Motley Fool Money - How to Greet the Next Bear Market

Episode Date: June 12, 2024

If everyone else is buying, should you be too? (00:21) Jim Gillies and Mary Long discuss macro news from the US and Canada. Plus, Jim reflects on down markets of days gone by. Then, at (16:10) Alex Friedman talks with organizational psychologist Richard Davis, author of the new book “Good Judgment,” about the importance of a CEO’s personality. Public.com disclosure: A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at public.com/disclosures/high-yield-account Companies discussed: PTON, UA Host: Mary Long Guests: Jim Gillies, Alex Friedman, Richard Davis Producer: Ricky Mulvey Engineers: Dan Boyd, Dez Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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inflation cools and stocks are hot. You're listening to Motley Full Money. Inflation cools and stocks are hot. You're listening to Motley Full Money. I'm Mary Long, joined today by Jim Gillies. Jim, thank you for being here. Thank you for the invite, Mary. Always. We've got a double whammy of economic news today in the States. And I understand that there is perhaps an irony in talking to a Canadian about American macro moves and monetary policy. But we're going to give it our best shot and see where we wind up. I'll throw you something and let us start on your home turf.

The Bank of Canada reduced interest rates by a quarter of a percent last week. That made it the first central bank in the G7 to begin an easing cycle. How are the vibes where you are? What's consumer sentiment look like and feel like up north? Pretty bad, actually. People are definitely feeling the pinch of what inflation hath wrought, particularly at the gas pump, as well as in your grocery aisles and your favorite restaurants. In Canada, the housing market, I realize that the housing market in the U.S. has been not great for the

past little while. People are feeling priced out. People are feeling stressed about mortgage rates today. It is significantly worse in Canada and has been actually up here. There are various reasons for that, not the least of which is that a lot of people in the past five years pickle themselves in debt when buying a house because FOMO is a thing. GDP per capita in Canada has meaningfully diverged away from GDP per capita in the U.S. and not in a good way. And there's some political and tax stuff as well that I think probably would just bore most Americans, so I won't go down that road. The way I've heard it explained to me recently has been a lot of Americans think their economy is doing poorly when in actuality it's not.

but in a lot of Canadians think their economy is doing not particularly great, and they're right. So the quarter point cut last week, widely expected, unsurprising. I'm not sure it's going to do. What's been interesting is the, of course, these things take time to work their way into the system and then through the system. But the one thing that I can tell you, at least anecdotally, I've seen it with my own eyes and my significant other and I. We pay attention to this kind of stuff. The number of home listings, like, there was a lot of talk about, well, people are just waiting for, you know, they're waiting for that first rate cut and they're going to pile into, you know, woohoo, it's time to send housing on its next leg up.

It was really interesting when the Bank of Canada cut last week, I think on Wednesday, what actually happened was the number of listings did explode. It's almost like sellers were waiting. It's like, okay, here we go. So it might actually have an interesting effect that people are just really gearing up to put. The supply of houses suddenly spiked, which, you know, all else equal should arguably knock the aggregate house prices down. Not something that's happening, I think, on your side of the world's longest undefended border, at least yet. Anyway, so that's long and rambling macro. It's about as good as I can usually do on macro.

I'm generally pretty bad, as is everyone else, about understanding what macro will do in the short term. But, you know, inflation down is good, or at least slowing, I should say, is a good thing in general. But like I said earlier, I think the American economy is doing actually really well, whereas other countries are not. The headline takeaway from this morning's Consumer Price Index report is that inflation here in the U.S. is cooling ever so slightly. So core prices, they're up 3.3% in May compared to a year earlier. That's a 10th of a percentage point lower than April CPI. So that's the right direction, slow movement, but the right direction. It is also off the Fed's 2% target.

