Episode #153: Kim Shannon, Sionna Investment Managers, “I’ve Long Believed That The Market Reflects Human Nature As Much As It Does Underlying Fundamental Value”

Episode #153: Kim Shannon, Sionna Investment Managers, “I’ve Long Believed That The Market Reflects Human Nature As Much As It Does Underlying Fundamental Value”

 

Guest: Kim Shannon is the founder, president, and co-chief investment officer of Sionna Investment Managers. She was previously chief investment officer and senior vice president at Merrill Lynch Investment Managers Canada.

Date Recorded: 4/16/19     |     Run-Time: 53:55

Summary: In episode 153 we welcome Kim Shannon. Kim begins with a discussion of human nature and her value investing framework. She covers the importance of using discipline, the characteristics she and her team look for, the question of value’s efficacy, and the opportunity going forward for value to show its might.

Meb then asks where she’s seeing value right now. Kim talks about Canada and it’s valuation relative to other markets, and that a number of investors are interested in the concept of concentrated investment portfolios. She then gets into potential overvaluation in pockets of the Canadian housing market.

The conversation then shifts with Meb asking about Kim’s event in Omaha this year around the 2019 Berkshire Hathaway meeting, the Variant Perspectives Value Investing Conference, to raise awareness about the gender bias gap in the investment sector.

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Transcript of Episode 153:

Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Welcome podcast listeners, we got a great show for you today. We are recording this the day after tax day, so hopefully all of you paid your taxes in time or even got a big refund or even as I tweeted, checked out my favourite resource, for the Americans out there, unclaimed.org to see how much of the $50 billion sitting in state coffers could be claimed of yours. We found over a million for listeners, so our biggest find this year, I think, has been six grand. But if you find anything, let me know. Shoot us an email feedback in the mebfabershow.com. I’d love to hear if you find anything.

Anyway, everyone loves found money, particularly when the government’s holding it. So today our guest is the founder, president, co-CIO of Toronto-based Sionna Investment Managers. She’s got more than three decades of experience in industry previously serving as a CIO at Merrill Canada. She also serves as a board member, Canadian Coalition for Good Governance. She’s won a gazillion awards including Morningstar Fund manager of the year. Welcome to the show, Kim Shannon.

Kim: Terrific. Thanks. Glad to be here.

Meb: Kim, I just missed you. I’m so sad. You’re in Toronto. I was just in Niagara-on-the-Lake. Beautiful little town. Hopped down to Buffalo for a couple hours, chat with the CFA Society. Toronto is very high on my to-do list, but before we get started, you told me before we started, how did you get the name of your firm?

Kim: When you try and register names, they’re all taken, and so you often have to go to a foreign dictionary and turned out that Sionna stands for Shannon. But value, consistent, they were all unspellable and unpronounceable in Gaelic. But Shannon seemed to flow.

Meb: I love it. Well, my mom’s side is Scotch-Irish and I was just over in Dublin, and I think it’s kind of Northeastern Ireland where Mebane, the name, comes from, which is my full name, which we can trace back to the fellow that came over on the boat in the early 18th century. But when I was just over in Dublin, I ran into someone that looked exactly like me. It was the weirdest experience in my life. I couldn’t tell him. I didn’t want to be like, “Dude, we look exactly alike,” because it’s either offensive or it’s just kind of weird. But anyway, so let’s get started. So, you started this firm. Why don’t you tell us a little bit about your sort of framework and approach to investing and we’ll kind of get deeper and spread out from there?

Kim: I’ve long believed that the market reflects human nature as much as it does underlying fundamental value. And human beings have a tendency to access. And other people…like philosophers would call it irrational, pesky human behaviour that makes us so unbelievably unforecastable and unpredictable. There’s a passion out there. People would like the world to be nice, neat, orderly, forecastable, but because of this human element, it’s not. And I find far too many investors wish that the market could be more formulaic. And I’ve always embraced the human element and use it in investing because I find far too many people don’t.

And that’s one of the reasons why I’m very interested in market history, because although the dynamics and the fundamentals do change as humans evolve and grow and businesses develop and change, that the one constant is human emotions. And market history illustrates to me how irrational human beings have interacted with financial market data in the past. And that long-term market cycles are quite lengthy in nature and we enter a market at a moment in time in a position in its cycle and we watch it play out. And some of the early lessons in our early investment career, may not be valuable for us later in our investment career.

For example, when I first started the industry, I started in ’83, the big boogie man that had just passed was inflation. And so all the coursework in the CFA was focused on how to manage an investment portfolio in an inflationary environment. Well, we haven’t seen that in 38 years. We may be about to see it soon, but we’re not there yet. And so you’ve got to learn your lessons fast and apply them in the right moments in time. And so I started working for a philosopher value investor who taught me how to invest using a value investment style. And at first, I thought he was a bit off his rocker. He claimed that stocks would all revert back to their mean, it was that simple. And I was a science major when I asked for the proof of the pudding of his belief system. He didn’t have one, he just claimed that they did and I would just have to watch it.

