Bay Street sage still has fire in his belly

Even four decades on Bay Street has failed to mellow Ross Healy.

After 40 years as an analyst and money manager, the no-nonsense CEO of Strategic Analysis Corp. is still firing from the hip and making the unpopular calls many of his peers in the investment industry won't make.

The one-time schoolteacher is best known for taking dead aim and opening fire on Nortel Networks and its brittle balance sheet six years ago while the street was deceiving investors with popular buy recommendations and exotic target prices for the stock.

Healy, a stickler for pristine balance sheets who maintained his discipline when few others could in the raging bull market that peaked in 2000, was scorned in some circles for his bearish stance - until Nortel turned into the most devastating stock crash in Canadian history.

Brennan O'Connor, Business Edge

Strategic Analysis Corp. CEO Ross Healy won't back away from making the unpopular call when it's warranted.

Today, the 63-year-old Healy is as fiery and candid as ever, forecasting a disaster in a popular sector of the stock market, but one thing in particular has changed. When the sage of Bay Street speaks, people sit up and take notice.

1. What was your boyhood dream?

"Frankly, my boyhood dream was to go to college. I grew up in a rural environment (at Bancroft, Ont.) and not many kids went to college then. I never really wanted much beyond that, although while I was in high school I did seriously think about going into law. My sister went into law and we only needed one good lawyer in the family. She had quite an excellent career. My parents and grandparents were always interested in investing and I had shares in a couple of companies as a kid. I was never allowed to cash them in and spend them. I had investments as a kid and was aware of them. One of the stocks was British American Oil, which did fairly well. I think the other one was Bell (Canada), which muddled along and paid good dividends. My father (Ross Healy) was in the life insurance business until he had to take early retirement because of asthma. He retired and we bought a resort hotel at Bancroft. I remember my father bringing Fortune magazines home with him when I was in high school and I read them from cover to cover. That's what I loved to do."

2. What was your first job after graduating from high school?

"I spent the first year after graduating from university teaching high school. A dear friend of mine and fraternity brother was in the investment business. He always said, 'Man, this is so much fun.' And then when I talked to him about teaching, he said that was something he always wanted to do. We were almost thinking that we would switch jobs. I taught at a really nice school in Oshawa, but it became pretty clear that teaching was too structured for me and it would have eventually driven me nuts. I kept going over how long it would take to become an assistant head of a department, to become a head of a department, a vice-principal and then a principal and so on. I kept going over it and I thought, 'Jesus, I can't live my life this way, not knowing what the hell's going to happen to me.' So I got out and went into the world's most uncertain profession. I started working for Midland Osler Securities (brokerage) as a sales trainee in 1965. Eventually I moved into investment research and I just loved it. I've stayed in the business for 40 years."

3. Can you remember the first stock you ever bought?

"I had a small inheritance, a very small inheritance, from an aunt and I promptly lost about three-quarters of it in Windfall Mines and Oils. I'm talking about a $1,500 loss. And it was the cheapest and best lesson I ever learned because I never touched the penny mines after that. So I got my catastrophe out of my system early and never bought a penny stock after that."

4. Who was your mentor during your early years in the business?

"It was probably Murray Sinclair, who came to have a very jaded reputation after I worked with him. He was very, very clever and he taught me a lot. The other person who taught me a lot was a very shrewd old bird by the name of Eddie Gunn. I worked with them at Midland Osler. They were both excellent mentors who taught me a lot about how to think about the business."

5. What's the most important lesson you learned early in your investment career?

Brennan O'Connor, Business Edge

Ross Healy has built Strategic Analysis Corp. into an investment leader.

"If you're going to have investment success, you have to bring a discipline to your investment process. It's nice to sort of hit for the fences, but it's an awful lot better if you get on base every time or most of the time. From time to time, you kind of feel like getting off the track, but then you look back at what you've done and say to yourself, 'Well, it's not only worked but it's given me a better rate of return than the indices and it's nice and steady.' "

6. What in your mind makes a good equity researcher?

"One of the things I learned early at Midland was the importance of independent thinking. If you went against the crowd and looked for really beaten-down securities, you could do well. The first real zinger I found (as a research analyst) was Revenue Properties, a real estate company that I identified when the stock was trading at three bucks. It went from $3 to $84 in two years in the late 1960s. It was beautiful, just wonderful."

7. You're best known for your bearish call on Nortel when it was trading over $100 in 2000. How does that stack up against the best calls of your career?

"I would say it's the best call I've made on the downside. It's great to call a catastrophe, and I certainly did, but it's also nice to make people money. There's a certain satisfaction that comes in seeing people get their comeuppance, but it's not a satisfying experience because, sooner or later, as you become well known and identified with something as I did with the Nortel catastrophe, a lot of people come up to you who are seriously bleeding. Their stories are horrendous and dealing with people's very profound pain is difficult. You have enormous sympathy for them and you realize that when these stupid things are allowed to happen, they cause tremendous collateral damage. They're things that destroy and there's very little pleasure in that. When I grew up in the country, everybody carried a rifle and they shot things (animals). But I hated killing things and I don't like seeing people in pain. There's nothing you can tell them (victims of Nortel's collapse). You just kind of live with their pain."