So what's your read on this? Should we be hanging a mission accomplished banner down here or not? I'm going to go with the not, you know, because it is above the 2% target. It's above the, I think you guys have a range. They have a target range. They also talk about 1 to 3%, which is where they want to be. Still above that, the American consumer is still feeling pretty good and still spending. I know that house prices are up, transportation, cars are down, or use cars are down. I don't think you should be hanging a banner just yet. And again, like I said, there are some real concerns on this side of the border, which I think is reasonably, you know, like I said, it was an expected rate cut. It's probably not the only one that you're going to see this year. I don't really know what a quarter percentage point cut is going to do in the short term for most people, aside from, you know, if you've levered up your life and your HELOC is maxed out, you know, you'll get a little bit of relief. But housing prices.

that departed from reality about five years ago in this country. So, you know, a quarter point's not going to do much to improve the affordability there. I've been a proponent of, look, you know, you don't cut rates when things are going great. Okay? Like the rate cuts are a tool to stimulate an economy. You guys don't need that. Right? So, so I don't think you're going to see a rate cut today. I'd be shocked. saw rate cut today. I know there's talk now. The first rate cut on the U.S. side from the Fed will probably come in September. I'm too sure you need that, frankly. The so-called dot plot that I've seen from a few places. How many, you know, which is basically how many, how many

are you going to get this year? Has gone from three earlier this year to, well, maybe to now maybe one or zero. I'm kind of in the camp that you guys probably don't need any, at least for a while. But, you know, get a few more reports. And the reason in Canada, they were able to start cutting was, again, things aren't great economically up here right now. And it made more sense to cut here. It might make more sense to make a few other moves over the next couple of years, not just rate moves.

But right now, I think you guys don't need it. So, no, I wouldn't hang a mission accomplished banner just yet. So we'll see what happens when the Fed meets later this afternoon. But right now with this inflation data out, stocks are loving that news. The S&P and the NASDAQ are at fresh all-time highs. Apple's riding the wave after its conference earlier this week. You like to tell stories, Jim. I do. And we were talking before the recording. You've been at the Fool for 19 years. You've been through some frothy markets before. You got any tales, stories you want to tell from manic market moments of days gone by?

I'm not sure we're in a manic market, but we're in a comfortable market right now. Usually manic markets, I'm just like, where's the nearest sideline I can go sit on? But, you know, as someone who has to make a new stock pick wreck every two weeks, I don't have that luxury. Don't always get to sit on the sidelines. No, don't. But I generally, I really love down markets, actually. The most recent one I would point you to, and I'm going to make up the numbers, but they're roughly right, but I don't have the spreadsheet open in front of me. I do have this on this spreadsheet. The most recent manic market or down market I'm going to give you is I'm going to suggest,

I know 2022 was kind of a crap year for a lot of folks, but I'm going to suggest that the terror that accompanied the early days of COVID. So March 2020 on where the market fell 35% in a month, I know personally at least one person who went completely to cash during that time. Unfortunately, they did not go back into equities at the bottom, but they went back into equities when they were about 20% higher than when they went to cash. So that was dumb. Whatever, we all have our comfort levels. But when the market was panicking in 2020, from about, I'm going to go March through to the end of, I'll go to the end of 2020. Those were prime days for stock picking, even though it didn't feel like it. And that's kind of the big broad lesson I want to throw out there.

When the market sucks, when you're scared, you know, you feel like you're going to vomit when you're punching the buy button, which is the story I got from Bill Mann who got it from somewhere else. Paradoxically, those are the best times to buy, right? Like I look at some of the recommendations we made in Hidden Gems Canada at that time. We picked up MedPace, I think it's $69 or something. It's $400 and changed today. We picked up Air Cap at $25. It's $90 plus or something.

We picked up tiny little ridiculous contour brands, which is the parent company of the Wrangler and Lee brand jeans, right? I mean, like, who doesn't have wealth dreams constructed on the back of Lee and Wrangler jeans? We picked them up at $17. They're 71 or 72 today. Oh, and by the way, they brought their dividend back. You're getting two bucks a year in dividends now. So you're getting your cost basis back now every, what is that, eight or nine years?

Oh, and by the way, the stock's up. But you can pick those types of recommendation, or you make those recommendations. It's the proverbial shooting fish in a barrel when we've drained the barrel and the fish have stopped blopping. In markets like today or even more manic markets, it's a lot more difficult, frankly. And so you have to kind of say, okay, well, what industries are out of favor? What segments are out of favor? Is that where I should be looking for? And look, and I'm a big proponent of indexing as well.

