Benj Gallander: The Contrarian Investor

Vince Cherniak - - Interviews
The London Yodeller

INTERVIEW CHERNIAK Benj GallenderBest Picture Oscar wannabe The Big Short is a cautionary moral tale for our age, exploring Wall Street greed, fraud, ineffectual or complicit government regulation, and, inevitably, the cynicism of bankers preying on the ignorance of the public and the poor. It’s also a bit of a philosophical investigation into the moral bankruptcy of making money for its own sake and the dangers of high finance’s investment vehicles that few can understand and yet affect everyone when they crash. Whether it’s best picture of the year, no matter: it’s certainly the best picture to explore and comment on the biggest financial crash since the Great Depression. With compelling central characters played by Steve Carell, Ryan Gosling and Brad Pitt to name a few, The Big Short unravels a complicated subject in a very entertaining style — yet with all the players and jargon, it’s a bit of a challenge to keep your bearings. It brings to mind that Keith Richards anecdote about going on stage: “I look around me, and there’s Charlie, there’s Mick, and there’s Ron… now, where’s the guy who knows what’s going on?”

Fortunately for us, Benj Gallander is just the guy who knows what’s going on here and can parse the proceedings. The Western grad is one of Canada’s most successful investors — the president of Contra the Heard investment letter has achieved 20% + annualized returns over two decades. He’s the author of The Contrarian Investor’s Thirteen and other best-selling books on investment and business. You might know him from his Globe and Mail column, or through his regular appearances on Business News Network. He prides himself on his contrarian ways, and not just on a philosophy that made him rich. He’s the kind of guy to take up ballet lessons as an adult on the premise that we should try things we don’t like. And at the age of 50, he engages in competitive piano lessons with his kid to keep them both on their game. Gallander believes in keeping both brain hemispheres in tip-top shape, so in addition to the business focus, he’s written and staged six plays over the years, and is a founding member of Toronto’s SummerWorks festival. He wrote his first book at the age of 18, the recently published Thoughts of a Teenager, which reads as a precocious version of Blaise Pascal’s Pensees.

When I first met Gallander, with his disheveled hair and a backpack full of newspapers, I mistook him for a street person. But there’s something endearing in a guy who holds his cutlery unconventionally like a little child (“It’s contrarian, but it gets the job done,” he says.) He’s also written a book of poems, MBA Hobo (I’m not making this up) and contrary to the old adage, Gallander is a guy you can judge by the cover of his book. Though to be fair, he informs us that he does in fact own a nice suit.

What was your first reaction coming out of The Big Short?

Well, it was interesting for me. I went with my 15 year old. He was by far the youngest in the room and he asked me if I understood it all. He said it was a very complicated film and I said I understood 99 percent of it, partly because I had read the book before. I guess when I look at the film, I see much of what has happened before you see the same kind of greed, a lot of the same kind of players who are only out there for their own purposes and to get rich. The difference now is that technology has become a major player in how things can get done, and you also see how the public bought into it, and you see how the government did not regulate it, and it all came down in the end into a major panic that almost brought down the system far further than it did. It was a great movie, entertaining, that in many ways is very sad.

Was it faithful to the book?

I read the book quite a while ago, and I think that it was. I thought it was wonderful the way they made it more entertaining. Because the content of this film is so complex, part of the question was how to create entertainment out of something that is difficult to understand and I thought that the direction was wonderful and a very different way of presenting a film. I thought it helped people stay engaged and gave people a better understanding of what was going on.

Why is it that the subject of economics and finance usually makes people’s eyes glaze over?

Well, it’s complicated and a lot of people are just so focused on their daily lives that it’s not an area that they want to look at. A lot of people don’t want to look after their own investments. They’d rather put it into an Exchange Traded Fund or mutual fund because they don’t want to spend the time on it. Also I think people in the industry like to portray it as brain surgery. So, John Q Public, you can’t really do this, you have to leave this in the hands of the professionals.

The banks invented these risky products predicated on a belief that house prices will keep going up. The Federal Reserve is behind it, yet even the guys inventing them aren’t sure what they’ve got.

I’ve learned over time to stay away from things I find complex or anything new-fangled because too often these things are invented so that certain people profit from them. Often they come up with these things and make people feel they have to be involved. I think history as we know it is a good teacher but one of the problems is people — when they’re growing up they simply cannot know certain things because they haven’t been exposed to them, so often the same errors have to be made. Then they’ll say, Okay now I get it.’ That’s unfortunate but that’s often the way it is.

