Behind the Numbers Podcast

And so when we started thinking about automation and we started thinking about businesses and how they deliver their work, it became very clear that there's a gap in the marketplace, that people use this term, "automation," to mean a lot of things. In tech-- well, you guys will know this, but perhaps for your listeners-- technologists have a great ability to overcomplicate and oversimplify everything.

Either everything is so unbelievably complex that you have no idea what it is or how it'll work, or so unbelievably oversimplified that it doesn't tell you the full story of what it will do. And so you end up having these buckets of terms that emerge like AI and machine learning and big data, but when you start really digging beneath the surface to try and understand what they do, it's a lot of just hubbubs.

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Hi, everyone, and welcome to episode seven of Behind the Numbers podcast. As always I'm here with my co-host Jeff, my associate portfolio manager.

How's it going, Rob?

I'm pretty good, thank you. How are you?

Good.

And we have a really interesting guest who I'm going to intro in a second. But before I do, I just wanted to reiterate why we do these podcasts. It's always based on making our clients and everybody around us into better investors. That's essentially what we're trying to do, educate and teach. And we do this through various forms. The podcast is the latest form where we have a very interesting guest. And today of course, we have somebody really special on the program.

And we also do blogs. We're just about to release our latest blog, which is going to talk about the metaverse. And today's kind of related to that. And we also do educational videos. If you haven't checked out those as well, they are available on the Behind the Numbers education part of our website. And we also do webcasts only for clients. So if you are a client and you're listening to this, please check out the webcast we sent you a week or two ago, which essentially explains how we're managing the portfolios and what our takes are besides what you see on your quarterly packages.

So the inspiration for these podcasts is always from clients. So we field a lot of questions in client meetings. We do advise some very smart people mostly in the business community, many in the tech community. So a lot of the questions that we've been getting lately last quarter were mostly about inflation. Now this quarter, as we see emerging growth starting to come back, we're getting questions on automation, AI.

This is the week of-- it's actually November 18. Rivian just did their IPO a few days ago. EV stocks are going crazy. So we're getting a lot of questions about those as well. So it's all part of what we're going to tackle today.

Well, without further ado, I just want to intro our guest, Mohannad El-Barachi. Mo is a co-founder of SweetIQ. Mo is also a serial tech entrepreneur, active venture capital investor, and most recently he co-founded a company called Wrk, which we're going to talk about today. Mo, welcome to the Behind the Numbers podcast.

Nice to see you, Rob. What's up, Jeff?

Good to see you, too, man. Jeff doesn't talk much, Mo. So please, you have to understand how he operates.

I see him on the screen so I have to acknowledge his presence.

Perfect. So Mo, we have a ton of things to tackle today. And I think we'll start with Wrk. So obviously we're going to talk about automation. Wrk is an automation company. But in your words, what is Wrk and why did you recently found the company with somebody else and why?

Yeah, so I think it's important to just get a little bit of background and history to understand why this is important now. Whenever you're building technology companies, timing is almost everything. Facebook five years earlier or five years later wouldn't be Facebook. And the same could be true about basically every company in the world, but very specifically with tech because there are various trends that emerge at specific inflection points in the industry. And it just so happens that automation right now is the hot one.

So historically speaking-- so I've been in the tech industry for almost 20 years. And my background is computer science. I came at this industry with the lens of a programmer who knows how to build code and build software. In 2009, 2010, when I co-founded my last company, SweetIQ, we were in hypergrowth mode after a couple of years. And we had all of these internal manual processes that needed to be scaled. The company was doing really well. We were building listings for clients. So the data that was powering the little pin that appears in Google Maps was being powered by my software for businesses all over the world.

And so the challenge is synchronizing this data across systems can be done using automation, using what's called APIs. But in some cases on platforms like Bing or even Yelp, there was no such API. So we had to do manual preparation of information in Google Sheets and loading data into forms and so on, just work that was just very manual and repetitive.

We tried to build some automation for it but the challenge with a lot of these businesses and these platforms is they change over time. And so maintaining this internal code becomes a challenge. And we needed to find a more systematic way of being able to have automation. There really was no solution in the marketplace. And similarly after we got acquired by Gannett in 2017, we saw that the problem that we had with 200 employees was multiplied multitudes at 14,000 employees across 120 offices, that people use this term "automation" to mean a lot of things.

In tech-- well, you guys will know this, but perhaps for your listeners-- technologists have a great ability to overcomplicate and oversimplify everything. Either everything is so unbelievably complex that you have no idea what it is or how it'll work, or so unbelievably oversimplified that it doesn't tell you the full story of what it will do. And so you end up having these buckets of terms that emerge like AI and machine learning and big data. But when you start really digging beneath the surface to try and understand what they do, it's a lot of just hubbubs.

So the reason that we started Wrk is because we really couldn't find a solution to help us deliver our work at scale. And we'll dig into what this means a little bit later. But the reality is automation right now was one of the hottest trends in the tech industry. Timing is key. Organizations, especially post-COVID, are trying to find ways to maintain business continuity despite all the disruptions. And the reality is a lot of the work that we do behind a computer screen today can be automated using technologies that exist. But the challenge is how do you decide which one to use? How do you integrate it? How do you just adopt it internally within the organization? That's effectively why we started Wrk.

So we're going to come back to that. We're going to talk about how automation and AI is going to change everything. We've already been speaking about that for years. But I think today having you on is going to be really good. So we'll talk about that. We'll come back to that. We'll come back to the metaverse. We'll talk about autonomous, how they're all kind of interrelated, and highlight the importance of understanding what real automation is and what you're talking about versus kind of like the fake stuff that's out there now. But before we do, what are you working on right now at this moment? Is there something in particular that you're doing at Wrk or something you're really excited about?

Yeah, so the Wrk platform is actually not specifically an automation platform. The Wrk platform is a work delivery engine that sits as a layer on top of automation. So automation is a tool in our shed and not the only tool in our shed. And so going back to the point I was making earlier about these big buckets where people like to sort of throw certain types of technologies, automation is in its purest form a piece of software where you give it an instruction and it'll just do that same step over and over and over again.

So it could be something like filling out a form on your website. And imagine that you have an Excel spreadsheet with 10,000 entries and you need to submit every single one of these entries into this form 10,000 times. Well, you can build a little robot to do that. Or taking a bunch of data from an image and data from Excel, generating a chart, and putting it into a Google presentation or a PowerPoint presentation.

So these are sort of manual repetitive tasks for which you can build automation. What we decided to do is we built the software that will use bots along with humans to build a hybrid automation model. So Wrk will deliver your work for you at scale using a library of pre-built, pre-configured robots. And some of these robots actually will deliver the work purely through automation.

And others will do it through a combination of humans and machines together. Because the one thing that we've come to learn is in today's day and age not everyone is fully ready to trust the machine 100%. So we provide the layer of cognition on top of the machine to make sure that you are finally sort of comfortable with the results that are being outputted. So that's what we're excited about right now.

