The Canadian Investor - 25 Investing Terms That Every Investor Should Know

Episode Date: September 12, 2022

In this episode we go over investing terms that every investor should know when investing in stock or index ETF. From registered accounts to income statement, we go over the most important terms that we think every Canadian investor should know. Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor Podcast. Today is September 7th, 2022. My name is Brayden Dennis, as always joined by the one, the only, the wonderful Simon Bélanger. So we are coming hot off the press. Some breaking news.

It is just right after this morning's Bank of Canada rate hike announcement. Give me the details. I haven't even looked at it because I've been deep into some spreadsheets here this morning and just crushed eight blueberry pancakes. And we'll see how this goes. That's a bit aggressive but eight eight felt right yeah get ready to use those tiny airplane washrooms yeah yeah that's probably not the i'm literally going to the airport later after this and now

that you put that into context i i might be in for a rough afternoon yeah well yeah and to get back to the rate hike, so the Bank of Canada said they would be increasing the benchmark by 75 basis points. I think for the most part, there was still some people thinking it might have been 50 basis points, but I think it was a take size. I saw the most common were either 75 or 100, and they settled on 75 basis points. They're still doing their press conference. I don't have a full context on what TIFF is saying in terms of their reasonings, but the early kind of, let's say, talk that I saw

is that people should expect some more hate, sorry, rate hikes in the future. Some more hate hikes. Still waking up a little bit. And obviously with the baby, sometimes not getting a lot of sleep but i think the consensus is that there will be some more rate hikes in the future how many how aggressive will these they be i think it remains to be seen but they really want to get a lid on

inflation what are you talking about the very sophisticated financial analysts of tiktok said today was a cut. So, dude, I don't know. I'm conflicted. People who know what they're talking about, people on TikTok. I mean, I just don't know where to look today. Simone, we have a sweet episode. This was a listener request many times over. And the latest, we're like, okay, let's get it done. Let's do this segment.

Let's do this episode. This is a great episode to share with your friends or fam. Say you're a big fan of the Canadian Investor Podcast. I mean, duh, who isn't? But say, you know, you tune in every show. We know you're listening. We've seen the numbers. This is a great one to introduce to your friends as like, hey, you got to tune into this podcast if they're, you know, just getting into the game. Because this is a glossary in terms that everyone should know, or at least know that they don't need to know. I included a couple that are like, you know, finance bros like to throw in some jargon that really is just a synonym for something very simple. So, we'll kind of demystify that as well. So, that's what today's show is.

Yeah, yeah, exactly. So, let's get started. And honestly, just doing this exercise, we probably could do a second part to this because there's another like 15 to 20 that probably come to mind that would be useful to people. Yeah. And even when I was writing them, I was like using more jargon in the definition of the jargon. I'm like, oh no, I am opening a can of weeds here. Yeah, I tried to keep it as simple as possible. Did I say a can of wheat? A can of weeds. I don't think that's...

Oh, that's so cute. We're both struggling this way. A can of weeds is a new phrase that's going to go in as number 26 on today's jargon list. Yeah. So number one, I thought it was a good idea to just start with registered accounts. Now, a registered account is typically an account that will have some sort of tax advantage tied to it. There are some in Canada and the US, and there are some in other countries, but obviously it's the Canadian investors, so I'll stick to the Canadian ones here. But I won't go into detail with each of the accounts. We've done some episodes on that in the past. Maybe we can revisit a more detailed

kind of outline of each account in the future. But essentially the main ones in Canada, you'll have the Tax-Free Savings Account or TFSA. We'll refer to that quite a bit on the podcast. RRSP, so Registered Retirement Savings Plan. You can have a locked-in RRSP or a LIRA, which is a locked-in retirement account. Typically, these are very similar to RSP. They're just some restrictions on when you can start drawing on those funds. Registered Education Savings Plan, or ESP, is another one. Registered Education Savings Plan typically will be for your kids,

so you have some money and it's tax advantage for their education. You also have a RIF, which is a Registered Retirement Income Fund. That will be for an RSP when you start withdrawing for retirement on them. You'll have to transfer it. Well, you don't have to transfer it to a RIF, but by age 71, you have to. A LIF, a Life Income Fund, very similar to a RIF, but this is for a locked in RRSP or a LIRA, like I just previously mentioned. And the last one here is a registered disability savings plan, RDSP. That one we've not talked about on the podcast before, and I'll be very honest,