8. What did you see in Nortel that others didn't?

"When it was trading at $121, we looked at the stock and determined that the minimum downside was $25. Then, we looked at the balance sheet, which was full of goodwill, and we thought to ourselves that if we took out all the goodwill, the potential downside was as low as $8. And that was if the equity didn't get wiped out."

9. Is there another Nortel type of situation out there on the verge of collapsing?

"Yeah, I think a number of the income trusts are potential Nortels. We've already seen one income trust this year (FMF Capital Group) that Bank of Montreal (BMO Nesbitt Burns, which led FMF's initial public offering) is being sued over. I think there are more of those kinds of things out there. Firstly, a number of the trusts are paying out much more than they earn. They're basically paying dividends out of capital and yet investors have become blind to that and treating the repayment of capital as if it was income. That's going to come back to haunt them. Secondly, there are also a number of income trusts that may be claiming depreciation but they're not using the depreciation. They're basically paying that out as well. That essentially means that they're running their plant and equipment down and that will have to end. Thirdly, if we run into a recession these things are going to get hurt anyway. Fourthly, people think that income trusts are safer than common stocks and don't carry the risk premium of common stocks, and that tends to be a formula for major declines in the trusts. I greatly fear for some of the holders of trusts. They think that word 'trust' means something, as in something you can trust, and it isn't. It's just a form of a business organization.There's going to be some considerable pain."

10. Energy stocks were the big story of the market in 2005. What do you foresee as the story of 2006?

"The story for 2006 will probably be an incipient recession, which could actually lead to a fairly nasty one if the U.S. consumer is forced to retrench. It's going to mean he (U.S. consumer) is going to have to rebuild his balance sheet. That means that we're going to have a very different kind of recession than those we've had since the post-war period. Normally, there's an inventory correction and a business correction. But this one is going to be a balance sheet correction in which the consumer rebuilds his balance sheet. And that tends to take longer and the recovery is slower. So I think it's going to be a surprise."

11. How do you, as a money manager, prepare for that scenario?

"Seasonally, we've got a little bit more to run in the stock market and I would think that the energy stocks will do fairly well early in the year because it's their time (seasonally). But we will be slowly raising cash as we come out of stocks that get to our evaluation targets. We're running about 30-per-cent cash right now."

12. What's your best advice for the average investor for 2006?

"Don't be afraid to hold cash as an active asset. I often hear from clients and other people who get very antsy when they have cash sitting around. They want to do something with it. Sometimes, there is nothing that you should do. In those situations, you should be very happy to hold cash and wait for much better opportunities to emerge. Part of our job with our clients here is training them to be comfortable with the notion of actually having cash. That is difficult for some people."

13. What's the worst-case scenario for the market in the event of a recession?

"I'm simply hoping that the Fed (U.S. Federal Reserve) actually does know what it's doing whilst suspecting that they don't. I'm hoping that they will act fairly promptly to try to reduce interest rates and maybe mitigate some of the worst effects. But I don't think they'll be able to do much about the stock market because throughout my entire career in the business, when there's a slowdown, I've never seen a market in which I was able to look across to the other side of the abyss and actually get through unscathed. I know I shocked the hell out of people when I said Nortel was maybe worth $25 when it was trading at $121, knowing perfectly well that it might be worth only $8. But I don't like to shock people. That was one of the pieces of advice Eddie Gunn gave me."

14. What advice was that?

"In late 1969, while I was at Midland Osler, I was bearish as hell on the market going into the big market correction of 1970. I could see a big one (correction) coming and I wrote about it. So Eddie took me out to lunch one time and he said, 'You know, Ross, I agree with your analysis that this is going to be a worse than normal correction.' But he said, 'If you take extreme views, you will do one of two things - you will either simply be ignored, which is useless, or you will terrify people and they'll freeze in the headlights and they'll be run down. Either way doesn't serve your purpose.' Given everything that I've done since then, I guess that was one of the best pieces of advice that I've had. When the stock market crashed (in 1987), I was running a paper portfolio for the Financial Post, called the Talisman fund. As I was looking at the market, I got a horrific gut feeling that something was really drastically wrong and I hedged that portfolio using market puts, the first time I'd done so. When the market cratered, the portfolio came through it flat. It was the first time I had clients (of Strategic Analysis) actually calling and saying things like, 'You're not going to jump out the window or anything, are you Ross?' We weren't phoning clients. They were calling us. And I was able to say that I was fine, thank you."

15. We've seen a lot of allegations of corporate crime in the headlines in recent years. Do you think that situation has gotten worse than in your early years in the business or is it just getting more attention?

"When there's great wealth, there's great temptation to cut corners, and now they're paying the piper. But that's the way it always has been. Investors and everybody will look for the level of ethics to rise substantially as they did post-'29 (after the 1929 crash). I've always avoided companies whose management I don't trust. While I was at Merrill Lynch Canada (as director of research), I always remember an analyst I had working for me named Roly Jones. Roly once observed that you can never make money with Conrad Black (the former Hollinger International CEO who is facing fraud charges). Even when you know what he's doing, you still can't make money. Let's just leave it at that. It was an easy call not to have anything to do with anything that Conrad did. That's what Roly said, and he was a darned smart analyst. Given the record of Conrad's companies, I thought that was extremely good advice. So, when I was with Merrill, we never issued a buy or sell recommendation on Conrad's companies. We simply didn't touch them."