And indeed, over two, two-and-a-half years, I witnessed…he was much more of a cigar butt investor than I was, ended up to be…that these weird stocks that were super cheap and ugly and in trouble started to float and drift upwards and reverted back to something more normal. And it was only then I became a believer, I now know that Andrew’s Smithers has done some work showing that 80% of all stocks revert back to their mean.

So my central core investment philosophy is the price you pay when you enter an investment has a significant impact on your long-term results. If you buy cheaply, given some time, and if the risk factors are acceptable, that stock will drift back up something to more normal for itself. If you overpay for a security, it’s very painful. Over the fullness of time, it won’t rise that much and you won’t get much of a return and it won’t pay you for the risk that you’re taking overall. So that’s the core of my background in philosophy. So I combine a little bit of market history and the understanding and the explanation as to why individual securities get mispriced and why it’s important to go in there and pick them up.

Meb: As you talk about value, there’s probably a million different flavours that different value investors would embrace and it’s pretty broad term. Talk to us a little bit about sort of your approach. Is it purely quantitative, is it totally discretionary? What sort of inputs are part of the process and all that good stuff?

Kim: I’ll give you a good sense of the process. Keep in mind that most of our client money is in Canada. So I grew up in the Canadian marketplace.

Meb: So it’s all junior miners and cannabis?

Kim: Well that could be an interesting rough ride for clients.

Meb: It’s a barbell approach, you know, you’re diversifying.

Kim: It did very much affect the investment philosophy that we took on in the early days because value managers are out there trying to buy the beaten up cheap stocks, and the cyclicals in particular. And if you were to do that, you would own a lot of cyclicals at the bottom end of the cycle and none at the very top of the cycle. And you could have a very divergent portfolio from the benchmark and have very different results. Now I think in the long run, even playing a deep, deep value game, you will win the game of investing. It’s just will your clients still trust and believe in you when you have long dry spells of underperformance? The whole philosophy behind value investing was invented in the U.S., which was the deepest, broadest market in the world. And now all markets are idiosyncratic. Even the U.S. market has a lot…a huge weighting in its top three sectors.

But Canada has more resources than most and is a bit more cyclically orientated than most. And so how do you take value when you have a market that from time to time, several times in my career, in fact, the gold segment has been more than 10% of our benchmark, and it’s never been more than 1% in the U.S. And so if you miss those gold rallies, it can be incredibly painful. In 1993, in Canada, the gold sector was up 150%, mid-year ended the year up 100%, and if you weren’t in it, it was very painful against the broad indexes when it was 10% of the benchmark. I developed a style which we called relative value investing, which was very pragmatic in the Canadian marketplace and created a smoother ride for investors, less volatile in its return, because by going relative value we said, “We’ll be in all sectors at all times plus or minus 5% sector weights, but we’ll make strong stock picks within each segment.”

And if gold was its own separate sector, we would be neutral most of the time in our gold weighting, even if it was an absolute value, but we would own the cheapest names in the segment. And by definition, by having the same weight but in the name that had the most upside, we would ultimately win the game of investing, which is what we did in a very consistent basis. And that allowed us to build a mutual fund that grew from $40 million to the largest Canadian equity mutual fund in Canada because of that quality outperformance over long periods of times with a modest level of risk and not much amplitude against the market in our investment approach that we still use here at Sionna today.

We start off quantitatively using models and downloading data on stocks to just scroll through the entire universe of stocks identifying what is truly cheap, and then that allows us to do deep dive on more manageable size companies making sure that they qualify from a risk, a financial risk, an operational risk, etc. perspective, and that the numbers alone being used in the model aren’t being tricked. And so there’s a lot of looking at aggressive accounting practices and trying to make up for the fact that if there is some, making adjustments and looking at the more conservative way of looking at the company. And then coming up with portfolios of stocks and our traditional method was sitting in the 35 names, we also run more concentrated portfolio of 25 names. We’ve got method of investing in a team environment here at Sionna.

Meb: Is there any particular factors that are part of the process that you guys really like or are you old school plus earnings sort of shop? Are there any factors that you guys really don’t like? And the part B to that question would be value in general as a factor has had a pretty tough run at least particularly in the U.S. for this past decade where it’s been driven by a lot of growthy sort of names. So anyway, you can talk about both those sort of concepts. We’d love to hear a little more about how you guys think about value factors and process.

