Reynolds during the litigation in Illinois in 2003 and got it right. The tobacco industry ultimately prevailed in the litigation and those bonds returned to value.
The second way to make money is to get a cycle right. We have to be very careful with this. If you go back to our investments in the early 2000s, we saw that there had not been a cycle in oil and gas and mining since the 1970s, and there was a cycle that was just starting because there had been very little invested in that industry. And we made very good money in oil and gas and mining during the 2000s and then ultimately they added too much capacity and then those industries underperformed. For a decade we had an opportunity to make money in those cyclicals from the extractive industries.
So we have to make cyclical calls. An area we’re currently involved in is commercial aerospace. This is an area where air travel has continued to grow. And because Boeing and Airbus have production problems, the market does not get overs supplied. You know, we get worried about an oversupplied market, that would move us the sidelines um you know in aircraft component manufacturers, also you know again I remember the first and second Gulf Wars impacting air travel that is also a risk so we know that there’s a cycle and we have to be mindful of what the risks are that ends the cycle.
John: Would you say that this new wave that we have in terms of the Trump effect is creating more and more difficulties with what’s going on.
David: I do not want to minimize the concern investors have for regulatory and policy uncertainty. I read people’s emotions and I understand they are very concerned. Our job when others are panicking is to have level heads. Buffett would say buy from fear and sell to greed. And if we were to put up a chart of the policy uncertainty index you would see that when it’s elevated it’s an opportunity to invest. My take on current events is that I think first of all – that there are a lot of people who don’t understand how similar Trump and Biden’s policies are. For example, the issue of dealing with NATO. There was not a lot of cooperation under Biden with NATO allies. Similarly when we talk about the policies vis a vis China it seems to be bipartisan that the democrats and the republicans are very concerned about the influence of communist China.
I think that when it comes to protectionism there is a very clear difference between Democrats and Republicans. Trump’s behavior in that respect is the volatility of it where they’re not taking a clear position and it’s changing from day to day is a relatively novel negotiation tactic that I think is upsetting to most people. But protectionism in and of itself has been a facet of every single Republican administration.
I can say the same thing. To be blunt, immigration was also bipartisan. Immigration, you know, advocates for migrants called Obama the great deporter. The media doesn’t report this this way and people are reacting to the media. My job is to try to stay sober when others are drunk, to try to be emotionless. I think that the most important part of my job is to be emotionless when it comes to work. That is if we see risks get elevated, be emotionless about reducing risk before they’re finished getting elevated. And to be emotionless about opportunity because it can come from areas we didn’t expect it to come from in the past. And to be emotionless if we made a mistake, to correct it.
I mentioned I like commercial aerospace earlier. I mean, there’s discussion about tensions with Iran. If that causes less people to fly, then I’m going to drop commercial aerospace like a bad habit. I have to be emotionless about it. But then there’s a second facet of this that is very difficult. I have co-workers, I have family, I have friends and I and as I suppress the emotions around investing I have to try to do my best to be well behaved outside of work. So I mean this is also part of the problem which is that when we’re emotionless stress does not disappear but discussing it and having the proper coping mechanisms: rest, family time, exercise, disconnecting, watching a great movie, listening to music, cooking a meal, the things you know, because the stress doesn’t disappear so we we have to manage it.
John: But of course stress also can add to how you view your decision making from a risk tolerance perspective and would you say that the more stress the more the potential for risk tolerance to change?
David: It’s a very interesting question. I’d say that for investors it’s absolutely true. In my case what I want to do in risk management is to not be thinking about my personal emotions, about anything. It’s to look at indicators that are arbitrary and are ideally quantitative. In other words, if we were analyzing a financial institution, this probably one of the best examples, is to talk about a financial institution because fundamentals and technicals are so connected. I can tell you I’ve invested profitably in financial institutions where I’m not sure that it lines up with my personal emotions about how they do business. But if their credit spreads are tightening, if their funding costs are falling, if their market share is rising, these things are all quantitative. and very frequently the opportunity is to find a business that’s out of favor and it’s becoming in favor. So we want to go to the areas where we can separate the emotion and I will tell you sometimes you know I am a little bit stressed because sometimes these are organizations that have been in trouble in the past. But I’ve seen some of the best opportunities are where companies have settled all their differences with regulators. Perhaps they have new management. The bar is set low and there’s a lot of upside.
We were very involved in Wells Fargo before regulators had an issue about their sales practices. When we saw them looking into it, we said, “This company is too expensive”. For a company that has got an inquiry into their sales practices, we moved to the sidelines. And then as all the investigations unfolded and they were in the process of working with the regulators, it gave us an entry point you know after some underperformance of the stock and it’s continued to rerate as they have settled their differences with the regulators one at a time and they recently had the asset cap lifted. So part of it is, you can’t just say, “Oh, you know, they did something they shouldn’t have done.” The reality, unfortunately, in business is that every company at some point does something it shouldn’t have done. I can tell you that this may be harder for your clients to relate to because many of them either don’t have an overall view of a large organization or have an overall view of a medium-sized organization. If your clients are entrepreneurs and they employ dozens of people, they’re not going to see the same statistics if they employ thousands of people.
I can tell you from my first big job, my six years at the mill, where we had over 450 employees, it was 550 before we did cost reduction. You get into those numbers and then you start to see things that occur through the population and some you get into large organizations. The reality is there are going to be people who are misbehaving. That is why we have HR departments and compliance departments. We try to make sure that if there’s problems we find them soon, and correct them.
But it’s a fact of life that when you have a very large organization that from time to time they might have to settle things with regulators. I don’t want to cause a problem for anybody, but I mean, JP Morgan has been a very good performer for us over the years, but I do remember when they had the London whale, and I do recall inquiries that had to do with Wakovia, which they had bought at the request of the regulator. Then they decide to take issue with Wakovia’s actions. So even the best of them have to talk to the regulator. So this being in the penalty box and getting released from the penalty box for what is otherwise a good company is a very powerful opportunity.
John: Very
Investment Disclaimer:
CEA Wealth Management is a trusted and experienced financial services firm dedicated to helping individuals, families and businesses achieve their financial goals since 1996.
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This newsletter, video and/or podcast was written, designed and produced by John A. Leroux, an Investment Funds Advisor with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc.
The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