Like, I'm a big fan of, you know, you should have some portion of your investment dollar into index funds. So funds tracking the S&P 500, funds tracking. Funds tracking the TSX-60 for the Canadians like me. Funds tracking a broad European and Asian index. Because you want to have, because look, I don't own NVIDIA personally, but I've got, you know, 40% of my family's wealth is in index funds. So I've got a fairly significant invidious stake. Just by want of its position and its performance in the S&P 500,

I have a fairly substantial position there because I have a fairly substantial position in the index. And so, like, some areas of the world today where I still think the energy story, like the energy resurgence, like oil and gas, meaning like fossil fuel energy, not green energy. I have two degrees in engineering, one of which is environmental engineering degree, but here I am talking about oil and gas. But no, like, I don't think the oil and gas story is fully appreciated. A bombed out sector from the 2021, the market mania, where I was very vocal. It's like, you should probably stay away from these because, you know, we don't, you know, everyone loves them, which is when you should stay away from them. But with SPACs, special purpose acquisition corps, most SPACs that came out in 2020 and 2021 that everyone was so hot to trot over, they've been bombed out. Like more than half of them are down by 50 plus percent or more. I think it's 10 or 11 percent of them are down 90 plus percent or more. And, you know, okay, fine. So,

they've been bombed out and there are some ownership issues when you're dealing with SPACs. You know, and there's always the, you know, the sponsors you brought it public, they generally can, you know, extract a little sweets for themselves too that you and I can't get. But all these things are down 90 plus percent. You know, it's like, okay, well, this is now maybe a little bit interesting because, you know, maybe there's a real business or two that was bought by some of these SPACs and if, you know, and they've been bombed out and no one cares anymore, that's when I want to go in and look. Or some of the growth darlings that just got slammed because, you know, growth wasn't real and the mania wasn't real.

I'm looking at you, Peloton, $165 at its all-time high. It's, what, under $4 today? And it's like, okay, well, yeah, it was a terrible investment, terrible company at that time. I have very fond memories of the then CFO on the conference call. I think it was November 2021 in a response to, hey, you guys are burning cash faster than, you know, faster than your, well, you're just burning cash at an alarming rate. Do you need to raise capital?

Oh, no, we don't need to raise capital. And like less than two weeks later, they raised $1.25 billion. All of those executives are gone. The stock, like I said, has been bombed out. They burned just an unholy amount of cash. but they've also refinanced their debt recently. And they just turned in a quarter where they actually were cash positive. And they've laid off 20, 25% of their workforce on top of the 15%.

And all of us, and oh, and by the way, the brand's probably got some value, right? And the value of a subscription service probably has some value. And I'm like, okay, is this something might be, again, not a recommendation. I'm still mulling this over. But is this something that might have some value at this point when no one wants it? And that's my broad market mania takeaway. When people are excited about everything and just throwing money at stocks, I'm probably just going to dollar cost average into indexes and whatever.

I'll feast on the margins. When everyone hates stocks, that's what I'm saying, okay, let's go. go have some fun. So right now, we're kind of in the middle, probably closer to, you know, the world loves stocks. So it's like, okay, well, you know, I'll take my time. But, you know, the next bear market, you know, should be greeted, in my opinion, with glee, not fear. Jim, it's always a pleasure talking to you. Thanks for helping to paint a picture of the macro, the macro situation in Canada and in the U.S. for us. Your services are much appreciated. Thank you, Barry.

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Published by Capital Client Group, Inc. How do you help a board pick a great CEO? Up next, Alex Friedman talks with Organizant. organizational psychologist Richard Davis, author of the new book, Good Judgment, on what he's learned about leadership and CEO succession from judging people for a living. In your book, you talk about judging people for a living. What does this mean? Well, that's a totally strange thing for me to say when people ask me what I do, that I judge people for a living. But in a weird way, it's very true. I'm an organizational psychologist, which is

basically psychology of the workplace. And a big part of what I do is assess people for particular roles. So when a company is hiring a senior executive, someone goes out and finds candidates, a recruiter or whatnot. And then once the company has narrowed it down to one or a few candidates, they send them over to me, and I do an assessment, and I provide my insights about the person and actually recommendation around hire or no hire. So ultimately, what the company is doing is sort of outsourcing their judgment about people to me. So what do you base these judgments on? The core thing that I'm assessing is personality and capability.

