New Series: When active patience leads to long-term results, with Nadim Rizk

11 March 2025 by National Bank Investments
New Series: When active patience leads to long-term results, with Nadim Rizk

 

He is renowned as one of his generation's leading global equity managers*. Four years after founding PineStone Asset Management, his firm now manages over $72 billion in assets.

In this video series, Nadim Rizk shares his journey and the secrets of his long-term outperformance. He talks about the evolution of his investment strategies, market challenges, and the impact AI will likely have on the industry. 

Source : Les leçons d’un investisseur étoile , La Presse

The launch of PineStone, Initial Growth, and Long-Term Focus

Nadim explains PineStone's core principles, emphasizing value creation for clients over product sales. He describes the year-long setup process that led to significant growth and client acquisition. His investment strategy focuses on long-term capital growth through ethical, high-quality companies, highlighting the importance of preserving capital.

We want to be in the business of creating value for clients. We don't want to be in the business of selling products. From early 2021 to about the spring or summer of 2022, we spent a lot of time setting up the organization. So, as you may recall, the front part of the business or the investment part and some of the distribution people came with the initial transaction. What we were missing  was operation, compliance, finance, accounting, office systems, IT, all of that. We took over a year to set up everything, which is quite long, but we had the luxury of time and we wanted to set up something high-grade, institutional, global in nature. 

So, we put in my opinion, best-of-class systems, structures, et cetera. We started hiring all the heads from spring to mid-2022. started seeing a new inflow of business and clients like National Bank who has been a long-term supporter and partner of ours joining. And then we started seeing other institutional clients come in. Today we're sitting at almost 40 employees, most are based out of Montreal, but we have some employees in the US and in the UK, but most are here. We're running out of space in the office is incredible after three years. We so far have just crossed 30 billion Canadians in direct business. I'm just excluding the legacy of our business, which is crazy and way beyond our wildest imagination. So very excited.

We want to be in the business of creating value for clients. We don't want to be in the business of selling products. PineStone is meant to be a focused organization that does one thing or a few things, but it does them well. We're not trying to be everything to everybody and it's essentially impossible. And if that means we have limited growth or limited clients, or limited size, then so be it. We're here to compound client capital and all of our money is also invested in the same strategies alongside clients, which is a big deal for us. So, I personally have most of my money, invested in the strategies. In a nutshell, the style is one of private ownership focused on capital compounding. I'll explain it. We're interested in investing in high-quality companies from every aspect of quality, from a financial perspective, as well as from a culture, structure, governance, transparency, ethics, et cetera.

These are businesses that we find not only have something special to them, but they are also well run and ethically run, so to speak. And we are very confident in putting capital into them. And once we find these businesses, we tend to be invested in them for the long run. And by the long run, I'm talking 10 to 20 years in general, which is unique in the public space. Most, investors in the public space tend to transact, which is normal because the public space gives you liquidity. We think of it as private investing in a public setting, which means, you know, we own X amount of the business instead of owning a hundred percent of it. But we think of it as owning a business versus owning a stock.

And we get the liquidity as a free added bonus. It's a little bit at the best of both worlds. And I think consistency and focus allowed us in the past to generate this nice track record mixed with an obsession of capital preservation. We really don't want to lose money and we want to consistently make money.

We usually don't make a lot of money all of a sudden. You would most times be hard-pressed to see the most exciting stock in the fund. Unfortunately, we're still waiting for that data to happen at some point, but usually a lot of what I call singles and doubles for those that watch baseball, consistency with a very strong capital protection. And that combination creates a tremendous amount of value over time.

Personal journey and changing investment philosophy

In this segment, he shares his journey into the world of investing, starting from his early experiences with his father to his professional career as a fund portfolio manager. He discusses the evolution of his investment philosophy, emphasizing the importance of understanding what one is investing in and the need for a structured process. He also highlights the significance of learning from mistakes, both personal and those of others, to improve investment strategies and decision-making.

So, I personally started investing, with my dad who was not an investor. He was a, he was a doctor, a family physician, but he was exactly the opposite of what I just mentioned. He was interested in making a lot of money quick. Investing was about finding a not-expensive stock, which meant it had a low price and buying a lot of shares and watching these shares quickly jump. Something like Nvidia would have made him very happy. We, you know, that's how I got into it. I was about 14, 15 years of age and I had no idea what I was doing, but we were doing this together and that's what got me or had made me fall in love with the investment world.