Kim: Yeah. I’ll take the first half of that question, which is what are we most like? When we’re doing our fundamental analysis, we use a really structured questionnaire template. We really believe that discipline helps you a lot in terms of learning lessons. So that it makes it easier to do pre and post-mortems of the stocks that we’re buying and not make the same mistakes over and over again and try and avoid those proverbial value traps that keep emerging from time to time. We do publish with our clients the characteristics that we’re looking for. Yes, we want to maintain classic value features and so we look to see that our PE multiple, price to sales multiple, price to cash flow multiples are all below the market. And then we’ll look at, we’re hoping that the dividend yield is higher, and yes, the current environment has been fairly challenging for value attributes for a lot of interesting reasons.

And so, some of them we’ve haven’t done as well on in the last several years in terms of matching them. But we also follow through on fundamental analysis. And also, when you’re orientated in a cyclical market like Canada, from time to time you can own an energy stock that is truly very cheap. But if it has microscopic earnings, it gets explosively large PE multiples, which really messes up the perception of what you’re achieving in your portfolio. You know the stock’s cheap, it’s just doesn’t look that way. So, the fundamental analysis really kind of protects us a bit and also helps us explain when we’re being challenged on some of those characteristics. And we recently wrote on it an insight piece about book value and how it’s becoming a little less material throughout my career. It’s become a…and it used to be, historically, when the market went above 1.75 price-to-book value, it didn’t stay there for very long. Now that tends to be more of the market averages, and so you do have to be a bit adaptable and flexible.

But we wrote a piece on is it still a valid number, and we included were not ready to throw it out with the bath water yet, but it’s a less helpful tool these days than it has been in the past. That doesn’t mean it won’t come back. I think your second question was a really interesting question as well, which is has the market, in essence, become more perfect or more efficient and therefore has the value style lost its ability to outperform? And I have more market experience than most players. And I think that’s a really important feature for an investment manager to actually witnessed a number of market cycles. I’ve been involved in the CFA Institute for many years and when you look at the current age profile of active membership of CFA societies, Toronto Society being my local one and one of the largest societies in the world, the age population on over the age of 55 represents less than 10% of the population base.

And then as you look down the age profile, you realize there’s a bunch of people that haven’t even witnessed 2008 that are active in the marketplace today. And then there’s an even bigger number of people who did not live through 2000. And we are right now in one of the more lengthy periods of time where value has underperformed against the growth style. But if you pull up something like Fama [SP] and French, they won a Nobel Prize in economics for the research they’d done their entire career on value versus growth. And their studies continue to show that 86% of the time value outperforms the growth style. And there are brief shining moments in time typically at the end of the cycle when growth outperforms value. And of course, what ends up happening at moments in time like this is people start to wonder whether value no longer works.

And I’m seeing more and more questioning about, has the market become much more efficient? We’re sitting in the camp that if you go back in history and look over and over again, you see a number of the factors that people are pointing out to say the market’s become very efficient and they’ve happened before in the past. Like have you had periods in time in the past where almost all active managers underperformed a benchmark? And absolutely you did. You had that occur even back in the Nifty ’50 era. You didn’t even have ETFs or passive strategies. I mean, the first passive fund was 1973 so they weren’t in place to make that reason for why it happened, and yet you did have the market become inefficient and then created another huge opportunity for value managers again and again and again since then.

So you’ve had people question whether value is done, and I suspect that it’s not. It just has new dynamics and new products to use that people think have really changed the dynamic of the market. But I think that the old norms will fall into place. And I think that we are in a very hyped market today and you need to look no further than some of the valuations of cannabis and technology stocks to suggest that, yes, growth may have gotten carried away with itself. Once again, there will be another opportunity for value to show its might, that investors need to be patient.

Meb: That’s what creates the opportunity, these sort of behavioural cycles. You know, we look around….they do these annual surveys each year. Schroeder’s does one is as well as some others. The answer’s always the same, but they interview 20,000 people around the world. They almost always say they expect future returns at 10% but the millennials are always much higher. And the reason being of course, because most millennials haven’t lived through any bear market, particularly in the U.S. Obviously, if they’re living in Brazil or Russia or Greece, they have, but haven’t lived through it in the U.S. And so certainly studying history, I think, is the single best thing that people can do to get a little more expectations in line. You guys had a great quote from a paper y’all wrote in 2018 called “It’s More Cyclical Than Secular” where you said, “Despite technological advances, the humanness of markets has continually created exploitable inefficiencies. Expanding time horizons often illustrate what looks like a permanent secular trend in the short run proves to be cyclical in nature in the long run.”