So I'm glad you explained that. Because a lot of people don't understand what we're talking about when we say automation. In the recent podcast we talked about how we're not too concerned about inflation over time. And everybody's screaming about the price of containers and the price of lumber. But in reality there's forces at play here. And your company is essentially at the forefront of this where automation brings down costs of everything.

Because once things are automated, we don't need humans to do these tasks that are monotonous, right? And we can scale. Scale is a big word. But you can essentially scale everything you do on a daily basis. So we're going to talk about how we're investing in companies that automate now. You know one of the companies, the public companies. We'll mention it later. We'll talk about that. But why don't we talk a little bit about the importance of understanding kind of not to get fooled with what seems to be automated and what really isn't? Maybe just go a little more into detail about that.

Yeah, well, first I want to mention something relative to what you just said in that I think there's an apprehension with automation in that it's going to displace the human. And that's not true. I think that it's important to put it in perspective that automation is there to remove the mundane and monotonous so that the human can work on higher level tasks.

That's right.

If you have an employee that's sitting there on staff all day and all they're doing is copy pasting or they're filling a form or they're generating the same document or report 10,000 times a day, it's a waste of their God-given talent, right? If you can remove that burden from them and allow them to work on something more meaningful, you're optimizing your workforce, not reducing your workforce. I think that's a really important distinction. Because people are afraid of well, what's going to happen to my staff? The robots are going to render humans useless. That's not true at all.

So that's aspect number one. Number two, in terms of cost reduction, It's actually really quite obscene. So I'll give you a very specific tangible example. We have a company, without naming names, that is in the wine monitoring business. And so they have sommeliers that will help you manage your cellars of wine, so if you're a restaurant and you have thousands and thousands of wines or you're a private collector and so forth.

So in order for the sommelier to be aware of what your stuff is, because it's all digital remote, you have to take a picture of the label of your wine. And then they recommend the temperature that it needs to be stored at and so forth. They manage something like about 100 million wines annually all over the world. But they have these sommeliers that are sitting there trying to match a label that you're going to send from a picture from your phone across a database that they have. And it would cost them about $1.20 per wine matched for the sommelier to start doing their work.

We've now taken on the job of just doing the matching of the images, bringing down their cost from $1.20 to $0.17 per wine matched. So when you reduce your costs by 90% and now your sommeliers who have spent years and years and years training on the stuff that they've gotten trained at, now again, you've optimized the output and the yield of your business. And then your margins are really quite significant, right? So I think it's just important to set that foundation.

Specifically to the question around AI, look, like I said, technologists have an ability to overcomplicate and oversimplify everything. AI is not the it all and be all. You have to understand that these are categories of study. AI is not some random machine that's going to come and figure out everything for you.

In order for you to have true artificial intelligence, you need to do something called building a data model, which means that you take a very large set of information-- phone calls, the way that people click on certain things, written scripts that you have transcribed, and so forth, and you feed this massive amount of data into the machine. And the machine starts to learn how to detect something.

So for example, one of the largest applications of artificial intelligence is what we call optical character recognition. So that's you give me any document in any format, a PDF, a handwritten note, and the machine will be able to extract the text out of that. That's an AI-trained model that can do that. So this example, as you can see, is exactly what AI is. AI gets trained to do one thing, extract text from document, extract sentiment from something, generate documents at scale that do something specific.

So it's important to state that AI and machine learning is a one direction thing. It'll do one thing really, really well. So I just want to frame that when you're thinking about AI, don't think that it will solve for everything. It'll solve for one thing. Now you can layer multiple AIs together and start building. But it takes a long time for you to be able to train the machine into a machine to figure things out in itself over time.

We're not yet at the level where AI can self-learn. There are companies that claim that they can. I have yet to see an end-to-end application that is fully done by AI. So I think it's just important that tech organizations deploy very aggressive B2B sales playbooks. And they go after the jugular, right? They'll try and find your pain point. And then they'll give you these big topics and say AI because it's overly complicated and you're not going to understand what it means.

And they'll tell you AI is going to solve it. Because the news out there is AI solves everything. That's not true. If you want to cut through the BS, ask them to show you a real tangible example today and not something that will take six months to train a model to do the thing that you need it to do. So just be careful around consulting AI, which is what most of the AI is today, and actual true AI, which is a machine that has already been pre-trained to do the thing that you need.

Really cool. Mo, so I wanted to actually circle back to something that you kind of opened with there just talking about-- because it is a concern we've heard from clients when we talk about AI or when we talk about replacing, I guess, some tasks and RPA and things like that. We often get the question, like you mentioned, about like, is this going to replace human workers? What's this going to do to unemployment rate? What's this going to do to economic factors, which obviously play a pretty important role in the economy of today?

So I wanted to share some data that I kind of recently saw in an article that I was reading. This is automation, but this is maybe more, let's say, the older version of automation where you kind of use robotics to just do things at larger scale, so thinking of like the agriculture industry or something like that, farming, which is one of the, believe it or not, one of the industries that probably adopted robotics and things to replace humans in certain roles earliest and most extensively.

And so there was actually a study that was done that was looking at the purchasing power of farm workers, So. The actual labor of human workers on farms over the last 50 years as automation has kind of taken over a lot of the tasks. And it's actually, believe it or not, farm workers are one of the few areas where, let's say a manual labor job has actually kept up with the overall inflation since, I think, the data went from back to 1950, and looked at now and looked at the wages. And basically it's actually kept up with inflation, which is not something you can say about a lot of, if you want to call it, more manual labor areas of the economy that are still there.

So it's quite interesting. So obviously that all comes down to productivity, right? So this stuff, this automation or these machines that they've brought on, have just allowed them to be so much more productive that they still need workers. They're still employing almost as many people. But the income that's being generated by the companies and by the farms is so much higher because of productivity that the actual purchasing power or the wages they're getting paid has actually kept up with inflation.

So it's a pretty interesting kind of thing. And in the same study, they were also looking at which major companies or which industries today have the most, if you want to call it, robots per employee or per 10,000 employees. And at the top of the list was Amazon, which is, I think, they had something like 3,000 robots, if you want to call them that, per 10,000 employees. And it hasn't replaced human workers. Amazon's one of the largest employers in America.

And that's actually a really important point, Jeff, as well as you think about the younger generation that is coming into the workforce today. They're not interested in doing that type of work. They're not interested in doing the menial, the repetitive, the mundane, the tasks that will pay the minimum wage and a little bit more. That generation unfortunately suffered through all of that, like the older generation that is now sort of going into the latter stages of their years. But the younger generation coming in would rather stay at home, mine Bitcoin, or work on NFTs, or do gig work than go and do that type of a job, right? So I think it's important that we recognize that trend as well.

Absolutely. So we gave examples of business process automation, robotic process automation, AI, machine learning. We talked about how that kind of keeps inflation in check, increases productivity of workforce-- Jeff just mentioned that; Mo, you gave examples of it-- and makes task-driven jobs obviously more obsolete so people can focus on better and more important, meaningful things, which we've been talking about.