I don't exactly know how it works. I'd have to do some research, but if people are interested, don't exactly know how it works. I'd have to do some research. But if people are interested, I can always do a segment on that in the future. This is why this podcast exists. There is enough nuance between the taxation, the registered accounts, and some interesting securities here to warrant this podcast journey. And these accounts, I think, should be well understood. It takes a bit to really in your mind, compare and contrast the pros and cons. But I assure you, you will get it. You will get it. It's not that crazy. And you're probably already familiar with the TFSA RRSP. Those are the kind of two workhorses of most Canadians' portfolio. We've talked about them extensively on this show. Know how to use

them. Know when to open a taxable account when that makes sense. Take the time. It'll be worth it to really understand these. Yeah. And just based on some tweets I've received and also questions we get, but also in my day jobs, questions I get from people, there's still a lot of people that do not understand, even if we just stick to the TFS and RSP that don't fully understand how it works. So definitely worth putting the time in to just understand the pros and cons for each. Now, to the opposite of a registered account, you alluded to that you have non registered accounts or taxable accounts. That's pretty simple. It's not a registered account. So it's a taxable account, you can invest

typically while you'll be able to invest in a much broader set of investments. The rules are much more flexible in this account, but it is taxable. So the dividends will be taxable and so are your capital gains. And the capital gains, I will talk about that. I'll define it a bit later in these terms. Yeah. And we've talked extensively about this as well. Sometimes it makes sense tax efficiency wise to have a taxable account, depending on where you are with the amount of money in your RRSP, for instance. If it's a gigantic number and you're withdrawing it, it may not make sense from a tax perspective. So these are your friends. These are your tools. You mentioned that they're misunderstood. I don't have the number in front of me, but it is

in the low 40% TD published, or I think it was RBC actually, RBC published in the low 40% of Canadians are using their TFSA as a cash account to hold cash instead of using it as a wonderful compounding machine in equities that can provide investors with a rate of return. So, that report every time I see it when RBC publishes it, makes me think, Simone, we need to keep doing this podcast, man. We need this podcast to be in everyone's living room right now. Yeah, we'll slowly eat into those numbers. But anyways, now to the next point, that's one of yours. I think it's actually a really good one for anyone wanting to invest in individual stocks, for sure.

Yep. Number three on the list here is a bit of a three for one as well. And it is the three financial statements, okay. The income statement, the balance sheet, and cash flow. Accounting is the language of business. And I've made it very clear my stance on this. You don't have to be a CPA. You don't need to be the best accountant in the world. It's frankly unrealistic to be a professional level accountant as a DIY investor while working a completely different field. It's unrealistic to expect the carpenter is going to also be a CPA, but it is realistic for that carpenter to become a very good DIY investor. Having said that, you should be familiar with the three financial statements and why they matter. So I'm not going to go through each line

item here because you will fall asleep, I'll fall asleep, Simone will fall asleep. But generally an income statement, which is the first one, is what every company will maintain as like their profit and loss statement. It reports their sales, aka revenue, their direct costs, their expenses, and it eventually results in their bottom line, aka net income, aka profit, aka earnings, or a loss if it's negative, if they're losing money. Next up, we have the balance sheet. This is the health of the business. It's their assets. It's their liabilities. It's shareholder equity. It gives investors a look at how much cash they have

on hand in the bank, how much debt they have, all of the assets that they're holding as a company, whether it's machineries, trucks, factories, cash, notes receivable, and gives you an idea of debts that are coming due, both on the short term and long term. A scary balance sheet is a business in trouble. And then the third, the cash flow statement, it summarizes the movement of cash and cash equivalents. But for simplicity, it summarizes the movement of cash in the business. It helps us get a good look through into the business and helps us correct for some of the accounting issues that we see with just looking at the bottom line or net income from the income statement. So you'll hear us talk about free cash flow, EBITDA, those kinds of things. I'm going to talk about both of those as well as

different terms in this glossary here. So to recap, you don't have to be a CPA, don't stress, you don't got to be an accounting whiz, but you can do extremely well knowing each statement, why they matter and how they work together. You know, you don't have to audit every company's depreciation methods, right? Like that's just not required. That level of granularity is not required, but knowing your way around the three financial statements is very important. Yeah, yeah, exactly. And the more you look at some, the more you'll be familiar how they work, the more you'll understand the nuances between different type of industries as well. And what you'll see, right? Don't expect to see a utility with zero debt, like it will not

happen, something like that. But you know, for tech companies, it's pretty common to see a tech company without any debt. So just as you look at them, you'll be familiar. They'll have net cash position quite often. Yeah, exactly. Yeah, they'll have a net cash position all the time, like more cash than debt on the balance sheet. It's amazing. Yeah, exactly. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones,

all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best

products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host.