One of the film’s attributes is the style they break the fourth wall to get Selena Gomez to explain a Collateralized Debt Obligation (CDO). Another thing done well is the musical punctuation — for example when they were talking to the Florida mortgage brokers who are boasting of signing people up with no jobs or money, you’ll notice Crazy (the Gnarls Barkley hit of that era) is playing in the background. It’s a poignant joke. Later on, in sort of a shortcut commentary to describe the injustice of these banksters walking away from their disaster untouched, and with huge payouts — Rockin in the Free World cuts in. Were there other memorable stylistic flourishes for you?

What I found interesting, the two mortgage brokers were absolutely reprehensible but they very much amplified a certain kind of person. Often people in almost any profession, they tend to look out after their own group and their group need rather than the big picture. In this case you have individuals only looking after what they need and laughing about it and the stupidity of others. One thing I did miss that my son caught — I didn’t realize later that those two guys were at the job fair. Maybe you caught that. A lot of times people don’t want to ask questions, and a lot of times they understand that the people who they are signing on won’t be able to repay, but they just decide to do it anyway. Again it’s reprehensible but they look at what they can have in their pocket at the end of the day.

Then there’s the argument made by the lady from the Standard and Poor’s rating agency, when she gets called on the fact that she shouldn’t be putting a triple A rating on these products. He’s calling her out on her own moral deficiency, and she says, ‘Listen buddy, if I don’t give him this rating they’ll walk down the street to our competitors at Moody’s.’ Everyone seems aware some fraud is going on, but let’s not ask any questions.

They just decide they want to do it or the competition will do it. The rating agencies were in it to a degree and there’s all kind of questions ‘Who’s sleeping with whom?’ so to speak. Bankers who put out information on companies, what do they call it — the Chinese wall, is that the expression? There’s a vested interest to do certain things, and to turn a blind eye when it’s worthwhile. Is it Stephen Schwarzman who is the head of Blackstone… he was just saying how one of the major problems is how there’s too much regulation. And he’s a guy who last year made about 85 million dollars — which was down from other years — and if there was less regulation he would probably make much, much more. You have to regulate against people like that who just take too much money.

What did you make of the character Mark Baum, played by Steve Carell? Is he the ostensive hero? He’s on a crusade to punish the banks, seeking vengeance for everything from 25 percent credit card loans, crushing student loans, to these toxic products preying on ignorance.

Yeah I think it’s fair to say that he’s the hero. He saw many of the problems out there, and people and corporations that preyed on other people, and even at the end when he was questioning whether he should take the big windfall. He was willing to call people out. He was willing to stand up. Now, part of that is a personality type based on whatever he was made of. I don’t know if he had ADD or Aspergers but he was willing to do it. Often people aren’t willing to do it, they sit back and they just let things happen

There’s a finer point in here on what constitutes virtue. These banks are betting against their own products, its wrong, its fraud. So Baum makes a presentation where he says, “For 15 thousand years, fraud has not paid but now it does” and he wants to see the banks bleed. But that is complicated for him: if he cashes out, he’s become part of the problem. It’s a very dark film actually. There is no redemption because at the height of the crisis, when we see Bear Stearns and Lehman Brothers have collapsed, they throw up this quote on the screen: “Everyone deep in their hearts is waiting for the world to end.” Its a quote from Haruki Murakami. How did that register with you?

Given the way the human animal is, there are always going to be people who look to game the system. I think that’s pretty much how it its always been and always will be. It’s always going to be a part of society. I sometimes take it back to the cabin principle. When I was a kid at camp with 10 or 12 kids in the same cabin, certain people always seemed to assume certain roles. The bully, the jokester, the one who gets picked on. It seems very much the same to me in offices and the larger society. Anywhere that I’ve worked, there’s always one or two people who get picked on a little bit or considered the outsiders. I don’t really think that’s going to change. I’m sometimes staggered by the amount of crime out there and now with the internet, it offers a whole other place for crime to occur.

And you have guys like Taleb saying that the way financial industries are getting so complicated, with instantaneous global connection, there’s bound to be some sort of new Black Swan event down the road.

I think that’s pretty much given — thats whats going to happen. There are people who are looking to scam us and it’s just the nature of certain people and the kind of work that they do.

When the scam is coming from the very trusted institutions that run our economy, this gets to the notion of moral hazard. The idea of moral hazard is that the person or corporation is not put on the hook for the losses that stem from that risk. Post ’08, have we eliminated moral hazard? Specifically have banks covered their own risk outcomes in 2016? Or are taxpayers still at risk of having to do a bailout?

