Paul Harris, partner and portfolio manager at Toronto-based Harris Douglas Asset Management Inc.The Globe and Mail
Money manager Paul Harris believes the biggest mistake investors make is buying bad companies – which he says there’s no shortage of in the stock markets.
“The way markets are set up is more for investors to gamble rather than invest. That’s fine. I have no problem with somebody doing that, but it’s not what I want to do,” says Mr. Harris, partner and portfolio manager at Toronto-based Harris Douglas Asset Management Inc., which oversees about $163-million in assets.
“Just because it’s on the stock market doesn’t mean it’s a good business. My job is to look for really good businesses and try to hold them for as long as I possibly can.”
Mr. Harris cites well-known research from Arizona State University professor Hank Bessembinder showing that less than 4 per cent of stocks account for all of the net stock market gains in the U.S. over a 90-year period (1926 to 2016) covered by the study.
It’s why Mr. Harris has largely stuck with the same roughly two dozen stocks his team bought for its clients when his firm was created five years ago. He invests in North American companies with strong balance sheets and a successful track record of return on invested capital.
Harris Douglas Equity Portfolio currently holds 28 stocks across sectors such as technology, health care and consumer staples. Today’s top five holdings include Novo Nordisk A/S NVO-N, Microsoft Corp. MSFT-Q, Apple Inc. AAPL-Q, Costco Wholesale Corp. COST-Q and FirstService Corp. FSV-T.
As of Sept. 30, the fund’s one-year return was 24.8 per cent, while its three-year and five-year annualized returns were 9.6 per cent and 11.1 per cent, respectively. The performance is based on total returns, net of fees.
The Globe spoke with Mr. Harris recently about what he’s been buying and selling:
Name three stocks you own and are buying for new clients.
FirstService Corp. FSV-T, the Toronto-based property management company, is a stock we bought five years ago when we started the fund. Our average cost is $108.02. The company does property management for condos and gated communities in Canada and (mostly) in the U.S. It also owns housing-related franchise companies such as California Closets and Paul Davis Restoration, among others. FirstService has been good at making small tuck-in acquisitions to expand in different areas. It has never been a cheap stock, so we buy more when we see it fall. A risk for the company is potentially paying too much for an acquisition, but it has been a good acquirer over the years.
Novo Nordisk A/S ADR NOVO-N, the Denmark-based global health care company behind well-known diabetes care drugs such as Ozempic and Rybelsus, is another stock we’ve owned for the past five years. Our average cost base is US$26.67.
Diabetes and weight-loss drugs have become very popular in recent years, which has helped drive up the stock, but people are underestimating the longer-term value. More research that’s done shows these drugs may help solve other problems such as heart disease, sleep apnea and liver issues once people who take them lose weight.
While there are a growing number of competitors in this sector, companies such as Novo Nordisk and Eli Lilly and Co. LLY-N have a massive head start. Obesity rates have to come down because it’s a very expensive health care issue around the world. Novo Nordisk isn’t as diversified as Eli Lilly, which is one risk for the stock, but we still think it’s a great company to own. I continue to buy the stock for new clients.
Microsoft Corp. MSFT-Q is another stock we’ve owned since our firm started. Our average cost is US$52.28. It’s one of the few companies that was way ahead when it comes to AI [artificial intelligence]. Most companies have a lot of data, but it’s very messy. Microsoft has this great advantage, given its large and diversified customer base, to help companies understand their data and use it effectively using AI while incorporating many existing products such as Outlook or Office. The stock has done incredibly well for us over the years, and I continue to buy it for new clients. While we may not see the same growth with AI in the short term as in recent years, it’s still a good long-term business.
Name a stock you’ve sold recently.
I haven’t sold a stock since 2020, and that was Gildan Activewear Inc. GIL-T. We sold it during the early days of the pandemic as a decent percentage of its business comes from events – and with the lack of them, we felt the earnings would be poor. As for other stocks, I don’t feel the need to sell anything because the companies I own have done well and are compounding wealth for my clients. I would only sell them if they started to do something very different.
This interview has been edited and condensed.