Now moving on to something a bit broader here. So market index or market indices, people may think, wow, that's easy. I know the S&P 500, S&P TSX, Dow Jones Industrial. Yeah, those are all indices. But what sometimes people don't realize is there's thousands of indices out there. So you'll have indices that will track specific geographical regions, for example. Some will track track specific sectors like I know on the TSX we have one specific for banking some that will be an ESG focus index and so on the three main companies that you'll see in terms of providing those indices and I think there might be a few smaller ones but the three main that I've seen are snp so standards and poor footsie ftse no idea

what it stands for but people pronounce it footsie and then sounds cool exactly and then msci is the last one so those three you'll see very often so if you see like index ctf from vanguard blackrock chances are they'll be using one of the index provided by those three players. So the FTSE are usually referred to as the FTSE 100 FTSE. It's the Financial Times Stock Exchange. All you need to know is it is the index for the London Stock Exchange in the UK. So when you hear FTSE, just think UK London Stock Exchange Index. All right. Next up, free cash flow. Free cash flow has become financial nirvana. I was reading a book by a Harvard biz professor who I

interviewed one time, and he described as financial nirvana in his book. And I've been using that term since because it has widely become a better known measure for profitability for a business. You can use this as your best friend. And the reason I hinted at it in the financial statements is that the reality is, is net income is not a great measure of profit. There are so many non-cash items like depreciation, amortization, for example. Free cash flow better measures how much cash is being generated in the business. It's so much better to figure out how much cash is going in or out of the business if they're free cash flow positive or negative. Also accounts for CapEx capital expenditures, which is a gigantic difference for free cash flow as well. And this typically is a gigantic amount of money or a gigantic line item for a business, especially with CapEx heavy businesses like heavy machinery or Amazon

building at warehouses, this line item is just hanging out, chilling in the back of the cash flow statement. But in reality, it is a large cost center for these asset heavy businesses. And so free cash flow then adds that in. And you have free cash flow as a better metric because you figure out how much money the company's actually generating when it comes to real cold hard cash. Because now we're accounting for those large capital expenditures and the funky accounting stuff that goes on. And so free cash flow is the goat of profitability metrics, in my opinion. Yeah. And just to add a little thing to what you said. So if people are looking at the cash flow statement, they're like, oh, I don't see a line for capital expenditure. It will usually be

purchase of property, plant and equipment. That will be the capex. If ever you're looking at that and you see that line, that's what you would subtract from the cash from operations, right? That's right. Yeah. And if you're looking at a, you know, there's multiple ways to calculate depending on what your starting line is. Like if you're starting with net income, then you do this. If you're starting from, you know, the top of the cash flow statement, cost from operations, then you add interest expense minus CapEx. Essentially, it's how interest expense minus CapEx. Essentially, it's how you get free cash flow. But there's many ways to calculate it depending on where you start on the financial statements. The reality is what's important is that it is a good measure for actual cash movement during a certain period versus a long list of non-cash items that go into

net income. Yeah, yeah, exactly. Now, moving on to a term we've been using quite a bit recently, and the term I believe I used at the very beginning of this episode. So basis point, but you also hear BPS or BIPs. So that's a term that we've been mentioning a lot because of interest rate hikes by the Bank of Canada or the Fed in the US. It's useful for that, but it's also useful when looking at figures in percentages, especially like margins that you'll be talking just next here. So one BPS is 0.01%. So when you hear that

the Bank of Canada is saying it's hiking its interest rates by 50 BPS or 75 BPS. Well, it means that the 75 BPS that they just did, it means that it's adding 0.75% to the existing rate. So if the rate was 2%, it will now be 2.75%. It is actually higher than that. I just had a random example here to keep it simple. The reason why you don't use BPS or BIPs and don't say that the bank increased the rate by 0.50% is because that would imply multiplying the existing rate by that amount, which would not equal the same thing. So just something to get used to it, especially if you're starting to dig into financial statements, you're keeping track of what central banks are doing, get familiar with this term because you will hear it a lot. Yeah. Like you can't, if you increase something by 0.5, you're multiplying it by one over two, AKA dividing it by two, cutting it in half.