I think we’re still at risk. The last few times I’ve been on BNN I’ve mentioned how I think the Canadian banks are making a mistake by continuously increasing dividends instead of paying down their debts. If you look at CMHC and the government, we the people are responsible for a lot of the mortgages out there, and the banks may be writing them, but at the end of the day if they turn bad it’s the taxpayers who could be responsible. 

We’ve seen it in Cyprus, Greece, where there is a bail-in. You find this a legitimate fear for the U.S and Canada?

Well we just saw it. Go back to 2008. I forget how many trillions of dollars it cost them. They had a great dig at the end of the film, the one guy who went to prison…. Remember?

Yeah, one guy from Credit Suisse. At the end of the film were informed that in 2015 several businesses have begun selling a tranche product that is basically a rejigged CDO, then the film fades into Led Zeppelin’s lines “If it keeps on raining, the levee’s gonna break” — suggesting we haven’t learned a thing and the past is going to repeat.

As I said, a lot of it is just the human animal. They want to make money and they present complicated options to people who don’t understand them. Even now, you read that if you have your money in say a bank account or a GIC, you’re losing relative to inflation which is true. But at the same time, that’s suggesting you should be in things that are riskier so that you can be ahead of inflation. I did my MBA thesis on the Bank of Nova Scotia. At that point the banks were having trouble with third world loans, remember this? They decided they needed to have higher returns so to get higher returns they went to the third world where things were riskier and ultimately it blew up in their faces. I think we weigh things too much in terms of growth. We have to have growth all the time. I don’t know at a certain point if growth is really the key or you have to start looking more to stability. If we’re not hitting the growth targets that we want, then something’s wrong here so therefore we have to juice the system.

Thats one of the explanations for how the subprime mortgage thing came to be because, in the early 2000’s, you had a lot of rich people, Chinese, Russians, all over the world looking for higher returns so Wall Street invented a product where they buried a little more risk into them to give them higher returns. As they note in the film, they took this fairly stable investment based on mortgages and created an atomic bomb that almost destroyed the world’s economy. Six million people lost their homes in the U.S. alone, eight million jobs. So you’re right about the ruinous impact of the drive for growth.

This is a major problem and it has to be addressed through taxation. On BNN I suggested maybe they should make the capital gains tax the same as normal tax. The person who was interviewing me said, ‘Well, then the rich people will just get their lawyers looking at the ways to avoid paying.’ You can say sure, but I’d imagine they already have their tax people looking at ways to avoid paying. I don’t have a problem with someone looking to pay as little tax as possible in legal ways, but the government has to set a solid framework so people pay their just due. That’s more difficult now with globalization.

Should some of these “too-big-to-fail” corporations pay for their mistakes to keep the system kind of honest? They say in the film, they knew all along the government would bail them out and the taxpayer would pay. They privatize their gains but the losses are socialized by the tax-paying public. Is that a capitalistic system?

These white collar criminals have to be punished for their crimes. I can see how they’d get prison sentences, but often the monetary price that they pay is very, very low if anything at all. They should not get away with the spoils that they’re cheating. I see these fines that people pay, they pay 20 thousand or 50 or whatever. I think, ‘Hey that’s pretty good. They probably made 25 million dollars and it cost them a million dollars. That’s not a bad day at the office.

One guy from Credit Suisse went to jail for trying to hide three billion in losses, and yet that’s something every bank was doing every day. There was a documentary a few years back, Inside Job, covering the ’08 crisis, focusing on the policy makers and economists that were culpable. When I came out of the theater, I ran into this judge and he was fuming. He was muttering something like, “If I ever saw these motherfuckers in my court they would pay.”

I think if people recognize the potential dangers that they could be in if they cheat the system, they’re more likely not to cheat it. Some people will do it anyhow, no question, but if they see a lot of people going to prison for these actions, they may think twice about it. Other people won’t. They’ll think, ‘Well, I‘ll just get away with it’ or ‘I’m not doing the same thing.’

The Big Short leaves us with a big WTF feeling: How did we let this happen? Why didn’t anyone pay? Why was there no change?

You look at the [government] people who were meant to run interference, a lot of them were from Goldman Sachs, and you don’t get more capitalistic than that. Are these really the people who will look out for the people’s interest?

The film suggests that the people running Wall Street are basically running the government as well. That’s one of the themes here: Wall Street has basically got a puppet in their hands in Washington. I came across this quote: Governments are slowly having less and less say in what these organizations do. They are so large that they can combat government power with a clout of their own.

