Dr. Michael Graham, CFA

In 1964, the first year that all three CFA examinations were offered, Michael Graham joined the Toronto Society of Financial Analysts (later renamed CFA Society Toronto), applying his academic training (B.Comm., University of Cape Town, PhD, business finance, University of London) and his business experience in London and South Africa to the newly created role of research analyst at Canada’s then largest investment dealer, Wood Gundy. Over the next 53 years, Graham’s career has been a reflection of the colourful history of the Canadian investment industry. After working for Wood Gundy, A.E. Ames and Dominion Securities, Merrill Lynch Canada, and Midland Walwyn, Graham set up his own investment counselling and management firm in 1998, which has since grown into Heathbridge Capital Management.

Over his long career, he became one of Bay Street’s best-known investment strategists and currently remains an active commentator and counsellor through Michael Graham Investment Services Inc., which he founded in 2012. With a length and breadth of experience few can match, spanning six recessions and 10 bear markets, and with the mild manners of a gentleman (and gentle man) of Bay Street’s “old school,” Graham joined us for a conversation about the past and future of investment markets and the investment profession in Canada.

How does the TSFA of 1964 compare with CFA Society Toronto today?

In the 1960s there was a sense that a new society and a new profession were emerging; an immensely exciting period of change. The TSFA of 1964 and its members comprised a much more constrained and simpler group than now. Some still used slide rules, and computers were only just coming in; there was no Internet, no Google, no Facebook. For information, we depended on Financial Post cards—yellow for annual, white for interim. Annual reports had none of today’s detail or disclosure (bank earnings statements were five-liners; the CPR annual report, a pocketbook affair). We had nothing like the tools today’s analysts have to work with, the information at their fingertips. Yet we were excited with our roles—in an era when there was much prestige in being a research analyst and a TSFA member. I still pinch myself [over] the highest-level meetings I would be taken to, and the historic captains of industry I was privileged to meet.

Perhaps it’s this old-fashioned beginning that has left me preferring to leaf through actual (as opposed to digital or electronic) company reports, [and] also to focus on cash flows and balance sheets (and their footnotes). Having been weaned on Graham and Dodd, I still like eye-to-eye company visits and kicking the tires.

How do the investment industry and capital markets compare with today?

They, too, were simpler and much less multidimensional than now. It was an era when Bay Street was very much a branch plant of Wall Street. The old-world Canadian investment industry of the 1960s was built on four antiquated pillars—banks, trust companies, life insurers, and investment dealers. Furthermore, it had nothing like the size of capital that the banks and their bank-owned investment dealer firms can handle today. Colour-jacketed traders worked at their posts in an open-outcry Toronto Stock Exchange where computer-assisted trading [CATS] was still a decade away. There were no off-floor (“upstairs”) block or institutional trading or bought deals. Commissions on listed stocks were high, there were multi-point spreads in the over-the-counter markets, and mutual funds had 7 per cent loading charges.

Yet there was an esprit de corps that you don’t find today; there was a lot of camaraderie and a passion in being Canadian. I think in particular of the annual Canada Savings Bond drives. Never mind the interest rate; these bonds were good for Canada, and each fall an entire industry went flat out to sell them.

I also think back to how the industry rallied around the sweeping new Bank Act of 1967. I was lucky enough to have research responsibilities for the banks through a period of radical change— for example, the lifting of the ceiling on interest rates banks could charge, and shareholder disclosure the likes of which we hadn’t seen. An entire country was turned on. Investors’ interest couldn’t have been more enthusiastic.

I think, too, of the ground-breaking Canadian Pacific Investments issue in 1967—our country’s centennial. Such a $100-million equity issue was unheard of, in this case with a convertible preferred feature and a warrant attached. Much supportive research went into that issue. The Canadian capital market was stood on its head. Today, distinctive issues of this size or larger are a dime a dozen in a global market in which I worry research has a lesser role.

I miss the Canadian pride of the 1960s, which I hope might be resurrected in the 150-year celebrations and an era of fresh realization to come.

What changes have been for the better in your view?

The branch mentality is long gone. In its place are liquid, efficient, and price-competitive Canadian capital markets that can readily handle multi-hundred-million-dollar issues. There’s also a Canadian investment industry that, although bank-dominated, can more than hold its own at every level. And when it comes to investment management and research, our society now has the highest international reputation and is a leader within the CFA Institute. Proportionately, I believe Canada accounts for more CFA charters annually than most other member societies. At the sweep of a mouse and/or the push of a button, there’s nothing today’s well-trained and equipped Canadian research analyst cannot pull up, model, or evaluate. What a far cry from those pioneering days of the 1960s, all of which must augur well for Canada’s future investment markets and the Canadian investing public.

What changes have been for the worse?

Is an industry that has become information-laden and professionalized in the extreme becoming overly depersonalized? You simply can’t get as much from pulling something up on a screen as from reading and studying it in the old-fashioned way. I worry as well about the emphasis on ETFs and the products of the house—at the expense of studying the underlying securities in them. I wince when I see a portfolio built entirely of these products and containing no equities through which to build real—as opposed to synthetic—investment wealth. Research analysts can be caught up in this fad, too. The overriding need for superior performance and rankings, in other words, favours the short term at the expense of the long term, where targets are achieved and true investment wealth is made. I will always remember the great Bob Farrell (Merrill Lynch’s legendary analyst) telling me of the handful of key charts he liked filling in by himself on his family kitchen table. If Wall Street’s top market technician kept his finger on the pulse in this homespun way, I would argue that we should, too. The philosophy of shareholder ownership and partnership (a favourite Warren Buffett phrase) should predominate.