So why don't we talk about how-- so Wrk is a private company, right? Just want to make that clear. We didn't say that at the beginning. We wish it was a public company. It would be good for you. And we can invest in it. But it's still a private company, which is awesome. One of the fastest growing companies in the country for sure in your space in automation, so congrats on that, Mo. We're going to talk about how we play this in the public space, OK?

So now we're going to talk about a company called UiPath. And Mo, I'll give you credit for this. Because obviously we talk to you often. And you brought UiPath to our attention when the IPO-- obviously we see all the IPOs. But having you on to understand more of the relevance of this company has been good for us. So maybe Jeff's going to want to talk about UiPath, kind of what they do.

There's a good example on the website where they take a healthcare service kind of provider and they say, OK, normally you'd call in and it'd take five minutes to assess what the issue is. But if we use RPAs, or as Mo called it, robots, to assess the situation, it takes one minute. So again, productivity increase, less time on menial tasks, more time on meaningful tasks. So maybe Jeff, you talk about where we see UiPath going and why we're interested in this company.

Yeah, for sure. So from an investment standpoint, like everything, it was something that we got interested in because it was kind of brought to our attention. And it's in a space that we've been looking for, or a trend you can say, a secular growth trend, that we've been interested in for a while.

And then when you started kind of looking at the company or just looking at it today, for example, I think it has around a $28 or $30 billion market cap probably right now, and I think sales growth of 40% that's projected to continue for several years into the future, and I think even faster if you look at what's the portion of their revenue that's recurring, so like the ARR, Annual Recurring Revenue, that their revenue is actually growing faster than 40%.

So we look at different things. Kind of one thing that, I guess, shows the success that they have with companies is one, not only-- I think they have 60% or over 60% of the Fortune Global 500 companies as customers right now. So that's obviously a pretty good customer base to be dealing with, big partnerships with companies like Snowflake and other things like that.

And what really drew our attention or kind of highlighted the success that they're having-- at the end of the day, pleasing customers and growing a relationship with customers is very important-- they have 144% dollar-based net retention rates. So basically what that means is their average customer will spend 44% more each year as time goes by because they're expanding their relationships. They're adding new processes.

And the whole thing about automation, what's really interesting about the field, and in their particular case, RPA, is basically the total addressable market that they can hope to capture, it only increases over time as the sophistication of their software and as their abilities to complete more, take more complex tasks that still need some intervention now, maybe in the future that doesn't. That's no longer the case.

So they can almost create more of an addressable market as their product develops. So a lot of things kind of got us interested in it. And it's a name we added more recently. It's down quite a bit from the IPO. I think there's several kind of factors that were at play for that. But we're quite optimistic about it. And we added it maybe a couple of months ago.

Yeah, and of course, this is the purest play, right? There's other ways to invest. You can invest in the company who makes the AI chips like Nvidia, et cetera, which is another holding we have. So not here to talk about holdings, but just giving live examples of real public companies that you can invest in that are in the space.

Yeah, so UiPath is an interesting one. So when we started off Wrk, obviously we went out and did a ton of due diligence in the space. And what became clear is there's sort of a handful of players that are really worth looking into. Don't get fooled. RPA is yet another term for automation. RPA stands for Robotic Process Automation. And all it is is imagine you have a virtual-- well, your computer and a mouse and a keyboard that moves on its own.

And so what RPA will do is it'll record the work that your employees are doing repetitively and then replay back those sessions over and over again until it learns. So imagine that you have the call center example. And so when a call comes in, you have to go in your CRM or ERP and look for the phone number of the caller or the name and then pull up their record. Well, you can build a little macro effectively to do that. And that saves maybe a minute from the rep's time. But over tens of millions of phone calls, you can appreciate that that's quite scalable.

So the challenge with RPA today is that it has been predominantly really only been deployed by very large corps. So yes, the total addressable market for this is, in fact, infinite, in my opinion. Because it's every single organization that is going to automate at some point. But in today's day and age, it's focused predominantly-- it used to be the Fortune 100. Then it was like the Fortune 1,000. Now it's like the Fortune 5,000. And slowly it's starting to become more and more into the big mid-market and then eventually you go into the mid-market.

I actually met the chief strategy officer of UiPath, who is partially originally from Montreal, by the way. He's Moroccan-Canadian but moved to Romania a long time ago. And so they started off in Romania against a very large incumbent called Blue Prism, which was based out of the UK. And both of these organizations really represent a pretty large sort of portion of the market share.

And the reason that they're so successful is because they can go into these large organizations, deploy a piece of automation that will boost productivity like no one has ever seen before. And so in the same way-- you have to understand the decision-making process of these large organizations-- there's a hot trend that emerges. The CEO, CFO, CIO, comes in and says, we need to invest in x, in big data, in machine learning, in security and whatever.

And so lately the trend has been in automation. And they go and say, OK, Gartner, OK, whoever the McKinsey or whichever management consulting firm they're dealing with, which organization should we go talk to? And then they're always going to name the top 3. And to UiPath's credit, what they've done is they've built a platform that is slightly easier to use than the others, that has a little bit more bells and whistles, and that is slightly newer than their British counterparts at Blue Prism.

And so what ended up happening is they got a little bit more adoption. And then they were smart in trying to cover an international market a lot faster than their incumbents as well. And so when you compare UiPath versus Blue Prism, Blue Prism that is older and was generating more or less the same level of revenues, just got acquired or is in the process of being acquired by Vista for $1.5 billion. So that gives you the scale of difference of what these guys have been able to achieve.

But to Jeff's point, and it's the same thing that I'm seeing in my company as well, when we launch with a client, within the first three months we see that they go from one workflow to three to four workflows within that first three months period. So it's a land and expand strategy, which means for them growth isn't predicated on net new acquisition of clients, it's also just going to be internal growth from existing accounts, which traditionally in software, expansion of revenue internally within an organization is so much cheaper in terms of cost of acquisition.

Because you're not going out there and sending new reps. It's already an existing client and they're just growing. So for me, looking at the multiples of an organization like that versus a traditional [? SaaS, ?] we're going to see that skyrocket over time. That's why I'm in this industry. And to your point, Rob, maybe the stock is down since the highs. But you look at the volume in terms of the amount of trading that's been happening on that stock, it's doubled over the course of the last couple of months. There's going to be a lot of activity on this stock for sure.

Yeah, and I love how you're giving the high level management view of things. We talk about the "what" a lot. OK, this is what this company does. This is how they do it. But you're giving another perspective, which is amazing. That's why we invited you on. So let's finish off-- because we're already at 26 minutes, and I think you're a busy man and I appreciate the time you allocated to us-- let's finish off talking about big companies. And so we'll talk about ours. We'll talk about RBC. And so you were invited at a roundtable experience with our CEO, is that correct?

Yeah, yeah, it was a good call.

OK, great. So I want you to talk about-- I don't know-- what you felt and what you saw there and what you heard, if you got to speak about automation at all in the banking sector, and where you think that's going.

Yeah, I'll try not to disparage too much but--

Oh, go ahead. It's fine. It's our podcast. This is not-- no, I'm just joking.

