My full interview with Paul Harris, Bill Harris, and Paul Gardner of Avenue Asset Management originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca.
Avenue Investment Management’s office is situated on a quaint street in downtown Toronto. It feels tucked away, but the office is only a fiveminute walk away from the hustle and bustle of the financial district on Bay Street. The “Three Amigos” who run Avenue Investment Management — Paul Harris, Bill Harris, and Paul Gardner — seem to have so much fun working together that I almost imagine them tap-dancing to work every morning. Their office exudes a general sense of happiness, with bright, open spaces, light brick walls, and long wooden floors. Their main meeting room’s wide windows allow the sun to shine through. It was in that meeting room that all Three Amigos came together to answer my questions, and share both their individual and collective experiences in the market.
This is the only multiple-interviewee format in the book. At times, I felt like a referee, guiding the conversation, switching between talkers, and handing out penalties to any of the three who started to dominate the conversation. This interactive format worked, however, as each of the three investors had lots of great information to share. All Three Amigos are masters in their own right, but overlay their niche knowledge with one another to make final investment decisions. This process works a bit like the sounding board that exists between Warren Buffett and Charlie Munger at Berkshire Hathaway, in which both partners reach an investment decision after a constructive process. Paul Harris focuses on financial institutions, technology, and telecom.
Bill Harris’s areas are resources, utilities, and infrastructure. Paul Gardiner covers bonds, real estate, utilities, and telecom. While their mandate is to double portfolios’ values every 10 years, which implies a 7.3% annual compound rate of return, their flagship Avenue Equity Portfolio has exceeded that mandate by tripling over a 10-year period. Paul, Paul, and Bill are as much focused on risk management as they are on their upside returns. As we discussed in the interview, the Three Amigos managed to save their portfolios from a complete crash before the financial crisis in 2008 that decimated banks around the world. They witnessed weakness in the global financial sector and then quickly took action to eliminate that risk from their portfolios.
Paul Harris was actually my first point of contact at Avenue Asset Management. After years of watching BNN’s Market Call, I’ve come to respect Paul’s no-nonsense advice to callers. Also, his fashion sense and swagger rival those of Norman Levine, who you’ll hear from later (but a winner is just too close to call). Paul usually wears a colourful bow tie with a brightly coloured shirt and thick-framed circular glasses to accentuate his face. And his buttery smooth voice makes listening to Paul talk about the markets comforting and reassuring, especially during a period of market turmoil. Unfortunately, family man Paul Harris had to step out halfway through the interview to pick up his daughter, but later supplemented the transcription with additional comments. As well, Paul Gardner was slightly late to the interview, so his answers don’t appear in the first few questions. I was so involved in this conversation that I lost track of time as our conversation went late into the morning.
To clear things up before we get started, Paul Harris and Bill Harris are not related; their identical last names are simply a matter of coincidence — just as it is a coincidence that the other two are named Paul. Perhaps they were fated to be a team.
Paul Harris, Bill Harris, and Paul Gardner’s 24 Investing Lessons:
1) “Part of our success is having all of the stars aligned. If we were all equity heads, it would be hard to succeed because we’d have to look at different investment frames.”
2) “One of our critical advantages is that we understand the capital structure of any company. What happens with any company is that if they get the capital structure wrong, then their debt overwhelms their business and that’s when they can go into bankruptcy.”
3) “Once you’re in the bond world, you can achieve a 10% to 12% rate of return. All you need to determine is whether a company is going to go bankrupt. That’s all. The upside is very easy.”
4) “We just win by not losing. That’s how we survived the financial crisis.”
5) “Picture the TSX as a pie. The trick is to determine the most consistent companies in the TSX. We don’t own things that don’t make money.”
6) “Really good companies don’t change that much over time. [We] identify historically great companies, with great numbers, that we can we buy at a decent price.”
7) “If we need to have some exposure to a sector, then we try to find the best in class and just immunize our risk.”
8) “If you try to compound consistently at 10% or 12%, you will end up hitting air pockets. The problem is that you take up more risk and thus increased probability that you get no return.”
9) “We have a 30-year time horizon. You can double your money, then double it again, and double that again. But you need to give yourself the highest probability that it actually happens.”
10) “We know we’re going to make mistakes, so let’s just leave it at that. . . . If we make a mistake, we can sell.”
11) “If you buy a bond at a discount, there’s an end to the story. It’s called par. Conversely, stocks are indefinite. They can stay there forever. A bond has to have an end. You should know your rate of return, and then at the end of the game you end up at maturity.”
12) “We generally tend to overperform on the downside and underperform on the upside. During market collapses, we go out and find these special situation bonds that can go up and can crush the volatility.”
13) “We don’t care about the index. What we care about is getting you this rate of return between 8% and 10% with the least amount of risk.”
14) “[Generally], balance sheets need to be conservatively financed. Companies should be in profitable markets. Managements need to actually be good at what they do.”
15) “You need 8% to 12% free cash flow yield, and you can get that if you’re super patient.”
16) “You want to invest in companies that can either maintain the rate of return or enhance their rate of return when they reinvest their earnings. However, be cognizant of companies that enhance their rates of return through acquisition strategies or financial engineering.”
17) “Bad people and bad managers keep doing bad things. Good people and good managers generally keep doing good things. It’s a very simple concept.”
18) “You should draw a line under the price, and say, ‘We’ll give it this much time at this price.’ You have to be very vigilant. If the fundamentals start going wrong, the nice thing about public markets is that you have the advantage to sell a bad investment.”
19) “People get all excited about their investments and get to a point where they don’t know why they are investing anymore. So your real work is to come up with a very tight strategy, then stick to it.”
20) “The one thing you must accept is that the world doesn’t end tomorrow. If you look at ’08 and ’09 you would have thought that the world ended, but moments later, it was the bottom of the market.”
21) “The stock market and the economy are not correlated. They’re not. Your portfolio might act completely differently to what’s going on in the economy.”
22) “If you owned a thriving company, you wouldn’t buy it and then sell it the next day based on short-term market prices. When you own shares in a company, you’re technically an owner of that company.”
23) “We have a 20% insurance policy [i.e., cash] inside the portfolio at any one time. So it’s always a drag on performance, but then we have the ability to react at whatever that black swan event is, because we’re going to get impacted by events in different markets at different times.”
24) “It’s nice to know that when you invest in those stocks [companies with an ownership stake] you’re 100% aligned with the owners and management.”
Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.