And looking at value and thinking about it, one of the examples we often give is simply following Warren Buffett’s picks and there’s been some great pavers from AQR and others that can kind of decompose his process into a factor-based approach. And they talk about, “Hey, look, he does value and quality.” Like we all know that. It’s not that complicated, but we often say his alpha, a lot of it has to do with sticking to that approach and not getting sucked into the fads of the day, which is so easy and certainly seductive. So talk to us a little bit about as you look around the world, what does it look like? Are you finding value anywhere? Is there any specific geographies or regions or sectors or anything else that you think looks appealing or, equally as important, areas that people should certainly shy away from?

Kim: I should reiterate that we are still largely a Canadian-focused manager overall and that’s where most of our client money is even though we’ve been tiptoeing out into the rest of the world. So I’m always happy to get on a soapbox and defend the Canadian marketplace. We represent usually about 2% or 3% of [inaudible 00:20:14] benchmark. We’re often getting pundits coming in and suggesting that investors should invest globally, which I absolutely believe in, but accusing investors in Canada having a home country bias. So I’m often defending the might of Canada in highlighting that Canada, when you compare it to the U.S., which is a big market that is a huge segment of the global benchmark today, well through 60% of the weighting has become an expensive market overall and is certainly more expensive than the Canadian market.

And when you look at it against the Shiller PE multiple and you look at the number of standard deviations away from norm the valuation is compared to Canada, you come at it multiple ways, it looks like Canada in the next 1, 3, 5 years should get up to 5% even 10% better returns than the U.S. based on a cheaper valuation. And I’ve often seen people criticize Canada. There’s that assumption that because we’re so resource and cyclically orientated that by definition we must be a riskier market and a lower returning market. And I’m really enjoying that fabulous book out there these days called “Factfullness” by Hans Rosling. And in the book it says, “We humans get tripped up by these 10 instincts and our impressions about what’s going on in the world and our shortcut thinking often gets it wrong and that we really should test our instincts against facts.” And that’s why the book is called “Factfullness.”

So the facts on Canada, that I really appreciated when Dimson Marsh and Staunton took their study of multiple markets and multiple regions back 115 years in 2017 and they had Canada as a region and could compare the long-term 115-year Canadian results against other major regions and markets of the world that our overall returns were second or third best in the geometric or arithmetic calculations, whichever one you prefer, that the standard deviation was amongst the lowest in the world so that Canada is a very interesting market. It doesn’t deserve to be underweighted in benchmarks, and at this moment in time, it’s relatively cheaper than a market that’s getting a very hefty weighting.

And for those people who aren’t as familiar with Canada, we are the U.S.’s largest trading partner and they are our largest trading partner. Now we aren’t quite as big, as significant for them as they are for us, but they still represent roughly 75% of all our trade in Canada. We’ve long had this saying that when the U.S. sneezes, Canada catches a cold. So the U.S. is doing well, we do well. If the U.S. does poorly, we do poorly. And if you do a correlation coefficient between Canada’s GDP and the U.S. GDP, we rhyme because of that pre-connection between the two of us.

I think Canada is not a bad place to invest. And inside Canada, there’s some sectors that I think represent pretty decent value and individual securities always go out there and shoot themselves in the foot. We think that the energy sector has been beaten up and we have had dramatic improvement in the WTI spread of energy, and that hasn’t really been reflected in the stock prices. So we think that there’s some value in some of the quality names in energy in Canada today, in particular. And that the pipelines, which had been massively overpriced probably because of the chasing of yield, now with some people, you know, having differing views on rates and the difficulty of building pipelines, the valuation of the pipelines in Canada have been beaten up. And we think they’ve been beaten up to a level where they become quite attractive to contemplate in this marketplace. So those are a couple of areas that we’re finding as industry or segments as interesting beyond individual stock.

Meb: It’s interesting, you talked a little bit about this earlier and there’s traces of it in this recent comments where when I was in Niagara, I was chatting with some local Canadians and the challenge of being an adviser, and these are wealth managers, brought up the point that you mentioned, which is Canada’s percentage of the global benchmark is pretty low relative to the total, but most Canadians and most wealth managers would have a much bigger chunk. And the risk being that it’s a fine balance between what may be an ideal portfolio and what may be a portfolio that the person can stick with. Because as a wealth manager, they would laugh and say, “Well, look, Meb, if gold is up 50% next year and we don’t own any,” they’re like, “I’m gone because every other person in Canada own some gold and if my client doesn’t…” So it’s always funny to listen to the real world implementation versus a lot of the ivory tower because it’s easy to talk about portfolios and what certain people think might be a best way to construct one versus what’s actually workable in the real world.

