With 30 years of investment experience, a founding partner of Synergy Mutual Funds (acquired by CI Financial in 2003), former Chairman of Sprott Asset Management LP, Editor of Canadian MoneySaver and CEO of 5i Research, Peter Hodson has a lot to share. Read on for Part 1 in my interview with Peter.
My Own Advisor: Thanks again for this interview Peter. So, where and when did investing begin for you?
I actually bought my first stock when I was 11, in Ottawa. It was Mitel Corp., an Ottawa company. I had a paper route, and scraped together $300. Mitel took off, and in 18 months my $300 was worth $1400 or so. I thought that was a much better way of making money than carrying newspapers around every day. Alas, though, I sold Mitel, and decided (for some reason only a 12-year old might come up with) to buy a company called Vulcan Packaging. It made explosive-proof containers, or something like that. In a year, my $1400 was back down to $300. I decided I needed to find out what had just happened to all my money. This set up a long career learning about the stock market. I am still learning.
My Own Advisor: How would you describe your investing approach to someone who didn’t understand investing very well?
My approach is to try to find great companies, period. I do not care so much about valuation if it is a good company. It will grow into its valuation. What looks expensive now may in fact be cheap, if the company grows fast enough. I am happy taking stock risk, but not fundamental risk. I prefer companies with no debt, and good cash flow. I prefer companies with a strong competitive position, and management that owns stock in their own company (not options). I am not afraid to have big positions in companies I like.
My Own Advisor: What’s your take on index investing? A good approach for folks and if so why?
If the question is investing in an actively managed mutual fund or buying an index, I would recommend the index any day. Being a former mutual fund portfolio manager, I know how high fees work against the investor. The investment business is great, if you work in it. My company got high fees year in and year out, whether or not I performed well in my fund, or not. Moving to an index ETF can lower your fees dramatically. Over time, the fee difference (and compounding impact) can be huge for your personal net worth. If you have the experience, temperament and time to choose your own stocks then that is fine. Otherwise, indexing has shown to be a preferred choice over almost all mutual funds and over most individual investors. It takes trading and guess-work out of the equation, which boosts investment returns.
My Own Advisor: What’s your take on dividend investing? A good approach for folks and if so why?
Dividends are great, and it has been proven that companies that grow their dividends tend to be the best investments. For regular investors, there are many positives from dividends. For one, it reduces the likelihood of panic selling. As long as the dividend continues, investors can ride out market volatility, knowing they still get paid. Dividends attract new investors, and result in higher valuations. Dividends ensure that companies stay disciplined, because they need to generate cash to pay shareholders. There are companies out there (like Fortis) that have raised their dividends every year for 40 years or more. There are companies that started paying dividends at $0.01 per share 10 years ago and now pay $0.19 per share. Dividend growth almost always corresponds with stock price growth. It is the best of both worlds: more income and higher stock prices.
My Own Advisor: We hear this debate all the time: invest using RRSP vs. invest using TFSA vs. paying down the mortgage. What advice do you have for Canadians?
We far prefer the TFSA over the RRSP because of the flexibility of the TFSA. In addition, of course, RRSP withdrawals are taxed eventually, and many Canadians fail to realize this. But we also think debt should be paid down as fast as possible. Much depends on your tax rate and mortgage rate. To us, paying down a 4% mortgage is a guaranteed 8% return (if you are in a 50% tax bracket). Not much else can match that investment return with a guarantee. Being mortgage-free and debt-free will also allow you to be calmer when you are investing later, because you can better withstand the tough market times that always occur.
Thanks Peter for some great straight-talk about investing. I look forward to posting Part 2 of my interview soon.