[INAUDIBLE] So first off, I think your CEO came off as highly intelligent. And I think he's very smart in terms of understanding and knowing the global trends and the macro patterns and all the stuff that's going on. But the reality with RBC, like almost every single large organization that is sort of too big, is shifting the course of direction is very, very difficult.

That's right.

And I think that the general consensus is-- like, I pressed him pretty hard on where is the bank going to take a stance on things like cryptocurrencies, on the evolution of automation, on the trends that are happening in the marketplace with gig workers. We are, for example, leading the charge in transitioning how individuals get compensated from a time-based model-- I pay you $50 bucks an hour-- to a delivery-based model. I pay you $50 bucks when you deliver the thing that you need to deliver.

And we feel like that over-optimizes for outputs because if you're very good at what you're doing and you deliver the thing that I need in 5 minutes versus an hour then why should I pay you less for the hour that you've given me if your yield is much higher than someone else? And so I prodded hard on those. And I've been doing this across organizations left, right, and center. And the answer is almost always the same. When that trend becomes large enough, we'll sort of get there, which is almost always too late.

So look, it's like everything. Moving a big ship is very, very difficult. Having CEOs who are willing to take a big risk at an early stage like that almost never happens, which is unfortunate because organizations have an ability to make massive shifts in the ecosystem whether it's business or cultural or local. And so I think that corporations have an obligation to help create the catalysts for change to happen.

And so when I was speaking with your CEO I was trying to prod him to make any kind of public statement to say, this is the position that we will take on x. And I don't think it'll ever happen. And it's unfortunate because RBC is if not the most recognizable, definitely one of the most recognizable brands in Canada, one of the ones that has so much clout and credibility that people will follow it if someone just had the-- what's the politically correct way of saying it-- but the gall of actually taking a position and standing behind it in the same way that Elon is doing, for example, and leading the charge on a few things.

Yeah, we love Elon. And I agree with every point you make. Maybe one day when I'm CEO of the company-- that's not going to happen. Maybe Jeffrey. One day when Jeffrey's CEO of the company things will change. But until then we'll continue to manage our portfolios. Mo, you've been awesome today. Thank you so much. This is one of the best podcasts we've had. I always say that. But this time it's true. And I also want to just say that good luck with Wrk. I think Wrk is-- obviously we're going to follow it very closely. We're friends with Mo.

So if anybody wants to speak to Mo, get in contact, reach out to us. We can definitely hook you up. Also just want to say that check out our other content. We are hell-bent on communicating with our clients and making sure that you guys have the best perspective on what we believe and how we're going to execute on what we believe. So this podcast is part of that.

I also want to mention just a little plug for philanthropic reasons. I am going to be-- don't laugh, Jeff-- I'm going to be dancing with the stars on February 7th for the JFK Foundation. Mo is nodding his head. And so yes, along with the boxing and the cycling and everything else that I try and do and the drums-- by the way, I play the drums, just a plug for myself-- I am always trying to do things that I'm uncomfortable with. And this is definitely something I am uncomfortable with.

But I'm going to be raising money for a great cause. So check out LinkedIn. We've posted on it. If you guys want to donate, please go ahead. And so if not, just laugh when you see my videos and wish me luck. Because this is one of the most challenging things I've ever done in my life. So thanks again, Mo, for being with us. And we'll see you guys next time.

Thanks, Mo.

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Let me say one word about the business cycle. We do some pretty sophisticated business cycle work. Our work suggests it's still a fairly early stage in the business cycle. I know this recovery has been awfully fast, and people are saying maybe that means that the next recession might not be that far ahead. We're skeptical about that. We still think there are a number of years left in this business cycle, and the cycle work we do is very much consistent with that.

It's moving quickly. Maybe this is a five year instead of a 10-year cycle. I don't think it's an 18-month cycle, though. I guess that's the main takeaway. On inflation--

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Hi, everyone, and welcome to Episode 6 of the Behind the Numbers podcast. I'm Rob Di Iorio, Portfolio Manager at RBC Dominion Securities, and I'm with my Associate Portfolio Manager, Jeffrey Lynn. Jeff, how are you today?

Good, Rob. How's it going?

I'm doing very well, thank you. This is the first full week of September. So it's Labor Day week, and by now most kids are back to school. And we hope that this year's school year will go uninterrupted. Having said that, if you have not checked out our Behind the Numbers Classroom section of our website, we strongly recommend and encourage that you do so.

Our summer intern, Frances [INAUDIBLE], did a wonderful job creating three educational videos geared towards children and teenagers, really about just how to start to be a good investor, and how to start to be an investor, generally. Please share with your kids. These are short videos that you can share with whoever you think will benefit.

Everything our team does starts with making our clients and everyone around us into a better investor. That's really why we do what we do. So remember, it's not too early to start investing, and it's not too early to start educating.

But today we have a serious guest on, Jeff. I mean, we hit the mother lode with this guest. We're super excited to have Eric Lascelles on. He's probably the most high-profile guest we've had on our podcast so far. And I can't believe he agreed to spend time with us given his crazy schedule. So without further ado, Eric, welcome to the Behind the Numbers podcast.

Oh, gee. Thanks very much. Thanks for that nice intro. And yes, it's a pleasure to be on with both of you, Rob and Jeff.

Awesome. We're super excited to have you on. Today's podcast is dedicated to something we spend very little time on as a team, and that is economics. Eric, don't get upset, but I have been quoted as saying that 10 minutes on macroeconomics is 9 minutes too much. And that is only because we do not have the skill set to do any of the stuff that you do.

So we believe in leveraging what we do best, and that's finding fast-growing companies, or what we like to call generational companies-- companies we can't really live without. And those are the ones that help our portfolios grow. But we rely on guys like you to really help us on the macro side.

More recently, many of our clients have been asking questions, and most of those questions are economics based. So before we get into answering some of those questions, because we like to do that in our podcasts, and our blogs, and our webcasts, maybe you can give us an unplugged summary of your latest MacroMemo, and how you see the world today, and really just an off-the-cuff conversation.

Absolutely, and I'd be happy to. And the timing is good, in part because, just like everyone else, I'm gearing up for the fall as we have this conversation. And we've just been thinking hard about our forecasts, and hard about key themes and risks. So again, timing is perfect for this.

And I guess the first observation I would make is that we are seeing some evidence of economies slowing a little bit. And so it's probably most visible in the US. There was a recent job number that underwhelmed to some extent. We can see that some of the special metrics they put together during the pandemic, like hotel occupancy, office occupancy, some of these measures are going negative a little bit again after a very long period of happy growth.

And so we do see some deceleration in the economy. I think we understand broadly why that's happening. I think the most obvious short-term factor is the delta variant has picked up in quite a chunk of the world, and it's causing a little bit extra caution on the behalf of consumers, and workers, and businesses. And in some limited cases we're seeing tighter rules, but I'll elaborate on some other paths our governments are going down as an alternative to that.