Kim: And many people overlook home country advantage. Because when you invest in your own domestic market, you get certain tax advantages, you get good asset liability matching because ultimately, you know, most people in their own economy, I’m going to put this rather crudely, will live and die in their own economy. And unless your client is telling you, “I plan to move [inaudible 00:25:31] and spend my retirement years there,” they’re getting good asset liability matching by staying somewhat weighted into your domestic market. Plus, your fees within your domestic, you pay more for global managers, you pay more for your trustee costs if you’re investing outside of the country and you don’t have to do any currency hedging. And those factors, I think, often get overlooked in the rush to diversify into the exciting new categories. And yes, although retail investors, by and large, do have reasonably good exposure to Canada, we’re finding that institutionally you’re seeing that the weighting to domestic equities all around the world is falling to 10% or less of overall portfolios.

And it’s a new experiment that we’re all playing with here. And I’ve always found that one of the great tests of time of a philosophy or a belief system out there is to either shrink the idea or expand the idea and see if it still holds water. So in terms of like what is an ideal asset mix globally for investors, there’s no perfect model for asset mix. Early in my career, there was a great study that had come out and said, “Forget securities selection, if you can get asset mix right, oh my goodness, that’s where the money is. So you should be out there just making very wise asset mix decisions, stocks, bonds within each one, making some asset mix decisions and cash.” And so people ran out, and there was a lot of new funds called the star asset mix fund, a lot of money got poured into tactical asset allocation funds way back, you know, 25, 30 years ago.

And most of them went down in flames because it’s terrifically difficult to do tactical asset allocation consistently well. And so if you’re out there with making aggressive bets, you can often get in trouble. And so one of the best tests for is this skill that’s doable in the marketplace is to say who has gathered a lot of assets that become world famous for doing asset mix super-duper well? We know that Warren Buffett is fabulously good at private equity, we know Bill Gross was at a time amazingly good at bonds. And you can look at those people and say, “That’s a skill, but who did an asset mix?” And I’ve been asking audiences about this for many, many years. And so who is out there? Well, the biggest I can find, and most people agree with me, would be GMO. And I believe at their peak they got to $104 billion, which is really fabulous but pales in comparison to a lot of other categories.

And, you know, they ebbed and they flowed and so they had a very disciplined approach towards asset mix. So most people want to shy away from doing a tactical asset mix. And so what they do is the easy way to play that game is to follow a benchmark. And the all-world benchmark, or MCI world benchmark, is a common one for people to go to and it’s based on market cap weighting. And market cap weighting has it the benefits from liquidity perspective, but it doesn’t necessarily stand the test of reality. For example, the U.S. has a very large weighting in that benchmark. Another way to look at the world or slice and dice it would be GDP. Where U.S. would be only 25% of a benchmark like that and China would be much larger. And so right now, if you were to use, and most people now…I saw a quote today that said something like 70% of all investors use a benchmark to weight their [inaudible 00:30:44] weight and then do little drips around it.

Well, right now that benchmark, the all-world benchmark is saying give 60% to 70% of global wealth to the United States and the next largest country is about 8.5%, 9%. So you’re telling all domestics investors all around the world to keep 10% or less domestically and that’s 90% of your hard-earned wealth within your own economy to the rest of the world. And to me, that means that we will ultimately kill the financial services sector, which is one of the top three sectors in every functioning economy cause it to shrink down over time. And so I think that if we take that notion of market cap weighted benchmarks as the way to go for weeding of portfolios, and it captures a lot of invention, an unintended…there could be a lot of interesting unintended consequences emerging.

Meb: It’s interesting talking about market cap weighting because it’s the default for almost every investor and if you actually include closet indexing, which is the active people that despite the claims of activity end up just pegging the index because of constraints or they’re just so big that they can’t do anything else. We’ve heard estimates that you’re up around 705, 80% of funds and investors are doing market cap weighting. You know, we often say there’s almost any investment approach should be market cap weighting over time. Because of that, not having a tether to fundamentals or value.

And a lot of investors, particularly individuals, aren’t aware of that fact. And our favourite example is a fellow student of history, I’m sure you remember, but certainly Japan in the ’80s when they got to be the biggest stock market in the world, but trading for a long-term p-ratio of almost a hundred, and I was just over in Japan chatting with some locals and buy and hold is not even a concept there. They say, “Why would we buy old stocks? They’ve gone nowhere for 30 years.” And that’s not some tiny economy. It’s, I think, still number three in the world. So market cap weighting, while it may be the market, is certainly an odd choice for a portfolio as well as a decidedly sub-optimal way to invest.

Kim: True enough. And yet I find it fascinating and welcoming that a number of investors today are finding concentrated portfolios an interesting notion. And as a counterpoint, or in addition to, is people choose to use passive strategies. So people are taking that notion, you know, going one step further and saying, “Well, I will get market exposure through a passive strategy, but when I go active, I would really like to go very active with an active strategy.” And I find that very interesting and healthy development. Those investors so far have been reasonably sophisticated. Investors who are being sophisticated are willing to live with the ups and downs of being in a style like that because it will diverge in performance against the benchmark. So you have to give it more time to improve its ability and the client at themselves has to build an iron stomach of ability to stick with a strategy and the manager.

