A Comment -- General Comments From an Expert (A Commentary)

Inflation. He hasn't changed his tune on that. Investors have benefited from loose monetary policy that's created asset inflation, in both stock and real estate markets. Now seeing cost push inflation caused by supply chain disruptions. A lot of that will flow through. Fed and BOC have dropped the word "transitory", but he hasn't changed his view. We'll end up not so far from the 2% target that central banks are looking for. The bond market agrees with him. If inflation were the big worry of the day, bond market would show a much steeper yield curve, but it's not.

How long will it take this environment to play out? It's already gone on longer than anyone thought, so it's difficult to pinpoint. Are we going to get further into the Greek alphabet with variants? Things aren't back to normal. We have to be patient. Position for the future, and be patient for things to work out.

Sector positioning. Barbell approach has worked for the last couple of years. Everyone was surprised in Spring 2020 that markets reacted so favourably to the at-home-type stocks. He set up a mix of growth stocks with pricing power and multiples of GDP along with value stocks like industrials, banks, and materials that do well in an inflationary environment.

Time to take profits in an RRSP? He believes that one should always be fully invested, but this doesn't mean all in equities. Strategically, you should have your asset mixed defined and not try to tactically outsmart the market. Take a portfolio with 30% US equities, 30% Canadian equities, and 40% fixed income. Don't try to guess where the market's going and alter that asset mix. An investor with an RRSP is not yet of RRIF age (72), and they still have a good long runway ahead to invest, so just continue with what your asset mix is.

Portfolio construction. Use the tax benefits of the investing "bucket" to decide what portion should be overweighted. Consider a portfolio with 30% US equities, 30% Canadian equities, and 40% fixed income. TFSA should hold the most aggressive investments. Put a lot of your 60% in your TFSA. As well, you can be more aggressive in your cash account, where you have capital gains and dividend tax credit relief. In your RRSP, be a little more conservative, with more fixed income than the other accounts.

Under water. Stay or go? If you're in something you're uncomfortable with and you're under water, you want to think about tomorrow and the future. If you have a loss, do the best with it that you can. If it's where you are, then stay there. If it's not, then move on.

Stock's done well. Buy more or sell? Don't buy a company and put it in a drawer. You look at it each day and do an analysis in real time. Things change, especially valuation. Something that rises in price rapidly often falls in value. He has lots of companies he still likes, which have done well, but he sells because of price exhaustion. Stock's risen to a point that's not likely sustainable. It's trading above its normal range of valuations. As a stock continues to do well, you should have rules on the table that tell you if it reaches a certain percentage of your portfolio, you're going to trim it back. This is a portfolio risk aversion technique that pays dividends in rough times. For example, he's owned AAPL for 15 years, trimming it 7 times. If you don't do that, you can get a risk profile that's uncomfortable. It's a balance between doing well, doing well for the long term, and protecting your capital. That's the important concept of balancing risk and reward.

Pharma stocks. A lot of the pharma stocks have really suffered due to legislation that takes their drugs off patent. A leaky boat sector. Spend money on R&D, but then they lose exclusivity on patents. Big pharma buys each other to try to reduce costs, but you can only do this so much and they're there already. So PFE gets a boost on its vaccine, but you have to be careful what you pay, as the boost may not be long lasting. Also LLY, trading at a premium because of the Alzheimer's drug it has in the pipeline. Be careful, as these are one-offs. He's shy of the whole sector.

Expectations for 2022. Markets up over 20% this year. Third year of straight double digit gains. Hopefully 2022 will return to normal. Supply chains will resolve probably in Q3 or Q4, inventories will be replenished, and growth will deaccelerate from very high rates off the bottom.

Market challenges. The Fed has its hands full. CPI hitting 4.9% in November, 30-year highs. Unemployment levels at 4.2%. Going forward, have to look at pricing power. Brand strength is vital to maintaining margins and market share. Key to strong businesses is being able to raise prices without losing market share. For example, some global consumer products companies, such as UL, may lose pricing power because they're up against private label penetration in key categories such as food or home care. This is a red flag for next year if you think prices are going higher, which could motivate people to substitute private labels for brands names.

Sector focus. He doesn't advise from a sector point of view. He runs a concentrated portfolio, with 35-45 names. Bottom up approach, developing a thesis, with a target price.

Key to 2022. Brand names, with higher margin businesses and sustainable business models are key. Short term, 2022, we'll see higher prices from "transitory" inflation. In 2020, things were fine, and then the world stopped working. Easy to stop, but harder to bring the world back up to speed. So we're seeing shortages and backlogs. It'll take 6-12 month to resolve, you have to be patient.

Canadian bank preference. TD and BNS.