But I eventually realized that this was not a winning strategy because we never made any, we were not successful. We were buying at the wrong time and we were panicking quickly because we had no understanding what we were buying. And that's, in my opinion, how the ship or when this ship started, I decided that no, we should be investing, in nice stuff that we understood. And then, you know, watching it slowly compounds, which again, it is hard for human beings because we are hardwired to react to events, attacks, throughout evolution, we're hardwired to react quickly to this tiger or bear, whatever is attacking us and to survive. It's an amazing model throughout evolution that's a bad model for the investing world because it means every time there's something negative, we react and we have to do something or transact or change, which usually means we're transacting at the right, at the wrong time.

So that's how it started for me. I ultimately went to university. I studied finance. I got accepted into McGill. That's how I ended up in Montreal. I was in the investment club. I was what we call the stock rat. So, it was easy for me because I knew this was what I wanted to do. And eventually, I started my career at the amazing CN pension.

I also met the president of the CN fund at one of the McGill events. CN had very much that same investment style back then. They were into the buffet, concentrated, long-term, etc. And that's how my professional career eventually started. And that's how all these pieces worked together.
What has changed, in my opinion, and I would say we've improved it is the process by which we get to those results. I mean, I became a fund manager in 2003, which is more than 20 years ago. And as much as I had this investment philosophy, I didn't have all the pieces the process, and the know-how complete. And alongside Andrew, who's been my sidekick for a long time now, we started putting it all together and that process has improved all the time. 

I think that's going to continue to improve just because I think this business is one where you're always learning and you're always improving. Now the way to change might slow down versus the first 30 years, but it is going to continue. And we're always looking to add things and improve. I'll give you an example. One of the more recent few years ago additions was and the ranking process that we have that we call it the time scoring of businesses and time stands for T-I-M-E, track record, industry, management quality and economic model. That's something that we kind of invented a few years ago because we felt the more mathematically evaluate the quality of a business. So, things like that are going to constantly evolve.

We also try to learn from our mistakes. We try to learn from the mistakes that other people make. I remember we looked at a company in Europe and Germany called Wirecard, which we luckily passed on because we couldn't track the cash within the business. So, the business was successful, amazing track record. But when we followed the cash flows, they were very opaque and hard to find.

Ultimately, business we realized was a fraud. And so, this is also a case study that we took, analyzed there and looked at things that we could have picked up on that would have helped us avoid these problems. So, expect the process strategy, the way we deploy capital to change or improve if we can improve it. But, the overarching investment philosophy, I would say you should expect that stay, we're always going to be concentrated long term focused on the very small subset of the market that we know really well.

Market challenges, missed opportunities and geopolitical risks

Here, Nadim Rizk discusses the challenges and strategies of navigating market underperformance, particularly when missing out on major success stories like Apple and Amazon. He emphasizes the importance of understanding macroeconomic risks, especially considering rising US-China tensions and their implications. He reflects on historical market phases and the need for a balanced perspective on current economic conditions.

We are quite confident that what we own will continue to combine when we catch slowly up with the market. So surprisingly, despite the successful track record that we've built in the last 15, or 20 years, we've been, we have unfortunately missed a lot of the big success stories. So, if someone had told me 20 years ago that Apple and Amazon and all these companies were going to be crazy success stories and we were going to own none of them, I would have said guaranteed we're going to underperform. 

Shockingly, we did add significant value despite missing most of these large-cap mega opportunities. Now, luckily for us, we invested in other businesses that have also compounded significantly, but we, but they were not the big famous, you know, sexy ones, so to speak. 2024 is no different, except that it happened in a very compressed period. things like Nvidia went to 3 trillion market cap in a year and a half or two years. And that made it extremely difficult for us and I guess a lot of other people to keep up with that situation unless you were invested in that very narrow part of the market. 

Now, the way we look at it is we know from our own data that in the past, underperformance that was coming from things we did not own, especially in a strong and rising market, was not sustainable. Doesn't mean it's going to happen in the future, but that has been the case in the past. Underperformance coming from specific companies that we own that are really struggling is a more concerning underperformance for us versus, you know, markets up 25%. We're only up 15 or 20. So we are significantly behind, but that super performance is coming from a very small subset of the market.

So unless we think Nvidia gains three trillion in market cap a year, which in the past these things that happen, we are quite confident that what we own will continue to compound when we slowly catch up with the market.

We tend to store a lot of that macro risk in the back of our heads. We are quite aware of what's going on. I don't want to make it sound like we, completely ignore it and don't listen to it. do. I find news outlets tend to focus or over-focus on negative news because that's what really sells. there's, you know, it always feels like, you know, things are really bad today, but then we, when we look, go back in time.