Oh, Absolutely

Do you know whose quote that is?

I’m not sure.

It’s from this precocious kid in a book called “Thoughts of a Teenager,” page 73.

[laughs] That’s funny. Wow, I wrote that a long time ago. I must have been a deeper thinker then.

In the wake of the ’08 crisis Canada’s mortgage lending policies were praised for sparing us a downturn like the U.S., but some today argue that were in a bubble.

I do think so. I remember in 1984 which was when oil and gas prices came way down, and I went out to Calgary and my business partner took me to a subdivision. So many places were for sale because people had just left. They had bought them for x number of dollars and they had a mortgage for x number of dollars and now the house was worth a lot less than the mortgage, so they decided it wasn’t worthwhile or they lost their jobs. That always hit me. At a certain point, it doesn’t pay people to feed the mill, and I think that we could be getting to that point now. Prices in Toronto and Vancouver keep going up but they seem ridiculous to me. Calgary is a special situation because so many are losing their jobs, and I can see how that market could come down quite a bit. I think we’re in a danger zone. I read some quotes that make no sense to me: “You can’t recognize you’re in a bubble until after the bubble has burst.” Well, I don’t believe that for a second. We’ve recognized bubbles. It’s hard to know when they’ll burst but major dangers are out there now. I think the Bank of Canada made a mistake when they lowered interest rates twice. I think it’s good they didn’t lower them last time another quarter, but again, that encourages people to buy houses that ultimately could be beyond their range when rates go up.

One of the paradigms we have is that in the middle class real wages haven’t gone anywhere in 30 plus years. To make people feel wealthy, banks give people credit cards with high interest rates that make you feel like you can go and buy something. Housing is one of the last places people can feel rich, like their assets are accumulating.

I think it makes sense. People obviously buy a house for security and quality of life. They want to see their housing appreciate, that’s certainly a goal, but if the price of their house comes down then they feel less well off. Same as with the stock market. People are buying and their stocks are going up, they are indeed wealthier. But when they come down all of a sudden, they feel poor and they may react. They may not have prepared for when they have to sell the stock because of the margin call or for living. But there’s no question a house is the number one investment in a person’s life and is a major indicator of how well they’re doing.

And that’s not likely going to change anytime soon?

I can’t see how it will ever really change.

There’s a photo going around on social media of the Canadian Loonie with a tag, Hey guys look what I found, an American quarter.’ How do you see the low Canadian dollar affecting the next few years of our economy and potentially your investments.

Well I’ve been gaining because of it.

Because of your American holdings?

What I did after 2008, I weighted the portfolio the highest to the American side, the highest I had ever done. Last year it gave a huge boost to the portfolio. It added about 12 percent to the returns, even a little more. For me that’s been great. Unfortunately if you’re not competitive, your currency is going to go down. We really haven’t been good here at protecting our manufacturing industries, and we’ve lost an incredible number of jobs because of that. The low dollar means we’re likely to buy more Canadian, and we can export more — but at the end of the day my goal would be for a high dollar while working at close to 100 percent of capacity. Our manufacturing has been hollowed out. Some of it may come back now. But you look at certain countries like Germany, Switzerland that have operated with high currencies — it helps the standard of living. If you look at countries whose currencies are very weak, generally those countries and their people are impoverished. Without saying we’re moving towards that, I think a lot of lip service is given to supporting industry and manufacturing and we really have to focus. The Japanese did it years ago and the Chinese to a degree. Certain industries say, ‘Okay, we’re going to become the players here, and that’s what we really need to do and we need to protect those industries.

The price of oil obviously seems key to our evaluation. Would you prefer a lower or higher oil evaluation for our economy, because there’re pros and cons to that?

Well I love it when I fill up my gas tank. I’ve taken flak because I’ve suggested the government should add .5 or .10 cent gas tax at this time. It would be a good way for them not to increase the debt and the deficit too much. The price is low relative to what our producers and drillers need for many of them to keep going. But to a degree they were living in a fantasyland. You go back to Jeffrey Rubin saying oil was going to get up to 200 dollars a barrel. I never believed in peak oil, I just thought more would be discovered, and more will be discovered. With global warming it’s going to be easier to get to. So a higher price to some degree is good. A lot of the companies did not act in a conservative enough way. A major killer to me — of governments, corporations, and people is high debt loads. If you look at the balance sheets of the oil and gas companies, the vast majority of them were not in shape. They took on too much debt. So companies that kept their balance sheets relatively clean were much better prepared for a downturn. I said on BNN the other day — okay, if the government wants to do a lot more infrastructure, which I can see makes sense to a degree, I also have to ask how are they going to bring in more revenues? So I suggested raise the gas tax and knock down the RRSP level from 25,000 to 15,000 because only a very small cross section can pay that much. If we’re looking at income inequality like Trudeau wants to do, that’s one way of taking care of some of it.