Meb: The thing about the concentrated portfolios, and I 100% agree with you, is that often we’ll hear people say that they can handle a concentrated portfolio. Then you actually look at how weird it may be and how different and in just how concentrated it needs to be to actually make a difference, you start to get into that uncomfortable. And the challenge of so many investors is they like being warm and fuzzy by not being too different from the crowd, particularly when the crowd is romping and stomping like where I said in the U.S. for the past 10 years in the equity market outperforming everything, and so it’s always a fine balance between we’re awfully concentrated and weird here but between finding a balance between that and surviving the cycles, you got some boots on the ground in Canada. We’ve had some prior guests and commentators that express some concern about the Canadian housing market. Do you have any thoughts on that topic?

Kim: Our government has incrementally tightened the screws on the market for a while now and they finally seem to have been able to tamper it down. One of the fairly interesting factors in our market in the, we had a world market pricing for housing that was probably below the rest of the world and then now has risen, and we have certain markets like Toronto and Vancouver, which are very expensive, global-priced real estate markets nowadays. You have to look at the edge of the investing. And Vancouver, in particular, and Toronto more so of late has been foreign investors coming in and buying up the market. So not necessarily living here. And I know Vancouver is suffering from the fact that the average income earner in Vancouver is being priced out of the valuation of the local market. So we’ve had global money looking for a home and choosing to invest in Canadian real estate.

So there is pockets of overvaluation this market and the government definitely has made it much harder to get mortgages. And so we’re now seeing some rolling over of the market today. So that creates some concern about the banking system, ultimately feeling some credit losses, and there is some expectation that that may occur. And we also have a banking system that went through ’08 fairly well, and yet we have upped a lot of capital requirements even still in Canada. And so we have banks in fairly good shape to weather what I think will be a cyclical storm here in Canada that may be emerging now slowly but surely. But historically, the average Canadian consumer has had a higher percent of equity already in their homes and so less likely to walk away. In Canada, we have really strict bankruptcy laws, so it’s typically not an option that people want to take because emerging from bankruptcy takes a very long time to build a decent credit history as well.

And I think culturally, Canadians historically had been fairly debt adverse, although the younger generation certainly seems to have changed. But we still have good employment in Canada, so we have the ability to still make payments. So the debt burden is manageable at this point in time. There is some concern if there was a dramatic raise in rates that could be problematic for payments, but at the moment installation looks quite more abundant and not an issue. So we might be able to drift down cautiously here. So, yes, that’s a concern that’s been weighing on our markets overall, and also too, we should suggest that we never had any write-off of mortgage debt in Canada. So that benefit never existed and that’s why home equity has been higher or people were definitely incented to pay off their debt and stay debt free because there was no advantage in having an interest payment at all.

Meb: It’s interesting from an L.A. perspective, and I know it’s not the whole country here in the U.S., but I saw a chart that our friend Morgan posted on Twitter looking at the old Schiller real housing price index, net of inflation, and it’s crazy because it’s like for most of the century you have kind of low real returns and then you had the huge run-up to ’07 and then the big crash, but it’s kind of run right back up here in the U.S. Part of that, I’m sure, has a lot to do with the low interest rates like you mentioned. And I have a partner who is pushing me aggressively that wants to be a homeowner and I said, “Sure, be a homeowner. Let’s move to Kansas or Colorado or somewhere because it’s bananas here.” I want to ask you a handful of other shorter questions, but you can answer them long if you want, either way because it’s getting near the end, the beginning. You’re heading to Omaha. You’re going to Berkshire next month. I also hear you’re holding a little event there. You want to tell us about it?

Kim: Absolutely, would love to. Couple of women got together and we’re calling our conference Variant Perspectives, and it’s Friday afternoon for those of you who will be in Omaha May 3rd. And there had been a conference for women investors, value investors two years ago. It didn’t exist last year and we said we’re going to make one happened this year. We’re really pulling it together. We’ve got a room that’s at the Hilton Downtown Omaha from 3:00 to 6:00. And our goal here is to help and support increasing assets under female management to 2.5% by 2020. And what is happening out there is about 3% of U.S. investment firms are owned by women. These firms only control 1.3% of assets under management. Studies are showing that of all the professional service industries in the world, that asset management has been the least open to women participating. And my firm, Sionna up here in Canada, is a rare exception. Our AUM is under $5 billion now and we’re the largest woman-headed asset management firm by AUM in Canada.