Right. So mathematically people just use BPS or, go full finance, bro, and call it BIPs. So when you say, when we're talking about earnings episodes on Thursdays and we're like, yeah, margins increased by 75 BIPs, that means that maybe they went from 30% to 30.75%, right? Exactly. Speaking of margins, margins is something that you and I talk about with every business. I was trying to think about like, what are the things that we look at for every single individual security that we analyze? And it's without a doubt margins is one that is in that list. And the reason for that is you have to understand the unit economics of the business. And there are multiple margins you can look at. You can look at gross margins, which is at the top. You can look at operating margins. You can look at net profit margins.

Most people are familiar with the term profit margin. It's basically like how much profit is really left out at the end of every dollar you make. If you have a 10% profit margin, every dollar in sales, you make 10 cents in profit. Now, the reason margins are so important is because we're looking for companies. A very important piece of signal for a great business is a company that has maintained very high healthy margins and maintained because that can speak to their ability to continue to raise prices, to fend off competition and use their competitive advantage to not have to compete on price is basically the way I look at that. And the reason that I always talk about gross margins, because I want to

understand the actual unit economics of each thing that they sell. If we're talking about some company that sells a $100 t-shirt and they make 60% gross margins, when you subtract the cost of making the t-shirt, which is $40 in this case, you come out with 60 bucks. So that's a very healthy margin for like a real physical product. If we're talking about software, sometimes we'll see 90% plus gross margins. And the reason for that is because there's not high variable cost of goods sold. There's not additional costs for me selling a piece of software to person X and person Y and Simone. There's not additional costs for me to take on the same way that someone selling a t-shirt would have. It's the same reason we talk about Visa and MasterCard as having these sustained,

ridiculous net profit margins that speak to how difficult it is to disrupt them because eventually margins will get competed away. Unless you have such a high quality business, competitive advantage, and very hard to disrupt moat, you can really maintain those margins on a long time horizon. And they're very important to understand, not only from a quality perspective, but also to just get an idea of the unit economics of the business. Yeah. And the operating margins will just essentially add in the fixed costs that you have. So that's why oftentimes, you know, if you're producing, you know, five or 10 t-shirts, those fixed costs, you know, the cost of just lighting the factory and things like that,

usually they won't vary too much. Although this, we're starting to see that change in this current environment where it's varying quite a bit because of inflation and higher costs in general. But margins are really important. It will give you the health of the business. But make sure you do compare margins from, you know, you compare apples to apples and not oranges to apples. Because if you compare a tech company like Brayden just said to a clothing manufacturer, you're going to get completely different margins. Now, the next one here, I think this, I mean, it should have been number one. I don't think we're putting, you know, The next one here, I think this, I mean, it should have been number one. I don't think we're putting, you know, in terms of number one to, I think we have about 25.

No rhyme or reason for the ordering of this list. Exactly. Random order. So the next one here is compounding. So we've talked about this at length before on the podcast, but just based on some questions I've had and some replies to my tweets and just some emails, I think, you know, a lot of people still don't fully understand this. And I think it's something that should be taught in school

because it's so important on both sides, right? Whether you're racking up debt or you're investing. Now, this can be applied to a bunch of different things like interest, sales, earnings, cash flow. Compounding is simply calculating whatever percentage you're using on a new amount. Sorry, I think I messed this up here. So compounding essentially is just calculating whatever percentage you're using on an amount, but not on the original starting point. So for an example here, you have $1,000 and it grows at 10% a year compounded annually. After the first year, you'll have $1,100. So $1,000 plus $100 worth of interest. After the second year, you'll have $1,210. So the $1,100 from the previous year plus $110 in interest. So we're seeing that the

interest is actually higher the second year because it is compounding on the first year. So that's why compounding is so powerful and why over long periods of time, even a 1% difference in compounding can make a huge difference in terms of returns, for example. I do believe that every kid should learn about what I was lucky enough to learn from my math teacher in like whatever grade. There's a very important experiment for kids to understand, which is the question, Simone, would you rather have a million dollars or a penny that doubles every day for 30 days for a month. And, you know, of course, people are like, oh, a million dollars is a penny? You're kidding me. And the penny doubling every day, as you know, after I think after the 31st day is 21 million or something, right? And so, that speaks to the power of compound interest. And of course, you're not doubling your money every year. If you are, you'll be the richest human on earth. But that 10% market

returns every year compounding can create the most powerful snowball of wealth. And it is the reason that self-directed investors and, the regular person should feel so optimistic is because of the laws of compounding. Yeah, exactly. And it's why also we just look at fees a whole lot when we're talking about index ETFs versus mutual funds is that 1% or 2% different. It may not look like a lot just at first glance, but when you start just crunching the number over long periods of time, depending on the starting amount that you had and the money you're adding over time, it could be the difference of in tens, hundreds of thousands, if not millions of dollars, depending on what your starting base was.