“The TSFA of 1964 and its members comprised a much more constrained and simpler group than now. Some still used slide rules, and computers were only just coming in; there was no Internet, no Google, no Facebook.”

Were there people in the investment industry and public companies over the past half-century who made a notable impression on you?

There were so many I was privileged to meet, among them Sam and Edgar Bronfman (Seagram’s), Roy Thomson (Thomson Newspapers), Ian Sinclair (Canadian Pacific), Jake Moore (Brascan), and Walter Riston (Citibank). Jack Cockwell (Brookfield) is another for whom I have gained the highest respect. In the investment industry, I twice had the privilege of introducing the humble and ever courteous Sir John Templeton at investment conferences, once visiting him at his home in Lyford Cay, Bahamas. Still central in my investment life, after 22 pilgrimages to Omaha in the past 24 years, are the irreplaceable Warren Buffett and Charlie Munger, now aged 86 and 93, respectively, and annually drawing up to 40,000 devotees to partake of their wisdom—and trust. Also still going strong is perhaps my true investment hero, Bill Wilder, 95 next birthday, who was instrumental in old-world Wood Gundy setting up a research department and hiring me in 1962. Upstanding and unwaveringly ethical, he gave me constant encouragement. I was always allowed to express my opinions freely, including sell opinions in an era of ultra-competitive underwritings. I will never forget when, after a disastrously ill-timed sell recommendation on Canadian Breweries, Bill summoned the entire Wood Gundy sales force to tell them it was his fault, not mine. Leadership like this is truly rare.

“If I have one regret, it is that I, on arrival in Canada, took cover in my PhD and did not take the exams for the just-emerging CFA designation. However, I was grandfathered into membership, and I’m proud of the fact that I was part of the Canadian research movement right from the beginning, and that I was an original member of the international society, CFA Institute’s first global foray.”

How would you describe your investment philosophy?

A fundamentally based value approach would probably describe it best. But then Charlie Munger contends that all investing is value investing, and Warren Buffett states that “price is what you pay, value is what you get.”

The long-term trends are what count most for me—in sales and total revenue and cash flow more than bottom line earnings. From these, the trends in operating profit margins and the returns on shareholders equity tell a story over time. In addition, they are valuable management criteria. The trend in dividend payouts is also important, and I like to emphasize the rising yields on cost in strong dividend-payers. Dividend reinvestment plans [DRIPs] provide an added advantage. (My poster child is Enbridge, where even Einstein would be envious.) I’ve mentioned how I have always liked judging management at first hand. If you go about research in these ways and are prepared to give it time, you will see how the long-term strategic strength of superior companies and their managements wins through.

What will be the greatest challenges faced by the investment industry in the future?

The wise professor under whom I gained my PhD used to extol the godliness of saving and investing. I would say this “hallowed” virtue has seldom mattered more than now. Our world, including the developing nations, has a strong need for capital as never before—for near-limitless infrastructure, industrial development, services of every description, and new and exponentially growing technology.

I don’t doubt the ability of a grown-up Canadian investment industry to compete in this arena. Our skills and research capabilities give us the ability to punch above our weight and to raise capital in the sizes needed in the big leagues. Instead, the major challenge could be right here at home—governments not swamping an essential process with too much oversight and regulation, [and] also encouraging corporate and private investment with enlightened tax policies. Our industry for its part must guard against bank-owned dominance at the expense of the medium-sized individual firms and the personalized creativity they bring. Our industry needs to educate a grassroots population and the younger generation on the merits of saving and investing—true equity investing—and the successful building of retirement wealth that it can bring. This means promoting enlightened understanding of an essential, long-term process. I’m reminded of John Templeton’s emphasis on “time in,” rather than “timing,” the market. My wish would be that Canada’s investment industry, with its all-important research function, could truly “switch on” the Canadian investing public. That’s the real challenge.

What are the greatest opportunities?

I think I can best answer that question by describing three key slides I use in my investment presentations. The first is of a baby chained to a huge ball labelled “DEBT”—the legacy we have saddled our children and grandchildren with, the biggest bill in history. It’s terrifying. The second picture is of two groups—on the one side, the robber barons of old in their morning dress and top hats; on the other, today’s sweatered, tie-less and sandalled Silicon sultans (Mark Zuckerberg, Bill Gates, Jack Ma, et al.) leading a charge that is sweeping the world. The third is of onrushing digital waves (ones and zeroes) combining with cheap and abundant energy and posing the question of what this combination could mean. I’m convinced the resulting fresh economic growth will cut the chain to that ball. The lifeblood in this life-saving process is investment, and the knowledge and expertise to go with it.

What advice would you give to new entrants to the investment profession today?

First, ask yourself what other industry has a grandstand, front-row seat to view an economy and society like ours. If I have one regret, it is that I, on arrival in Canada, took cover in my PhD and did not take the exams for the just-emerging CFA designation. However, I was grandfathered into membership, and I’m proud of the fact that I was part of the Canadian research movement right from the beginning, and that I was an original member of the international society, CFA Institute’s first global foray. Today I would recommend a CFA charter as mandatory. It represents an invaluable body of knowledge and skills, and is a badge to be worn with great pride in an evermore indispensable industry.