From chalk boy to legendary advisor: Al Pearlstein’s long game

At 92, Al Pearlstein has a bit of a longer view of investing than most people.

But for the legendary Bay Street wealth manager and pension advisor, who’s seen clients through 11 market cycles since 1950, youth is no excuse for lack of perspective.

“Over the years, I’ve found that clients rarely spend enough time to understand their investments after spending a lifetime of saving,”Pearlstein said.

With new products filling up the financial advice market, interest rate fluctuations and market changes that take decades to play out, “it has become more difficult for the average investor to navigate the financial landscape.”

Pearlstein’s wisdom doesn’t only come from age. A life-long reader, he would devour books on finance, history and economic theory while studying at the University of Toronto – a habit he credits with landing him his first finance job, posting daily trades by hand at Milner, Ross.

He advises all investors and wealth managers to keep the broader political, historical and economic context in which stocks are traded in mind when making decisions about their finances.

“Economics is always subservient to politics in the short-run (10-30 years in general) until it isn’t,” he said.

“Two examples are the old Soviet Union and Venezuela, now. Italy,
Greece and many countries in South America since World War II have experienced political instability because of poor economic policies.
Having an understanding of history (also) helps explain why populism has become popular now.”

It also helps investors handle volatility, since a look back through history shows market cycles have a rhythm, and they rise and fall for particular reasons.

“Understanding the 8 to 11 year business cycles is the key,” said
Pearlstein.

In 1952, for instance, Canadian Pacific Railway, Cominco and Husky Oil all dropped 50 per cent in six months. Junior oil stocks dropped 90 per cent. If you excluded oil and gold, many quality non-cyclical investment-type stocks were down 20 per cent and the decline had been going on for almost a year.

Although the resource-heavy Toronto market benefitted from the lead up to the Korean War (1950-1953), it gave back some of its gains. This was followed by a period of relatively good markets from the mid-1950s through the mid-1960s.

To Pearlstein, it’s also important to have a basic understanding of the different classes of stocks, and to hold them in the right proportion – a balanced approach that, while popular today, was novel in the 50s, when penny stocks and get-rich-quick schemes were the norm.

“The two basic classes (of stocks) are aggressive and defensive,” said
Pearlstein.

Aggressive stocks are where you go to make money; defensive are more stable.

And specialty stocks, which are what you’d call growth stocks today, are the trickiest because “you only tend to hear about the specialties when they’re up … You didn’t hear about them three years ago when they were 50 cents, now they’re $50.”

Even riskier were promotional – the penny stocks, which years ago acted as an unofficial lottery service. As mining boomed in Canada in the 40s and 50s, people saw a chance to buy something for a dollar and sell it for $20 – not unlike the bitcoin mining boom in 2018.

“I tried to explain to people, to get involved with this stuff is a spider’s web,” Pearlstein said.

“The guy in the inside has millions and millions of shares, and his job is to sell as much as possible. He was a promoter in the truest sense of the word. Very, very few of these enterprises worked out over the long term.”

The reason people bought into speculative stocks hasn’t changed much in the last 70 years: a mix of greed, unscrupulous traders and shortsightedness – with no short measure of opinions from “uninformed friends and ‘talking heads’ on business television.”

“You have to have a broader point of view. After (markets) go up, people want to buy. After they go down, people want to sell. You have to try to act on what I call the contra-emotional basis,” said Pearlstein.

Too many investment managers and investors “haven’t got enough of a background to understand,” he added.

“They don’t know history.”

Al Pearlstein’s Top 5 Books to Read:

  1. The Intelligent Investor, Benjamin Graham
  2. The Battle for Investment Survival, Gerald M. Loeb
  3. My Own Story, Bernard Baruch
  4. Extraordinary Popular Delusions and the Madness of Crowds, Charles MacKay
  5. The Ascent of Money: A Financial History of the World, Niall Ferguson

Pearlstein credits his dedication to reading with helping him develop a successful, long-term approach to investing. He has five books on his must-read list, and has handed out more than 4,000 copies of these in the past 60 years. The giveaway comes with an offer: If you tell him you’ve read the books, he’ll buy you lunch. No test, no questioning, just your word that you invested the 100-plus hours needed to read the books, which Pearlstein believes amount to the equivalent of five years’ experience in the field of finance. As of 2019, he’s had to buy 13 lunches – the last of which took place in 2011.

5 months ago