So I just did the math. The 30 days is five, just a little over 5 million. Still pretty good. Goes over 10 million on a 30 day. Yeah, we're doing it on a 31 day month. Day 32, it's now over $21 million. There you go. Now leading in, well, I guess this was a good base for the next term here. So a term you'll hear a lot with financial media and you may be confused. So you may hear the term CAGR. So that just means compound annual growth rate. Now going back to what we just talked about for compounding, this is simply the rate of return at which something grows

on average from the start point to end point. So for example, to double an investment at an annual CAGR of 10%, which you just mentioned, it would take a bit more than seven years to do so because it compounds at 10% every year. But obviously, this would be the average because over a seven year period, a year, you may get 20%, another five, you know, it varies. But the average compound annual growth rate will be 10%. Yeah, it's a powerful growth rate term to understand because, one, you'll see it a lot. And, well, you'll see it get referred to with really great businesses. Not so good ones, you won't see that number come out.

not so good ones you don't see that that number come out speaking of great businesses let's talk about moats and competitive advantages i think it just kind of name dropped them earlier but a moat is really comes from the old medieval moat which was basically way back when, when people are trying to defend their castle from intruders, medieval times type gritty stuff. You would build a literal physical moat of water around the castle so it was very hard to breach the walls of the castle. Because what are you going to do? You're going to swim across the moat? No. So it was a way to protect what you have. And businesses that are in a great position want to protect what they have. And how do they do that? They do that by having a moat or a list, potentially a list of competitive advantages. We talk about competitive advantages all the time, whether it is scale, network effects. These are just some of the competitive advantages that a

business will use to flex on competition, to protect what they have, to maintain their moat. There's a long list of them. Network effects is one that we use all the time. It's basically the idea that the more users you have in an ecosystem, the better than that product has. I'll give a classic Costco example is the more members they have, the better pricing power and scale advantages they get to use over their suppliers, which means better prices. And better prices brings in more members. You have this runaway competitive advantage that it's just impossible to, you know, I'm going to build some warehouse to compete with Costco. And it's like, well, you don't have the member base. You don't have the flexing power. You don't

have the pricing power to flex on your suppliers. Like where do you start? And these are the kinds of things that protect companies like Costco from competitors over the longterm. Yeah. And I encourage our listeners, if you missed the episode, I think it must have been what early this year or late last year, we went over a list of modes that you'll see. So I just encourage people to go back and we did a full episode on that, on the kind of modes that you'll see with different kind of companies. I'll try to find the episode number here while you're talking. Okay, sounds good. And yeah, when we find it, we can also add it to the show notes.

okay sounds good and yeah when we find it we can also add it to the show notes now the next one here i referenced this a bit earlier at the beginning when i was talking about taxable account or non-registered accounts so capital gains capital gains is just a result of your asset increasing in value it will be the difference between your purchase price and the price that you sell the assets so if you buy a share of $100, well, at $100 and sell it later at $150, then you have $50 worth of capital gains. If you're investing in a TFSA or an RRSP, for example, you don't have to worry about that because you won't be taxed on it. An RRSP will be taxed eventually, but we won't go into detail. You won't be taxed at the time. However, if you're investing in a taxable account, 50% of that $50 of capital gains

I just mentioned will be taxed at your marginal income tax rate. So at the very least, you know, you're not getting taxed on the whole amount. But if you're a high earner, if you get taxed $50, I mean, you get $50 worth of capital gain, you'll be taxed on 25. So you can probably expect around like $12, $11 worth of tax on that amount because it is, let's just say you're paying 50% at your marginal tax rate. I would say, yeah, that's great. But I didn't hear any of it because I was Googling stuff. That episode is on February 14th, 2022. Okay. So that was earlier this year. It's called Eight Motes to Fend Off Competitors. We go through kind of eight types of competitive advantages that great companies have

to fend off competition. So that is February 14th. There you go. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep

is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money

hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. All right. Let's talk about capital allocation. Now, this is a term we use quite frequently, which is basically you're the manager of a business. You have a list of decisions. You have a decision tree of options to decide what to do with the cash that you have, the cash that the business is generating. Great businesses have opportunities for wonderful capital allocation from the management team in the list of investing back in the business to try to grow it even more organically, make acquisitions, pay down debt. Number four, they could pay dividends to shareholders with that cash. They could increase the dividend or they could buy back their own stock, aka share repurchases. So those are like the classic five decisions that the management

team will have to invest back into the business or reward shareholders via dividends or share repurchases. The reason that this list is important and you'll hear capital allocation thrown around as a buzzword is because investors are trying to understand which businesses and which CEOs and which management teams possess a high acumen for this decision. They possess a high acumen for this decision tree. When they have cash at the end of each quarter and they decide what to do with it, that they know what they're doing and not incinerating money. They're able to reinvest it at a very high rate. Charlie Munger says over a long period of time,

businesses will achieve the return of their invested capital that they put back into the business. And that mathematically makes perfect sense. So that's what we're talking about with capital allocation. It's a list of decisions that the business can make to reward shareholders in the long term or not reward them with poor decisions. Yeah, exactly. Well put. I won't add anything to that. Now, the next one here, market cap. So it's short for market capitalization. So it's simply the number of shares that are outstanding for the company multiplied by its current price. Personally, I find the market cap one of the most useful metrics to just get an idea at a quick glance of the size of the company. It has tons of limitations. So don't tweet at me saying like, oh, market cap's not useful and blah, blah, blah. I mean, I know it has tons of limitation, but it will give you a very quick idea of the value of the company. Keep in mind that it doesn't factor anything else. So it's just one of many metrics that you should look at when you're actually researching a company.

EV or enterprise value, for example, is much more more complete but it takes a bit more time to calculate if you don't have access to a site like stratosphere.io right away for so it is i think just for me just a good quick you know if i'm just seeing a company for the first time that's the first thing usually i'll look at is like okay okay, what am I dealing with? A small cap, medium cap, large cap, mega cap that gives me that quick at a glance view. You stole my term. Well, I wanted to give you this segue. Wow. You're it's like, you've done over 200 episodes of this or something. Next up, we have like large, medium, small micro caps. You're going to hear this term all the time. It's a micro cap. It's a large cap. It is an arbitrary term, but one you'll hear a lot describing how big the

company is or how small the company is from a market capitalization, aka market cap perspective, which Simone just explained. It's so easy to just be like, Simone, this is a 40 billion in market cap company. And then he will get an instant sense of like how big the company is. Like that's a, that's a large cap company. If I say, you know, it's a $1.9 trillion Microsoft, you're like, oh, it's the, you know, the largest company or second largest company in the world, right? Like that's, largest company or second largest company in the world, right? Like that's, you have that instant scale, you know, 200 billion in market cap for, you know, ASML or like what Netflix used to be after the destruction. You know, you understand like that's a huge, huge company versus, you know, one or two billion in market cap, which you'll find tons of those little gems. They're not small companies. They're still billion-dollar enterprises. But in the grand scheme of public companies,

these are small, maybe mid-cap companies. But generally, I think of over $5 billion as a mid-cap. So it's very arbitrary, but it helps give investors a sense of the scale of the company that they're dealing with. Yeah, exactly. And if you ever hear that term, you don't need to say like, think like, okay, it's going to be this range to this range. You know, just having a general idea. If you hear someone talking about a large cap, you're like, okay, I'm dealing with a pretty big company here, probably like you said, you know, 40, 50, 100 billion, doesn't matter if you know the exact, you're just, you know what you're dealing with versus if you hear a micro cap, that'll probably be around like, you know, five, 600 million, maybe a bit less in terms of market cap. So it's just

knowing what you're dealing with. Exactly. Now, a term that we refer a lot to when we look at ETFs. So it's the management expense ratio or MER. You'll also hear that if you're not interested in picking your own stocks and would rather invest in funds, whether it's ETFs or mutual funds, this is a term you should absolutely know. MER is an all-inclusive fee for funds. So it comes out of your return so the lower the fee the better because this compounds over time obviously with all else being equal typically index funds will have very low fees so we're going to be talking 10 basis points or lower so 0.1 percent or lower whereas an actively managed fund will have higher fees because the fund manager will have more expenses associated with the fund. So whether it's, you know, more expenses in researching stocks, potential staff

on hand and things like that in the hopes of beating the market. But, you know, they're fighting against those fees, right? Even if they do beat the market by a tiny bit, maybe they don't end up beating it if you factor in those fees. So that's why it's so important to look at that MER when you looked at a fun fact for a fund you might be interested in. Totally agree. This is one of the most important metrics you want to look at with the tear sheet on an exchange traded fund. And the lower the better, the lower the fee, the better. It's the first thing I look at. Yeah.