16. When you research a stock, how do you know management is telling the truth?

"I don't. Which is why I rarely talk to them. I look for a track record, I look for evidence that they run a sound balance sheet and I look for evidence that they can earn a decent ROE (return on equity). I don't listen to all the fluff. I look for evidence that they can do what they say they are doing. I find that much more useful than talking to them. Do I know some managers and management? Sure. Do I trust some people more than others? Sure. But it's largely based on their track record than what I know about them personally. I just see what they do. It shows up. If you take egregious amounts of options and ridiculous amounts of money for doing jobs that any decent manager can do, then you know you have to be careful."

17. Who's the investor you most admire and respect?

"The person who has had the most profound influence on how I think about things and who I admire is Peter Bernstein (a financial author and historian). He has written a number of excellent books. His book, An Economist on Wall Street, was the first book I read about the business. I've also gotten to know him and he's a very, very nice man. He always took his wife to the events he went to. He had a very sound, level-headed approach to things. I had even more respect after I got to know him. His advice was that the best stocks that he ever bought were the ones that were priced so ridiculously cheaply that he couldn't figure out why people were selling them at that price. Mostly, what you find out when things are really, really cheap is that there's nothing wrong. It's just that investors get all a-twitter and get all carried away. They go to emotional extremes and then they hand you stocks at prices that are just silly. And that's how money is made for value investors."

18. What is it about your business that really gives you a kick?

"What I get a kick out of is when people who I meet at an airport or on the street come up to me and say, 'Hi, you're Ross Healy and I'm George Higginbottom,' or whatever the dickens his name is. He says, 'I still remember that call on Nortel you made, I sold my stock and it's the best thing that I ever did.' I like having happy clients. I just really like helping people. I think they appreciate it because I'm dead honest with people and I have a strong discipline and stick to it all the time. The twin keys, as I call them, for a money manager is that you don't have an agenda. Your only agenda is to make them money."

19. Do you think success has changed you?

"If anything, this business makes you a little bit more humble about life. That's because if you've gotten to my age in this business, you do develop a humility about it. And I don't mean that I go around like a flagellant or some bloody thing like that. But to survive this long you have to lose your arrogance because, if you don't, you'll have lost all your money. And you will become increasingly aware of what you don't know. That is the real lesson that one learns after 40 years. It's not what you learn. It's what you don't know. (Chuckling) That's what keeps you humble - finding out every day that there's something you don't know."

20. How do you look back on 40 years in the business?

"It just went by in a whirl. The business has been everything I ever would have wanted out of life and perhaps even more. It was as uncertain as teaching was certain. I certainly got what I bargained for when I quit teaching. It has been lots and lots of fun. I absolutely love the business. You know, there are those people in the business who get to retirement age and get the hell out, and go and have a McDonald's franchise or go and play golf. And then there are those people like Warren Buffett (chairman of Berkshire Hathaway) and many others who are still around when they are 75 or 80. People say, 'Christ, I thought that Healy was dead. Oh, no, no. There he is, still stumping down the hall.' I kind of think I'm going to be one of those people because I just love the business. It's always interesting because every time you round the bend and think you've got everything figured out, the market throws you another curve. But the brilliance of the market is that it can read its own history, the same as I can read its own history. And therefore it's always changing. If I retired, what would I do? You know, if I retired, I'd be doing what I was doing except I wouldn't be paid for it. So why would I do it?"

Ross Healy

* Title: Chairman/CEO, Strategic Analysis Corp.

* Born/raised/age: Sherbrooke, Que./Bancroft, Ont./63.

* Education: University of Toronto, degrees in political science and economics.

* Family: Wife Judi, six sons.

* Career: Healy is a 40-year veteran of the investment industry who has provided investment consulting services at Strategic Analysis since 1992. Prior to that, he was director of investment research with Merrill Lynch Canada. He was a co-founder of Sceptre Investment Counsel and has also worked as a research analyst with two other investment firms - Fry & Company and Midland Osler Securities.

* Pastimes: Ballroom dancing, squash, bridge.

* Favourite investment book: Fooled by Randomness, by Nicholas Taleb Nassim.

* Favourite escape: France.

Strategic Analysis

* Profile: Strategic Analysis provides investment consulting services, portfolio management and corporate consulting to private and institutional clients. The firm, founded in 1978 as a research institute by the late theoretician Dr. Verne Atrill, provides research on equities on the S&P/TSX Composite and S&P 500 indices.

* Fund Stats: The Accumulus Talisman Fund managed by Healy had a one-year return of 23.3 per cent through November compared to the group average of 16.4 per cent.

* Web Watch: www.strategicanalysis.ca

* Address: 20 Eglinton Ave. West, Suite 1400, Toronto, M4R 1K8.

* Phone: 416-489-3603.

(Gyle Konotopetz can be reached at gyle@businessedge.ca)