And we have half of our investment team are women, the most senior women in our team are women, the executive team is three-quarters women. So we know that there’s no reason why there aren’t more women in the industry. Women are capable of achieving. Studies are showing women managers are able to outperform. And so we’re having a number of panels of women who’ve just recently founded firms or women who’ve run firms for a while now talking about the opportunities as a woman in the industry and some of the challenges and how they get around them. And then we’re talking to allocators and their issues and are they looking for women and what are their issues in finding women to promote or put into their funds as well as a call to action.

Meb: And what is the call to action? What’s the path? Because this is something we’ve mentioned a few times on the podcast. Ad it’s certainly been my experience as well. I mean, almost every talk that I give, if I look at even Twitter or podcast analytics, it’s so outrageously one-sided. It’s not like it’s 60/40 or even 70/30. It’s like you mentioned, it’s like 95/5. What changes this? Like what’s the path? How does this evolve into a world where there is more female representation?

Kim: I’m actually quite encouraged the last two years. We’re hearing more and more people really questioning, why is there a difference? And there’s more forums and discussions occurring where people are questioning. And so how do we get this to happen? It’s partly just asking pensioners themselves to go to their pension funds and say, “Do you have women working here? Are you hiring women managers, and why not? And do you think that’s correct?” And it’s about the bottom up asking for it. But I also think that there is people sitting back and saying, “Yeah, it doesn’t make a lot of sense. What are we going to do proactively?” And I’ve asked at conferences to…and a number of other women as well are sitting on panels in front of our peers being asked, how can we encourage or how can we bring more women into our organizations and develop them and grow them? And we’re sharing ideas about how to do that.

But I think far too many people have been using the excuse of saying, “Well, we have difficulty hiring experienced women.” And I think the real issue is are you growing your own talent? Are you hiring them right out of school? Are you making an opportunity for women at that level? And I think there hasn’t been enough encouragement of it at that level. And so women tend not to see themselves as being able to be successful and they’re choosing to go elsewhere. I think the industry is ready for a change, and so we’re helping push it from behind to keep moving in the right direction because it’s possible. And also to support the women that are already out there. You know, there’s more and more women-headed firms out there looking to grow their AUM, and they’ve got a great track record.

Meb: It’s a frustration. So listeners, if you find yourself in Omaha, go say hi to Kim. I’m 50/50 this year. I don’t know. I’ve been in the past and honestly these two, Warren and Charlie, they’re getting up there in age. I don’t know how many more there’s going to be, so if you haven’t been, I highly encourage it. The best part is probably not even the actual presentations, but walking around town, chatting with fellow fund managers and investors and getting to see a lot of the crazy questions people ask at the sessions. Speaking of value investors, who have been kind of some of the investors that have most influenced your career and way of thinking? You mentioned the…it’s actually my favourite investing book, “Triumph of the Optimists” by the Dimson, Marsh, Staunton crew. Any other investors?

Kim: Oh, I read them all. I’m a huge fan and I’ve gone to conferences for years and followed people. I really love Peter Al Bernstein, but unfortunately, he is passed away and he used to work closely with Robert Arnott [SP] who I continue to love all his work and his reading, a real thought leader in the industry. There was a number of Canadians that I quite admired, Peter Cundill. I was quite privileged to meet…Templeton was Canadian and started his roots up here in Canada before moving down to Bermuda. There’s so many good people. I run value quotes every day out of our shop. We offer it up to counterbalance all the Grossi news reports that we read and we’re using quotes from all over the place of investment greats to help keep the straight and narrow of value thinking alive. Because at moments in time and the market like this, it’s easy to out values. So you kind of need to jolt yourself together by talking, reading the investment greats over and over again.

Meb: It’s funny you mentioned that because we had one of Meb’s 10 terrible ideas. We had a bunch of websites we’d launched in the past that I said, “No, no, we’ve got to focus on our asset management business. I can’t have all these things distracting me.” But we had said it’d be nice if there was an investing quotes-related website and we built one. And I can’t even remember the name of it at this point. It’s like Quoting Alpha or something like that. I’ll have to look it up, see if I can find it. But that’s a cool idea because there’s so many that are just so succinct and wonderful. One or two more questions and then I promise we’ll let you go. Anything you were thinking about today? It’s 2019, which is crazy to think about. Any research, any ideas that have you guys particularly excited or concerned?