Instinctively. I'll look at a bunch of other things, but that's now I think about it. It's always the first thing I look at. Yeah. Cause you're just going to be like, Oh, I'm not paying 70 bips for this.

Like ETF. It's just like, there's no way I'm already pressed back on the browser. All right. Alpha. I wanted to include a couple, you know, finance bro terms that you're going to hear smart sounding people on TV use. You go, you know, there's so many investing terms that are like, that sounds pretty cool. That sounds pretty smart. It sounds

complicated. Usually they're very often they are terms for quite simple concepts. And I think alpha is one of those examples. It is a term used to describe an edge or an ability to beat the market. If I say something like on the pod, it's like, there's alpha in undiscovered companies on the TSX. It just means that there is an opportunity to have an edge and beat the broader market index because you're looking at opportunities most of the world's not. Or people will say there's a lot of alpha in those micro caps, those really small companies,

because the large investing community is not looking at them. Large fund managers are kind of like scoped out from a volume perspective from maybe they're arbitrarily constrained out based on they only invest in 10 billion in market cap plus. Those kinds of things may make it easier for investors to find quote unquote alpha, which is an ability to beat the market. Generating alpha is just like excess returns above what you can get from the broader stock market index. And then lastly, here's a term I'll use to pump my own tires, which is, Simone, I have generated alpha since I started investing. Hopefully that continues. I can continue to say that. Yeah. Yeah. I don't have anything to add here. It's not a term I use myself. So I just kind of hear, I know what they're talking about, but I think it's good for people just to make sense

of it nonetheless. Yeah. I probably say it once a year, once a year on the pod and there it was. Now next, I think a really important one again here. So liquidity. So liquidity or how liquid an asset is simply refers to how quickly you can convert that asset into cash. Stocks will tend to be pretty liquid, but it will definitely depend on which stock. Penny stocks can have a low trading volume, which makes it difficult to get cash if you're looking to sell your position. volume which makes it difficult to get cash if you're looking to sell your position so this is often overlooked by beginners especially those who gravitate around those type of stocks now something like bitcoin will be extremely liquid because you can convert it to cash 24 7 you don't have to wait until you know the market is opening you can do it right away on the other end of the spectrum real estate is

extremely illiquid because it could take months if not years sometimes depending on how the real estate market is to get cash on the sale of a real estate property especially in the market right now we're seeing properties sit for a couple months and then obviously you have the additional time for closing and the financing things could fall through so real estate as good as an investment as it can be it's very illiquid and that's one of the I think bigger risk in real estate especially for those who don't fully understand you know how it works and maybe invest in real estate during a full bull market thing that they can just sell it within a few days and then within a month or two, they get cash. It's not always like that, especially we're seeing it right now.

Good old liquidity. I saw a yacht. I'm off to Florida this afternoon. I got some wedding thing and then I'm back. I saw a yacht last time i was in florida called liquidity that was literally a cruise ship and i was beside we're in our like you know very humble boat going through the channel there to go out into the ocean rowing boat yeah yeah rowing boat yeah i'm rowing it through the ocean i'm actually kayaking my whole family and it was called liquidity. And I was just like, this guy is a hedge fund manager for sure. Like billionaire type energy there. We'll see though. It's kind of ironic if he ever needs to sell it in a pinch, he's probably going to have it. Is the yacht liquid? It's probably pretty liquid. Yeah. I mean, I guess it depends, right? I'm sure if you were trying to sell a yacht during the

financial crisis in 2009 true especially one called liquidity yeah exactly yeah i know i just know how like in demand boats are but that's a whole nother snack bracket you know like we're talking about like yeah yeah i don't even want to know how much that yacht cost is probably like i don't know 100 million dollars because we're not about, like, yeah, I don't even want to know how much that yacht cost. It's probably like, I don't know, $100 million. Because we're not talking about like a boat. I'm talking about a cruise, a literal cruise ship, helipad type energy. All right. Shares outstanding, number 20 on the list.

