Investorial

Ross Healy is the chariman and CEO of Strategic Analysis Corporation, an investment advisory firm. Though I feel at times, that Ross’s comments are too politically correct, too on the fence, I still recognize that Ross is very much respected in the Canadian investment scene. Ross is best known for his bearish call on Nortel when it was trading over $100 in 2000. As of June 2006, Strategic Analysis Corporation’s model portfolio has outperformed the S&P/TSX Total Return index to a tune of 20.9% to 11.7% since its 1993 inception.

If you haven’t yet, you should start by reading Deep Value Face-Off - Part 1 first!

On Holding Cash Positions
Healy: We’re running about 60% cash in a mutual fund. We’re certainly moving our personal clients in that direction. I think cash is going to be one of those very happy things in the next year.

Michael: We’re sitting on about 5% cash. However, I have 3, 4 takeovers which are in the process. If they transpire will probably add on another 10% cash. I very rarely go above 25%, 30%, because no matter how negative I am, as a stocker picker, I will always find some dirt cheap stocks.

Healy: Who is going to make the decision as to whether you ought to be in cash or not, if not your money manager. I’m paid to keep you out of trouble, not paid to put you into trouble. If that includes having cash, that’s probably going to be a good thing in the end

Michael: I’m not sure how much money you now manage, Ross. But we manage approx $1.3 Billion. For me to go into 60% cash, you’re talking $750 Million aside. I’m not that smart to be able to pick the bottom of the market. More importantly, if you’re managing $10 Billion for a pension fund etc., to go to 60% is very difficult. It’s almost like speculation. You have a luxury that I don’t have. I think I’ll stick to where I am.

Healy: Some people would call this a goldilocks market - “not too hot, and not too cold, just about right”. I would remind people what happened to goldilocks in the end. She was eaten by the 3 bears. Keeps that in mind.

On ETFs
Michael: I don’t use them at all. I don’t believe in indexing at all. If everyone’s doing indexing, it breeds mediocrity. We’re all gonna get the same performance. Mind you, that will be good because we’ll be able to keep our jobs. And the fact is that, we go to business schools. We take our CFA degrees etc to learn how to analyze and pick stocks, as opposed to buying what everyone else is buying. So in terms of ETFs, I’m not there and I’m not into indexing.

Healy: I use them the odd times if I want to rapidly increase my exposure to the market. It’s not particularly cheap but I have a pretty strong feeling the market is going to go up. I would typically use no more than 10% of the portfolio though. I’m with Irwin quite frankly. We’re stock pickers and ETFs are not our thing.

On Shorting Stocks
Michael: I’ll be right to the point. We don’t short stocks simply because we don’t run a hedge fund. We’re long only. I buy it if they’re cheap. If they’re not cheap, I walk away. If they look like a short, I walk away. Again, because it’s not my mandate. So right now, we’re just selectively looking for cheap stocks for the next move in the market place.

Healy: We’re not shorting anything yet, although I think we’re pretty close to a point where we’re about to. We do have a mandate to be short in our mutual funds. Certainly as far as our clients are concerned, we will from time to time give them good short sale recommendations.

On Canadian Banks And Why They Didn’t Like Them
Michael: I don’t dislike them, I just don’t think they’re deep-value. They’ve done rather well. You’re getting a dividend of several percent. If I can find a common stock that’s yielding me 4, 5% with potential for capital gains. I prefer to buy that instead of what everyone else is buying. Banks are very much over-owned in Canada. I want to buy where people are not

Healy: I have no banks, no financials. Quite frankly, a long look back at bear markets in this country tells you that when we get a good bear market underway, the banks often suffer rapid and severe setbacks. I’m waiting for that setback, because I’d like to be in them, but not at these prices. They’re too expensive. I think I can get them for 30% to 40% cheaper. I will wait.

On Gold
Michael: I’m not a gold player. My view is that it’s going to meander between where it is right now, maybe a little higher. But keep in mind that gold is a function of the U.S. dollar. It’s like an international thermometer of good health. But more importantly, it’s a function of something that can come out of the woodwork. A war out of them middle-east began, Nigeria cutting off oil or something like that. My sense is that it’s not dirt-cheap, so I”m not there.

Healy: I don’t have any gold. There are 3 potential buyers for gold. Central banks, they’re not buying gold. The large investors, they’re buying gold like crazy. And commercial users of it. Commercial demand for gold has really gone down badly. I think what we’re look now is a market which investors are selling to each other. That’s a very poor technical condition to be in.

On Fund Manager Conflict Of Interests
Healy: I buy my fund. I think it’s a huge conflict of interest to be trading on my own account and running a fund at the same time. Put your money where your mouth is. And be invested.

Michael: I’ve always said I eat my own cooking. My own RRSPs are in this. My kids’ RESPs are in here too. So we’re there.

On Metals
Michael: Right now, the metals are not exactly loved. I think on balance. We don’t think the world is coming to an end. We think that at this point, we’re in a period where everyone has lost their confidence, there’s fear factor out there. We do own a few metals. So the bottom line is we still believe in it, but what’s changed is the psychology. Investor’s psychology is terrible right now. [That's good for us] If you’re a stock picker, why not?

Healy: I think there’s a lot of professional investing in metals. Which makes me nervous. Hedge funds and all that kind of stuff. When you get not the users of metals, but speculators messing up the market. I think you get volatile and unknown kinds of markets, and I don’t want to be there in them. Long term, the emergence of India and China is going to have a profound effect on metals and energy as well. In a sense, I’m short-term bearish because of over-speculation in the group, but I’m long-term bullish on them. If you had a long time horizon, if you didn’t care what happened in your portfolio the next year. You can stay there. I think these songs are going to emerge.

On Where To Bunker Down In A Sliding Market Besides Cash
Michael: Stocks, if you buy something well. It’s half sold. In spite of all the negativity that’s going on, there are companies that are living, breathing everyday, that are making money. You probably don’t hear about them. In U.S., you’ve got the Sarbanes Oxley act, that’s the greatest catalyst for companies to be bought out. If you take a look at the paper today, you’ll also notice that we’ve gone through one of the biggest periods of corporate buy-back of shares. Pscyhology is so terrible right now, and we’re looking through the rear-view mirror. And in the mean-time, business is being done. I wouldn’t be so negative.

Another engaging value-investing debate is in the books. The final part 3 of our series “Deep Value Face-Off” will be coming soon. Stay tuned!

Related Posts:

• Deep Value Face-Off: Irwin Michael vs. Ross Healy (Part 3 of 3)
• Deep Value Face-Off: Irwin Michael vs. Ross Healy (Part 1 of 3)
• Irwin Michael’s Monthly Commentary - May 2006
• Irwin Michael’s April Commentary