So we're seeing some deceleration. And I'll admit, our growth forecasts for 2022 are a little bit more conservative than the consensus out there. So I guess technically that makes us pessimists. But I really do want to emphasize, we still think there's pretty good growth ahead. This is still very much an economic recovery. As much as we're technically on the pessimistic side of the spectrum, we still think real GDP growth can be almost 4% for both the US and Canada next year. Just happens to be the market thinks it might be 4.5%, or something like that.

And so I guess, to me, the theme is one of decelerating but still good growth. And the best argument for why the economy probably isn't good to go quite as quickly next year as this year is, I think, an obvious one, which is just that we're eating through the economic slack. We've opened things that were closed.

There aren't as many things left to reopen going forward. And so the natural buoyancy of growth becomes a little bit less so over time. And so that's certainly something we're watching quite closely.

We still think there's plenty of support for the economy. It's amazing how much money households, as an aggregate, have saved. And so conceivably some of that money could be deployed. Seems to me businesses are feeling pretty good. They're building inventories. There are reasons to expect further good growth, but maybe not quite as good as some are imagining, particularly as you see central banks start to think about scaling back a little bit of their support, particularly as we get, I think, a bit less fiscal support as well over the next year or two.

Now, to me, it's remarkable. And so I've done these presentations and discussions like this pretty steadily over the pandemic, and this is among the first times I've done this and I haven't started with the pandemic as the main discussion point. And so that's saying something. It's certainly still with us. And in fact, that delta variant, of course, is more contagious than any other variant before it. And unfortunately, we have seen an increase in infections.

But from an economic standpoint, it's a little bit less intimately wedded between the pandemic and the economy. And the reason is that governments and the average person are less willing to tolerate further lockdowns. I don't think we're going to see significant tightening of rules going forward.

It seems to me that you're going to see, really, two other strategies deployed. One is vaccine mandates and passports. And so in some entire sectors of the economy, the worker is obliged to get vaccinated, like in hospitals, and at schools, and places like this, the federal government-- the banking sector, in fact, at this point in time.

And then vaccine passports in terms of governments, or in some cases, businesses indicating who's allowed into their store, or into what kind of stores. And those are fairly well targeted in the sense that they don't have to shut down entire sectors of the economy. But in theory, you can control at least some of the spread of the virus.

And then simultaneously, and this is probably most evident in the UK strategy, but simultaneously, there is a thought that the connection between infections and bad outcomes, like hospitalizations and fatalities, are starting to decouple thanks to vaccines. So less severe outcomes are now the norm. And so conceivably you can just tolerate more infections. And that's actually been a winning strategy for the UK so far.

I think we're going to see other countries say, we can handle more infections so long as it doesn't overwhelm the hospital system, and so on. And so I think it's a bit of a different approach. Ultimately does a little bit less damage to the economy. We think economies keep growing through the fall, even as the delta variant seems to be quite prevalent at the time.

Now I don't want to go too long here, but let me say something about Canada and something about inflation in any event. Because those are two of the big things we've been thinking a lot about. And on the Canada side of things-- well, for the most part, the Canadian's economy actually has a little more room to grow than the US.

The delta variant hasn't hit as quickly. Canada is somewhat better vaccinated as well. And so Canada is in a pretty good position to continue growing. We still think there's going to be some deceleration over the next few months. But Canada is probably better positioned than most from that perspective. And just generally speaking, over the next few years, because Canada hasn't staged quite as much of a recovery so far, Canada has more room to stage a recovery over the next 18 months or so. So there are bits of good news in there.

Obviously, at least as we record this, there's a federal election coming up in the next few weeks. And gosh, I wish I could say with precision, A, what's going to happen, and B, what the policy implications are going to be. But the what's going to happen part of it is actually really hard to read right now.

The polls, and the betting markets, and the probabilities I'm seeing suggests almost equal odds of a liberal versus a conservative outcome. In both cases, very likely that it would remain a minority government, which limits the enthusiasm of the government. It seems to me that just about every party has some pretty big spending plans ahead. And so that's another, at least short term economic support. Though of course, it does bleed its way into the public debt at some point as well.

There are differences between the parties, and it's almost overwhelming. There are literally hundreds of campaign promises that each of the parties are making. And so it becomes a bit overwhelming trying to summarize them into a neat and tidy bow. I think probably the usual cliche applies, in the sense that markets are usually a little more comfortable with a more rightward-leaning party.

And so, for instance, as it stands right now with the liberals proposing a bank tax as an example, and a few other tax increases, I suspect markets would be incrementally more pleased with a right-leaning versus a left-leaning outcome. But I don't know that any response would be particularly strong.

And in particular, I take my cue from the US experience of the last six years. And so you had an unconventional Republican, Trump come in, and markets went up more or less for four years. And then you had a fairly far-leaning Democrat in the form of Biden come in, and so far markets have gone up fairly happily, despite a very different policy mix. And so I guess it goes to say that policy isn't the only thing that markets or the economy care about. And I suspect in the Canadian context, there's no big, sudden change, of course, for the economy coming, regardless of who gets elected.

Let me say one word about the business cycle. We do some pretty sophisticated business cycle work. Our work suggests it's still a fairly early stage in the business cycle. I know this recovery has been awfully fast. And people are saying maybe that means that the next recession might not be that far ahead. We're skeptical about that.

We still think there are a number of years left in this business cycle, and the cycle work we do is very much consistent with that. It's moving quickly. Maybe this is a 5 year instead of a 10-year cycle. I don't think it's an 18-month cycle, though. I guess that's the main takeaway.

On inflation briefly, let me just say it is extremely high. We have not seen it like this in the better part of a decade. And not in a sustained way in a number of decades. And so it does merit some attention. And it is potentially consequential for investors.

Technically, we think inflation might remain a little higher than the market thinks. But the bigger message to me is one in which we still have it coming down. We think it's less intense six months from now, less intense again a year from now. Ultimately, quite normal looking in a few years' time. It's just we're working our way through a few things in the meantime.

And so, for instance, commodity prices have increased a lot. They're now seemingly peaking, but that's been an upward pressure. Supply-chain issues have been enormous. And so we're may be starting to see some peaking of some of the transportation costs. Though the jury is out, if I'm being honest.

We're seeing also some evidence of the chip side of things remaining quite intense, as an example. And so we're not expecting chip shortages to be significantly resolved over the next six months to a year. And so, again, there's reason to think inflation stays higher than we're used to over the next year or so, but not really over the long term. And the bond market is feeling pretty calm about this. And I think that's ultimately probably the right attitude.

And then, just to finish on long-term thoughts, it's sort of fun to speculate how the world might be permanently different from the pandemic, and how it could function differently going forward. And any number of relevant observations there, but perhaps the big three I would comment on is, first of all, it does seem as though we're going to see more working from home in a permanent way.

Going into this pandemic, you had something like 5% of white-collar workers, or 5% of white-collar worker hours being conducted from home. It's probably going to be more like 40% coming out of this, and maybe 20% of the overall workforce hours conducted from home. So big change implications for downtowns, implications for offices, et cetera.

Online shopping obviously spiked during the pandemic. It since retreated quite a bit. We think it's more or less settled where it's going to end up, which is to say higher than it was before the pandemic. There's been a permanent hand-off there, but we think most of the rejigging is probably done at this point in time.