There have been many phases where things were really bad. mean, we had a sizable business in 2008 when it was supposedly the end of the world. So, you know, we have to always be a bit more relaxed when looking at these things, but we do have a few situations today that could cause issues for us. I think the biggest of them all is the, rise of the U S China tensions, which for people that are my age or your age, they remember the, you the cold war. 

And we tend to forget that since we've had a bit of a Goldilocks situation where the U S worth the only superpower, which, you know, like it or not, it does have a significant benefit to the investment or to the, you know, asset appreciation world, because you have one big, strong which essentially creates stability. And before that we've had the Soviet Union and we had this Cold War between US and Russia and a lot of tension. It seems to me like we're going back to that situation where China is now maybe the new superpower and not Russia, even though Russia is a close friend. And so it's sort of, know, them versus us. 

And we see it in all kinds of geopolitical situations. More importantly, for us specifically, we see it in the Taiwan region because that's a very sensitive situation. And given the significant semiconductor manufacturing in that area, it is something that we should keep in mind.

The Impact of AI on Investing, Current Holdings and Future Outlook

In this last segment, Nadim Rizk discusses the current investment landscape, emphasizing the importance of conviction in business opportunities. He draws parallels between the transformative potential of AI and the early days of the internet, while also addressing the limitations of AI. He highlights key holdings in their investment portfolio and expresses optimism about future opportunities in various sectors.

Really these are businesses we know very well, extremely well run, high conviction. We've owned them for a number of years, quite successful and we're very positive on the business opportunity for the next three to five years. I think AI has the potential to significantly alter a lot of things. The best way to describe it is similar to the internet in the early nineties. And now maybe at an accelerated pace, back then we knew that the internet had the potential to change things and it could be big. Now, I don't think we imagined that you and I would be talking virtually now on a screen like this or you know, Googling information and getting it in two seconds. I think AI is a little bit the same in the sense that I think it has the potential to be big. We just don't know exactly how yet because it's still early days. Now, we are seeing it in some of our businesses and we're already users of some AI tools. So even our business, we think it already has significant advantages now machines. I mean, the majority of the businesses invested in so far don't have a significant AI impact.

But we're also not so invested in the leading-edge businesses, things that can, can be disrupted. And even things that seemed obvious a few years ago, like autonomous driving, where everybody thought, okay, you know, drivers and taxis and all that business is going to be out of commission, it has proven to be more complicated just because autonomous driving is so complex nature. So, AI is very strong at memorizing something and doing it again and again. And it's in most cases, much better than human beings. Where AI so far is relatively weak is in making a decision that has not been downloaded in the current base of information, which is exactly driving. So if you and I didn't know how to drive, Terry, we went to driving school and we spent a few days, a few weeks on learning how to drive. And I was driving on my own and something that I haven’t seen before happens in front of me. My human brain is amazing in the way that it can connect and make up a decision. Even though something happened in front of me that I haven't ever seen before.

AI does not, the current AI doesn't have this capability yet. And so autonomous driving has to figure out every possible combination that could happen and then download it. Then autonomous driving would be perfect. But that is almost impossible because there are billions of possible combinations. We're today at the stage where everybody is investing in infrastructure AI. And that's why companies like Nvidia are doing so well because these are the initial companies that would benefit from the infrastructure. And eventually, Nvidia may or may not be the best and the biggest success story of AI. Again, today it is because that's the infrastructure build-out, just like Cisco was in the nineties, but eventually Cisco Systems was not the biggest success story out of the internet. It was companies that actually used the internet to actually grow their business.

I mean, I have to say, if you look at some of our largest holdings, these are the stories with the most conviction, at least for the next three to five years. 10-20 years is honestly hard to see as much as we're patient investors, but yeah, anything today, you know, risk-adjusted that looks very promising or very attractive and we have a tremendous amount of conviction in would be a large holding for us. 

And some of the names that if you looked at the funds that are in the larger holding. So, on the international side, you will see things like Taiwan Semi, Novo Nordisk, which is the diabetes care business, Essilor, which is the eye care, LSC group, which is the financial information company. A lot of these large holdings would be things that were, you know, very positive on. On the US side, it would be, you know, moody's the rating agency, Microsoft and technology, a MasterCard, AutoZone in auto parts. I know the unrelated TJ Maxx in discounts. But again, not the most exciting, but great business. Sherwin Williams in commercial paint. And really these are businesses we know very well, extremely well run, high conviction. We've owned them for a number of years, quite successful. And we're very positive on the business opportunity for the next three to five years.

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