Can we call you Canada’s Warren Buffett? He’s a value investor, you’re contrarian, but maybe you share some philosophies?

Oh, there’s no question we share philosophies. Of course he’s managing a huge pile of money and he’s buying into big corporations. We’re much smaller but we’re also looking at value, and I will buy more into turnaround situations – whereas when he’s buying a Coca Cola or an IBM, he’s buying majors.

Something you don’t do?

I’ll buy them when they’re badly beaten up. We bought Bank of America in 2011 when he got it. I’m not sure in terms of successful returns I think it’s fair to compare us to Warren Buffett. I admire his morality and I like to think that we are very thorough and honest in what we do.

Are there other figures outside the business world that are inspirational for you?

One book that made a huge impression on me years ago was Henry David Thoreau’s Walden. I just found that he covered so many different areas. And the way of that simplicity he was looking to live, I just really admired that. He’d talk about the economics, he’d talk about his lifestyle — he was just a unique individual. He had fascinating people pass through his place. I used to read a lot of Kurt Vonnegut, not so much now. He was just off the wall in so many ways. It was just great the way he looked at things. You look at his short stories and the way he would encapsulate things. He was a very interesting guy.

Are you as frugal as Buffett? Do you drive a better car than his purported 80’s Chevy beater?

Haha, I guess I do. I’ve never bought a new car. Right now I have — it‘s my second Toyota Highlander — and the first one that I bought was a demo, which had 21,000k and the second one I bought had 7,000k. I buy cars that have a fair bit of space now, because the four of us often go camping. When we drive to our place in the Laurentians, we are often loaded up so we need a certain amount of space. I bought my first car for $750 when I was at Western. I like to get value for my money. I’m always looking at discounts. The other day, I was going up and down the aisles and frankly everything I bought was on sale. If you can save ten dollars and you’re in the 50 percent tax bracket — that’s like 20 dollars, so it’s very worthwhile to save money and I’ve certainly instilled that in my boy’s head.

What’s the end game of being a successful investor, accumulating wealth? We have Buffett, Bill Gates, and now a 30-something Mark Zuckerberg vowing — after devoting their life’s energy to accumulating billions — they’re just gonna give it all away. What’s the end of accumulating wealth, for you?

Certainly some of it, hopefully, will be to pass on to my kids so that their lives will be easier, that’s important. And if you look at the second page of our Contra the Heard newsletter, in our philosophies, the last one is, acknowledge a responsibility to help those who are less fortunate. That’s important. We do have a responsibility to give some of it back. None of our lives are perfect or run perfectly. We all have certain challenges but we have to remember how fortunate we are.

By the end of The Big Short, when the various players shorting the banks had won their profits, there seemed to be a sense of disenchantment with the winnings. Dr. Burry, the mastermind of it all, closes his fund because, even though he got the bet right, the tumult of going through it all seemed to affect if not destroy his personal life. Can you relate to any of that?

I think that goes back to quality of life. I think there’s too many people who completely focus on money and will do almost anything for it and aren’t that concerned about other people and their suffering. So to me, it’s very important to have a balance. I work from home, so automatically that helps me create a certain balance. And because of the way we invest, I don’t have to constantly sit and stare at a screen. I don’t want to be monopolized and gated by the work that I do . . . going right back to the time after university when I just didn’t follow the normal course at all. For me, it’s worked out very well.

So yeah, there can be an obsession, and there’s people who get trapped and it’s unfortunate. The major arguments during a marriage are about money. Number one. For people who don’t have it, that’s pretty understandable, if you’re scrimping to get by and you’re focusing on it. But then there’s a lot of people at the other end of the pendulum who have a ton of money and yet they still obsess about it. At the end of my book The Uncommon Investor, the last line is, money often costs too much. Money’s very important. Contrary to the saying, to a degree, money can buy you happiness. That may sound horrible but money can give you options — you can go to that concert or restaurant, it gives you freedom to travel and do things. It can buy happiness and you don’t have to worry. But at the same time, I think that money can cost too much. You have to find the balance there.


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