And then lastly, just a lot more debt, public debt. Government debt has gone up quite a bit to pay for the worst of the pandemic, but also because there have just been some extremely generous government programs. And it's affordable for now. Interest rates are very low.

We actually think interest rates stay pretty low for quite a period of time. And so we're not expecting disaster, but nevertheless, that is an extra burden, and it's one that a lot of countries are sharing. And it does mean there's less governments can accomplish over the long run because of this commitment they've made over the past couple of years.

OK, so that was both too long, and probably also incomprehensive in terms of what you'd like to cover. So let me hand it back to you, and say, what did we miss in there? What kind of questions are you getting that we haven't talked about?

It was a great, off-the-cuff summary of your MacroMemo, which, by the way, Jeff and I watched this morning. We watched the webcast. If people don't know Eric, who's RBC Global Asset Management's Chief Economist. I'll repeat that. He publishes a MacroMemo and he does a webcast, which is awesome. Maybe we should share it on LinkedIn so everybody, all of our followers, can watch that.

I know if you follow Eric on LinkedIn you can watch that as well. And of course, he goes in depth about pretty much everything you spoke about. We'll come back to governments, and debt, and then the elections in a second. Because that's one of the client questions I think you'll answer will be related to that.

But really, you mentioned a few key things here. You mentioned-- we talked about growth. Is it still intact? Will this be a short recovery? Will this be a long? We have our view on that, too. So we like to look at technicals to help us.

And you know about this, Eric. There's the long-term technical bull chart that we've used for bull and bear markets, and that's one of our favorite charts. Because we walk people through the similarities between each bull market and each bear market. And we use that constantly in our client presentations and in our roadmaps.

So I'm happy to hear that you agree with us that growth-- we're still in a cycle where this could continue for several years, even four or five years' good growth. And then possibly at the end of the cycle then there would be some reckoning. But until then, we should enjoy, and we should be investing in, obviously, in great companies and the economy. So that's something that we agree with.

You mentioned savings rates being extremely high. And when I had talked about this last year people didn't believe me. How are savings rates at all-time highs? Well, people were amassing money. They were saving money and weren't spending it. And that's still the case. There's still a lot of money on the sidelines, which obviously will support spending, but also could support asset prices to a certain extent.

And then, inflation. I know Jeff's going to want to talk about this. Because you say inflation is not normal right now. Actually you said that in your webcast, and you said, but it will normalize. And I know, Jeff, we've talked about our view on inflation.

And it's more like it's a shift towards what technology does to inflation. And maybe Jeff could share just a two-second theory that we have. And then I'll come back to another point that I want to mention after.

Yeah. Yeah, for sure. No, we have this conversation with clients quite often. Inflation is a headline, obviously, that's been grabbing people's attention, and including the markets. Obviously earlier in the year, especially in certain, more growth oriented areas, and sectors that got hit, technology underperforming, that kind of thing.

Especially a lot of big winners from last year-- high multiples compressing as inflation numbers were spiking. But our view, and I'd be curious to hear your thoughts on this, and this is what we speak about to clients is that, over the long term, and I think you alluded to it as well as, short term, yes. Inflation might remain elevated, but longer term, it's probably not looking that different.

We always come back to the fact that there's a lot of, I guess, you could say, long-term secular trends that are deflationary. Obviously there's automation, there's lowering of costs. There's innovation as a platform. And obviously increasing mobility, and as well demographic trends in terms of slowing population growth, these are all types of things that are actually long-term deflationary, I guess you could say.

So I'd be curious to see if that's what you think are the driving factors behind inflation remaining low over the longer term. And how much should we worry? How much should clients worry about markets over the next 12 months, let's say, if inflation's high being affected by that? And how much will they look through, and it gets priced out to what the longer term trend will be?

Right. Those are great comments and questions. And so I do agree. Yeah, over the long run, I mean, you start with a very benign assumption, which is probably inflation will look normal. And then you say, what special considerations need to be factored in on top of that?

And I am with you. When I think of the extra structural factors, it seems to me there are more deflationary ones than inflationary ones over the longer run. And so I would argue, all else equal, maybe inflation ends up a little bit short of expectations or goals, as opposed to high. And the technological one is important for sure.

So technological innovation is deflationary. We tend to think actually we may see an acceleration in innovation over the next few decades. And so from that perspective, that could become a more relevant force going forward. I would also say demographics, and aging populations, and lower population growth, and lower fertility rates, we believe, are deflationary. I use the term "we believe" just because actually there is quite a debate there.

And yeah, there are a few books and a few other things arguing the opposite side. But I think we're in good company in making the claim that it's more deflationary than the contrarian. And, in fact, the IMF has done very sophisticated work on this and has reached a similar conclusion, and so on. So in the end, I'm skeptical of high inflation over the long run.

And as much as we may not see some of these artificial distortions disappear in the very near term, they're likely with us for a bit longer. I would nevertheless make the comment that it seems to me that most of those should fade with time. And from the perspective of investors over, say, the next year, as inflation maybe still doesn't quite look completely normal, and first of all, we could say markets have so far been quite calm to that.

I don't see reasons why markets should suddenly be worked up as the pressure fades. But the bond market feels very strongly that this is not a permanent thing. The stock market also seems to make the same comment.

And I guess I'd make one other comment, which is, when we look historically at-- and so the fear is, by the way, if you ended up with really high inflation and it got stuck there. That's actually bad for stocks and bonds. That's the problem, right?

Lots of things are good for one, bad for the other, asset class or vice versa. But high inflation is the one that's actually bad for both, so nobody likes that. It messes up the tactical asset allocation effort.

But the good news is, if you look historically, you'd actually need inflation to run really quite high to start to seriously interfere with the stock market in particular. And so I just don't see it right now. I don't see why used car prices-- yes, they went up 45% in the US from the start of the pandemic. It's bonkers.

But you'd need them to go up 45% next year again to keep the high inflation, right? The tyranny of inflation is you need to see those price increases just keep going, and going, and going. It's not enough for them to be high.

And so, actually, one thing we're thinking of, particularly for the first half of next year, is, as, for example, shipping costs presumably become a little bit less intense, we think some adjustments will be made then. Well, shipping costs went up by a factor of five over the last year. And so I would stop short of saying they're going to fall by a factor of five over the next year. But nevertheless, there actually will be some deflationary pressures that emerge just as these distortions go away. So that's worth keeping in mind as well.

Yeah, the year-over-year pace of inflation. It's like looking at companies, right? Year-over-year-growth, that's really important to determine how things are and how prices should be reset.

So we constantly document questions from clients, Eric. And we try to address and answer these questions through our blogs. Pretty robust communication strategy, as I mentioned-- our webcasts, our podcasts. And in the interest of time, we've picked two for you today to chime in on, OK?

So I'll mention the first one, and then Jeff will share the second one. So the first question we had from a client-- and I love this one, because we actually talked about it in previous podcasts. And I have my theory on it but I want to hear yours. So given the amount of debt the Canadian government has accumulated during the pandemic, should we expect higher taxes to help pay for these higher debt levels? And what would the impact on the economy be if this were the case?