And really, there are a couple of data sources that I use in order to determine whether someone has what it takes in order to do a particular job. I will throw some of these personality tests or even like an intelligence type test to measure their complexity of thinking or something like that. But people are more than scores on a test. And the real way that I get to know them and understand what makes them tick is a deep dive. It's a three-hour deep dive interview. It's kind of a chronological walk through their journey, a little bit like we're sitting around

and having a beer and talking about how they got to be here today. And through all of that, I'm sort of extracting some key insights about decisions that they made in their lives, the people they surround themselves and so on, that are very revealing about their personality. And then ultimately what I do is I synthesize the insights from that deep dive interview together with the test scores, and that's how I determine my recommendations. You've worked with a lot of companies over the years. What do you think they get most wrong about decisions with employees and their people? Well, we all have these biases when sizing people up. Sometimes we will hire people like us, for example. There's a cognitive bias that is related

to liking people that are like us. And there are all sorts of other biases that we have in sizing people up and picking people, ultimately. From my perspective, there is no good model of leadership. There is no one good personality, for example. That's kind of silly even to say. It's highly contextual. What matters in any one organization at any moment in time with any particular stress,

strategy will be very different than any other organization and any role even within that organization. So context matters a lot. It's really, really important to sort of start with the business, start with the strategy, start with what's going on in the operating environment and the culture within the organization. From that, determine, okay, what sort of personality is required in order to lead in that environment? And then from that, that's sort of the blueprint for success. assess, and then sort of you can assess personality against that context. In the book, you talk about working with Under Armour and Kevin Plank, what was that experience like? Did you have any big takeaways from your time with them?

Kevin is an incredibly charismatic individual. He is the heart and soul of Under Armour, and an unbelievable drive and ambition fuels him. The thing about about, Kevin is he has both good insight into other people, and he shows his personality on full display. I was once in a boardroom. I'll never forget this. It's the only time this has ever happened, and probably the only time that it will, was in a boardroom at the Under Armour offices, and there were a bunch of people around the table on the executive leadership team, and it was kind of a boring meeting, to be honest with you. And I could see Kevin. I was just there as a fly on the wall and observing and sometimes weighing in, but I could see Kevin at the head of the

table looking around, seeing the low energy, and he obviously had to do something about it. And all of a sudden, he leaps up out of his chair, hops onto this giant boardroom table, and starts walking down the boardroom table, sort of showing off the new underarm. or shoes that had just been launched, kind of like a modeling, modeling it. And to me, that wasn't just about charisma. That wasn't just about being gregarious. It was revealing his personality. He wasn't trying to mask anything or be a certain mold of leader.

He was being himself, showing who he is in all its glory. And in that, he created the kind of buy-in that's necessary to lead a hard-driving organization like that. So showing your personality, revealing your personality also energizes other people to do the exact same thing. Now that Plank is back as CEO of Under Armour, are there any things in particular you think he needs to do to turn around the business? I am very bullish about him being in the seat. founder CEO is, like I said, the heart and soul of the organization. I believe that Under Armour will get back to its roots of a passionate organization, driven by a passionate founder.

And you can build on the kinds of capabilities that you need in order to continue to scale. But to me, this is about getting back to Under Armour's roots, and there is no one better than Kevin Plank to do that. And it was really cool reading in your book that you worked with the late David Stern, the former commissioner of the NBA, along with Adam Silver, around their succession plan. What did you learn from that experience? Well, David was an incredibly charismatic and just an interesting person and, you know, a legend. And what I learned from him is he would drive hard at people and have very high expectations of people.

His mantra was the relentless pursuit of perfection. He was looking for perfection and everything. And he would kind of put you on your spot too. And the first time I met him, I was a little bit taken aback by the celebrity of him, growing up watching him on TV and so forth. He kind of put me on the spot a little bit. And in the moment, I realized that he was kind of testing me and looking to see if I would, if I would go back at him, and I did.

And that's kind of what set things off, set the relationship off. for success. In the transition to Adam, Adam is equally driven, big, big thinking, an extraordinary leader in his own right, but very different style, not as in your face, not as big a personality. Adam has a, has, has perceptivity. He has this ability to when you are talking with them, really kind of get into your, into your soul and make you feel as you're the only person that he's listening to, and he really cares, and he is really insightful and interested in you. And I think despite very different leadership styles, they both led in an extraordinary way this important organization in the NBA.

As always, people on the program may have interest in the stocks they talk about. And The Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.