Kim: If people haven’t read this, there’s this great article written at Berkeley University called “Unicorns, Cheshire Cats, and the New Dilemmas of Entrepreneurial Finance.” And I think a companion to this as well would be the book, “The Myth of Capitalism: Monopolies and the Death of Competition” by Tepper and Hearn. I’m very fascinated by how with, you know, quantitative easing and this flood of easy money going into private equity that we’ve supported these winner-take-all business models where firms like Uber and Lyft have been around up to 10 years, have never made a profit, are coming public, are stating in their prospectuses that they have no idea when they will make money, continue to lose a lot of money, and yet the world is willing to pay phenomenal valuations for them, justified by the belief system that eventually when they become monopolies, they can get excess returns to make up for the 10-plus years of not making any money and then make handsome return to future investors.

And that whole…just that belief is a really…we’ve put a lot of money behind an experiment that hasn’t been proven. Historically, if a firm didn’t make money for three, four, five years, people would abandon it. And yet we’re allowing all kinds of businesses to survive. To me, this is incredibly reminiscent of 2000 and this whole enthusiasm over monopolistic profits. And even go back to Adam Smith, he rallied against monopoly profits in that it’s not a social good and that governments will and should regulate against it. And so, I think that this is an interesting topic and article that I think if people haven’t been on it already, it’s not getting mainstream media, but it’s out there and it’s a really interesting story to examine today.

Meb: There’s a lot kind of rhyming with the late ’90s, one of the things you mentioned. If you look at the percentage of IPOs that are unprofitable, it’s back up to, you haven’t seen this really in the U.S since the late ’90s and there’s a number of other metrics…I think it’s a chart you guys may have posted, but about looking at some of the indices and valuations on some of the debt part of the market. But, you know, that’s what’s been working for a lot of people is chasing a lot of these Grossi names for sure. But they’re risky. They always are. A question we’ve asked all the guests, you look back in your career of the many thousands of probably investments you’ve made professionally, personally, all those sort of things, any stand out as the most memorable?

Kim: Well, you know, there was a couple of Canadian IPOs, and IPOs tend not to be good investments, that ended up being like phenomenal home runs, and CN Rail was one of them in the privatization of the Canadian life companies. But I would love to tell the story about my single best investment, which is I bought the book, “Margin of Safety,’ and you know, it was about $30 in Canada and now it’s arguably worth $2,000. In about 2001 or ’02, I ran to a conference and got it signed by the author and pulled it out and said…you know, I told him my stripes as an investor and I’d taken a fund from $40 million to the largest equity mutual fund in Canada, but I was shameful that my best investment in life was probably, and then I hauled it out of my purse, his book, and he was gracious enough to find it for me. It is kind of funny that that ends up being probably percentage-wise, one of my all-time, all-star exams.

Meb: I love it. Kim’s talking about Seth Harmon’s book, listeners. And, you know, it’s funny, in my early 20s out of college, maybe even been in college, the precursor to Amazon book marketplaces, but there used to be a website called half.com, which I think got acquired by Ebay, but it was really the used book market place and very inefficient at the time. And there was a little corner of the world where…and we’ve more than paid them back in spades because we pay them a lot of money as institutional research subscribers. But Ned Davis had put out a handful of books that for some reason they just didn’t do a large printing and they went out of print and two of the books are two of my favourite investing book still. One was Tim Hayes’ “Research Driven Investor” and the other was Ned’s…I want to call it “Being Right or Making Money.”

But these fantastic books, and they did a limited circulation and so I just scooped up a bunch of them, would resell them on half.com for $700. And for someone in their 20s, that may as well be $100,000. Being able to get $700 is like rent money. And so I used to joke with those guys when I chatted with them years later, I’m like, “You guys put me through my 20s by choosing to do a limited release.” So I’ve never got a copy of Seth’s book, but every time I go to an old-school bookstore and they have an investing section, I definitely take a peek to see if they have any…It’s like those people that do the dusty bottles in the old liquor stores, they go look in the back and they find the old liquor bottles that are worth a lot. Well, don’t sell it. Just keep it.

Kim: No, I got swarmed at the conference afterwards because people wanted to touch the book.

Meb: That’s funny. Well, if you are an unscrupulous person, you can certainly find the PDF online. It’s a fun book to read, and Seth is one of our favourite managers. We profiled him in our book, “Invest with the House,” where looking at his holdings cause they always are a bit unique and different as far as the manager crowd. Kim, it’s been a blast. Where can people find more information about you? They want to follow your writing, you’re up to, what all is going on, where do they go?

Kim: Well, our writing is on my website, sionna.ca. Just sign up and…in Canada, we make you sign up before we will send you our emails, but you can access a bunch of articles right off our website.

Meb: Awesome. Thanks so much for joining us today.

Kim: Terrific. Thanks.

Meb: Listeners, we’ll post a bunch of the show notes that Kim mentioned today on mebfaber.com/podcast. You can always leave us a review. We’re almost at 500, would love to hear what you guys think. Send us feedback at feedback@themebfabershow.com. Thanks for listening, friends, and good investing.

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