OK, it's a good question. I'll start by saying, in my experience, taxation decisions are often quite disconnected from fiscal need. And so often there are other motivations that-- inequality considerations, or these sorts of things. But I guess I'd put it this way. Absolutely there has been a big increase in public debt in almost every developed country in the world.

For context, and this will probably be gobbledygook to most people, but Canada had a public debt. The GDP ratio was 30% going into the pandemic. It's going to be 50% coming out of the pandemic. So we've seen this-- to confuse people even more, a 60% increase in the debt ratio in the span of two years. And so that is quite significant.

It is just about unprecedented. I guess you could do a bit of World War II math maybe, and find some similar jumps at a remarkable moment. But nevertheless, it's not a normal thing. And so it's created a lot of trepidation.

I should note that the very fact that bond yields are low means that bond markets and bond investors are not presently overly concerned that this won't be repaid or anything like that. And of course, the secret to that is that interest rates are very low. And so you do the math, and you say, debt went up and interest rates went down. And where's the winning combination?

And so one made things more expensive and one made it cheaper. And actually it remains quite affordable. Now it should become a little bit less affordable over time. But one bit of math we did-- gee, I guess, about a year ago when the pandemic was really rolling, was to say, well, how much extra of the Canadian economy is going to have to be redirected away from productive things to service this extra public debt? And the answer is, at worst, about 0.5% of GDP.

So you can take different things from that. You can say, gee, that's $40 billion a year. That's a ridiculous sum of money. So that's true. But equally, you can say it's not as though suddenly the economy has to be wrenched in a completely different direction to service this.

And keep in mind as well, that doesn't mean that the economy has to be 0.5% smaller. Because there are investors who are receiving these interest payments, and they're participating in the economy as well. And they're potentially spending money, and all sorts of other factors weigh in.

And so I guess I would say there is an extra debt burden here. It's not likely to be paid off in the near term to any extent. It does become a little more burdensome over time, but for the most part, we're pretty calm about the risk of a sovereign debt crisis. I would say, maybe provincially, Newfoundland has an issue that needs to be resolved. And they know that and they're working on that. But for the most part, at the governmental level we don't have to worry particularly about that sort of thing.

I would say, instead, what you have is governments really just using the pandemic as an opportunity maybe to shift the policy focus. And so, for instance, we had these grand experiments over the pandemic that gave jobless benefits to far more people than might have otherwise been eligible, and gave far more generous benefits. And in some ways, it worked very well in the sense that we haven't seen the kind of financial suffering, or bankruptcies, or mortgage delinquencies, or corporate delinquencies that we might have seen.

And so there is, I guess, a vision toward big government coming out of this thing. Governments can do more than we thought they could do, and they can be more generous, and they can get their fingers into more things. And there's always a pendulum that swings back and forth. I'm not sure this is a forever change, but nevertheless, we do now see a number of initiatives to extend many of these benefits. And in some cases, quite rightly, and in some cases, maybe more than is strictly needed. But nevertheless, that's the tendency we're going in.

So governments don't have to be bigger forever after the pandemic. The pandemic itself goes away, and that no longer needs to be the case. But in practice, it seems as though governments are inclined to do that.

And then the debate just becomes, well, are we going to continue to deficit finance this by issuing more debt? Or are we going to pay for this with taxes? And if I'm being perfectly honest, I think it's mostly on the deficit side still. But we do now see tax hikes bandied about. And I guess most explicitly, in Canada the liberals are talking about the extra tax on banks. But there are concerns that maybe the capital gains inclusion rate could go up, and things and things like that.

And I don't have any inside information into whether that happens or not. But I will absolutely acknowledge that, in general, it seems as though this is a time when taxes are probably a bit more likely to go up than down. And simultaneously, it's very much a focus on the wealthiest subset of Canadians in terms of footing that bill. And so we're going to see some of that. But I don't view it as an absolute necessity to balance the fiscal books.

I'm glad you clarified that. Because looking at things through an economic lens sheds a lot of light on how this debt can be handled. If you look at it just, I'm going to say, from a streets perspective, it's like, oh, they have to raise taxes. No, not necessarily.

So we can inflate our way out of debt. We talked about that several months ago. And so I'm glad you explained in more depth how that will work. Jeff, onto you for a second question from a client.

Yeah, for sure. So this was a bit maybe touched on at some point earlier in your overview, but we've gotten the same question from a number of clients who are concerned now, looking at rising infections from delta variant, and things like that. There's the concern that we might be heading back towards more of a shut down economy.

You touched on the fact that maybe something that's a bit less, going to be a bit less accepted, so it might not reach the same levels we saw before. But the question is, basically, is, will the same sectors and the same industries that were winners in the first, let's say, wave of work from home, stay at home-- so things like, obviously, technology, or anything cloud related, streaming, all these different trends that were very large net beneficiaries of the first waves of the pandemic-- are these set to potentially be longer-term areas that can continue to benefit, especially if work and stay at home is being prolonged, and eventually even maybe becoming more permanent like you mentioned?

Right. Well, gosh. Let me just start, as I always do, with the caveat that I'm not the stock person, you guys are. So I'll let you make the most important decisions. And if your views differ from mine, please, clients, listen to your investment advisor, not to the economist who doesn't manage any money directly. But so, in general, I'd say you're absolutely right. Yeah, this latest wave does return some focus back to many of the winners from the early parts of the pandemic.

As you mentioned, I think that this is going to be a much less dramatic wave, in the sense that I don't think it's going to reorient the economy quite as sharply as earlier waves did. And so less extreme on that front. Less likely to interfere with risk appetite in general, to the extent there's a defensive, cyclical debate that goes on at the same time. And so from that perspective, I don't think there's the same opportunity there was in retrospect back in March of last year by any means.

But nevertheless, we haven't gotten rid of the pandemic fully. Yes, it's sort of shifting from pandemic to endemic, meaning this thing that's with us, we learn to live with, and maybe we tolerate infections and don't tolerate hospitalizations, and these sorts of things. But in general, yeah.

I think many of these companies are structural winners. Maybe where I would stumble a little bit is to say whether all of that is fully priced in now or not. But my suspicion is, and usually it doesn't all fully get priced in, and I think there is still a bit of a reckoning that, gosh, particularly in the US, they thought this was done as of the spring. And it's not done. It's hanging around at least a little bit longer. So I do feel still very positively, structurally, on technology in general.

And as I mentioned in my semi-formal remarks off the top, work from home-- I was I was initially a skeptic that it would stick beyond the pandemic. And it really does seem in the white-collar space that, quite credibly, two days a week out of five could well become the norm at home, or some variation on that. And so that does require all sorts of video conferencing solutions, and other technological solutions, and internet backbones, and cloud, and these sorts of things.

And moreover, if you think, oh, two out of five days, that's significant but not overwhelming. Keep in mind, though, if you've got one member on the team who's working from home and the other four are in the office that day, you still need the same technological solutions as if everyone was in the office. So I do think that there's a structural story there that's quite favorable.

I guess the other thought would just be, as I mentioned earlier, our work suggests it's still fairly early in the business cycle. I think maybe it's starting to transition from what we would call early cycle to mid cycle. And so that maybe tends to be a little less glamorous period in terms of market gains, as much as it's still entirely consistent with further happy market gains.

And maybe it's a time when some of the early winners shine a little bit less brightly. But I do think structurally that the world has changed here. And quite a number of things aren't fully snapping back.

Eric, thank you. We're at 30 minutes and you've given us nothing but really great insight. And you've done it in a way where our clients can benefit. And I thank you for the time that you've given us today, and for all the amazing work you've done at RBC. We've been reading your work for a long time and we're fans of it, and what you do for our clients.

So maybe we'll have you on again in the future if your schedule permits. You did it today, so that was great. And you've been awesome. Any last thoughts that you want to leave us with?

Yeah, I guess just to emphasize-- and you guys are the experts here, but just to emphasize, keep that eye on the long term here. It's fun to think we're all wizards and we can anticipate the weekly move of the jobless claims and these sorts of things, but keep your eye on the long term. And in my view, at least, this could be a few decades in which we see innovation actually picking up to some extent as opposed to slowing down.

And so I'm aware there are other things slicing the other way, like aging populations, and maybe not cheap market valuations. But nevertheless, at the end of the day, innovation, and productivity, and these sorts of things is where wealth is created. And I feel fairly confident about that over the long run.

Can't pretend to predict the next week or two. But over the long run I do think there are some pretty exciting technologies coming down the pike that can continue to revolutionize the way we work and the way society functions. And there are good things that come from that.

Great. Great advice. Eric, have a great rest of the day. Thanks for being our guest on Behind the Numbers podcast. We'll see you next time. Thank you, everybody, for tuning in. Have a great day.

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What's really interesting, is many investors, including our clients, they mistakenly associate the idea of growth with higher risk. But we think that's misguided. But we will say that-- to be clear-- there's certainly, you know, times where there's risk holding these, because you'll underperform.

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Hi, everyone, and welcome to Episode 5 of the Behind the Numbers Podcast. As always, I'm with my associate portfolio manager, Jeff. Jeff, how's it going?

Good, Rob. How about you?

I'm good, thank you. And we are about to conclude the month of June, also the second quarter. So in the coming weeks we're also going to be taping a webcast for clients-- exclusively for clients. If you'd like to get a copy of that, just reach out to us. And in the webcast we'll talk about theme, which is what we're going to cover today in the podcast, but we're also going to talk about portfolio performance and positioning as well.

So for today we're really going to cover what secular growth means. Now, we just wrote a blog about this in the month of June-- we published it on June 14. And just to reiterate, one of our most strongly held beliefs when it comes to investing is that the core of our portfolio should always be exposed to long-term secular growth themes.

And one question we hear fairly often is, what does secular growth mean, right? So there's no precise metric to determine what falls into this category. The idea behind it is-- secular growth is pretty simple. It's a period of fundamental change or evolution occurring in a sector or industry, leading to significant and persistent growth.

So think of it this way-- and Jeff, you'll chime in as well-- companies that are changing the way we live. That's the way I like to explain it, that's how I've explained it in client meetings. They're not only changing the way we live, they're making the way we live better.

So in keeping with the theme of the blog, I think what we'll do today is we'll highlight how secular growth names can be extremely powerful wealth compounders over time. But we're also going to bring up the periods that can sometimes occur where we have flat to negative returns while you're waiting for that secular growth name to get from point A to point B. So Jeff, are you-- this is essentially-- you know, these are client questions and these are client-- these are questions that clients want answers to. So, Jeff, you're good with talking about that today?

Yeah, for sure. And for me, I mean, I think another way I've often-- we've spoken to people and kind of positioned what secular growth means, is also the whole idea of-- it's growth that occurs in an area, or in a trend, or some sort of development in society that's kind of independent of, let's say, economic cycles, right?

So I mean you can-- obviously there's always going to be the influence of what's going on in the economy. There's always the headline that can cause disruptions and periods of volatility and things like that. But in essence, these companies and secular growth themes, really what they do is they continue to essentially grow, and compound, and perform, and get larger over time, kind of, regardless of what the rest of the-- you know, regardless of how the overall economy is doing.

Right. So, you know, who cares about a recession, you know? That kind of company is going to emerge stronger, better. They'll actually-- in a recession or in a contraction, like what we saw last year, these companies will-- you know, they will kick butt take names later. I mean, they will just dominate and then they'll just steal market share.

So what's really interesting is, many investors, including our clients, they mistakenly associate the idea of growth with higher risk. But we think that's misguided. But we will say that, to be clear, there's certainly times where there's risk holding these because you'll underperform. And a good example of that-- and so we'll use a few examples today.

We used a few good examples in the blog, but I want to talk about first, I guess, Netflix from 2010 to 2014, because that's a long-- that's a stock we've held for such a long time, one of our longer-dated core holdings in the portfolio. So in that period, you know, 10,000 would have become 55,000-- over that five years. But from Q1 2011 to Q1 2013, the returns were actually negative. So I just thought that was shocking.

So what we do sometimes is we look back to see, OK, where did we generate a lot of returns? Where did we generate alpha over the last 10 years? Because we try and learn from our-- the wins, and we try and learn from our mistakes, and we try and replicate what works, and we try and reduce what doesn't. So we look back and this is an amazing thing.

So from 2010 to 2014, 5x return with Netflix. Awesome, amazing. But from Q1 2011 to-- so two years within that period-- that four year period, negative return. And so this is where timing is everything, and also you have to be super patient. Yeah, so Jeff, maybe let's look at some other examples or what we've learned from some of these examples.

Yeah, yeah, for sure. And often it's not even just periods of negative return, it's periods of-- it can be periods of pretty significant negative returns, like almost making more than five times your money in Netflix over five years. But looking from that period that you referenced, I mean, losing probably I think over 50% if you go from peak to bottom over the course of that period, right? So it's not just all moving sideways, sometimes it can actually even be pretty uncomfortable periods some of these go through. And there's plenty of examples of that.

There's, you know, sometimes they line up with the overall economic problems, so, you know? We look at a company like Google, for example, between 2005 and 2009. So obviously, during that period, that includes kind of the whole 2008-2009 financial crisis. And a company like Google, despite being relatively unhit in terms of revenue, I think they might have had one year or two--

They grew.

Oh, yeah, I think they might have had one quarter where their revenue was down slightly, and then it immediately went back up to higher levels again, you know, so being relatively unaffected by the overall, you know-- by what was going on in the economy and then the market was still down, I think, by, again, over 50% from-- if you look, let's say, going into 2008 versus kind of the beginning of 2009.

So, you know, that's just another example. And there's so many, there's-- Amazon is a great story. We looked at-- we went way back there actually till very early, I guess, days, in terms of Amazon, and back to 2001-- so 2001 to 2005, a five year period.