Shares outstanding refers to a company's stock currently held by all its shareholders. Okay. You're going to hear this a lot. You know, You get the market caps, the share price, buy shares outstanding. The easiest way to say it is the number of shares of the company. You will see it on their balance sheet as company stock. Let's say that there is company X. They have 100 outstanding shares. This is not typical because public companies will have hundreds of millions of shares or more or much more. If I own 20 shares of a company, of this 100 share company,

Simone owns 20 shares. Walter White slinging drugs on Breaking Bad owns 20 shares. Bugs Bunny owns another 20. And Rick Nash, the greatest hockey player of all time, Bugs Bunny owns another 20. And Rick Nash, the greatest hockey player of all time, owns another 20. You have 100 shares outstanding. That's five people, 20 each. When we say dilution, you know, another important term, we just mean the number of shares outstanding is increasing. The company's issuing more shares than they're buying back.

You have net share issuance in my example. they're buying back. You have net share issuance in my example. And so in my example, we have 20% of the company that I own, because I have 20 of 100. Simone, you owned another 20% of the company. But let's say I double the shares outstanding after, you know, five years of share dilution. We've seen this with many unprofitable tech companies or worse. It could be worse than double. Now there are 200 shares and now I only own 10% of the company. This is why we talk about dilution so much and it can go the other way. If a company is very, they're cannibalizing their own share count. You will have, you know, with a lot of net share buybacks, maybe after a while, I own 30% of the company. And so that is

good for shareholders when the share count is decreasing over time. And so it's one to definitely monitor. It's one to look at. We have shares outstanding on stratisford.io on the financial summary on the first tab. You can click it there. It's in the other bracket there for premium members. I haven't seen that available on many platforms, especially graphically. So I like that we have that. That is shares outstanding that you can find and see how it's trending over time. Yeah, I think it's something really important, especially when you're looking at tech stocks. You'll probably see some share dilution, but you definitely want it to be at least, you know, less than the company is growing. That's usually what you want to establish. Did I just skip a bunch of them? That's okay.

I think I highlighted the different color we can do when we do a second part because we're already running pretty long on this. Oh, yeah. Did you remove them or did I skip them? No, I put them in green for a later episode. Oh, okay. I guess I just don't read stuff in green. I just like skip right over it and have no context of what's happening. That's okay. I think, you know, we'll probably have more than enough to do another episode like this because I think there's a lot of useful terms that we won't have the chance to go over. This is the only 25 words you have to know. That's what we'll put as the buzzword title.

There's blogs like, these are the only terms you must know. Of course, there's probably, we can double this easily. Exactly. So I guess now we have to. Now the next one on the list is allocation. So allocation refers to the mix of assets or stocks, obviously, that you have in your portfolio. A classic approach that you'll hear a lot, although I do think it's very flawed and would not have performed very well in this current environment, is a 60-40. So 60% stock, 40% bond approach. But allocation can also refer to your holdings if you own individual stocks. So 60% stock, 40% bond approach. But allocation can also refer to your holdings if you own individual stocks. So if you have a portfolio of say 20 stocks equally weighted, you will have 5%

allocated to each position. Allocation is one of the most powerful tools for investors to mitigate risk by allocating a smaller percentage to a riskier stock or asset you can definitely mitigate the risk there and we've talked about this before where I know Braden I think the trade desk it's like one or two percent for you whereas constellation if I'm remembering on your latest update it's's like 30, 35%. So right there, you can see the different allocation strategy that Brayden is using. He believes that consolation is a much safer play in terms of having a larger position in this portfolio. It doesn't mean he doesn't think it will not grow at a very good clip, but it's a play that warrants a bigger allocation versus one like the trade desk that'll be very volatile. Yeah. I match my level of conviction

with my portfolio allocation is how I think about that. And I think that portfolio allocation is a very heavily under-discussed concept that is incredibly important for your returns. And I personally think the best way to do it is matching your conviction in the business to the sizing. And pretty good little science class that we had actually on this topic. Remember my analogy for gravity and portfolio allocation on the canadianscienceinvestor.com. Let's talk about emerging markets. Two more here on the slate. Emerging markets is a term you'll see a lot, especially if you're investing in a fund. It'll say, okay, 10% of the fund is investing in emerging markets, or like you'll buy an emerging markets exchange traded fund. All it means is less developed economies geographically. All right. So

examples of emerging markets, markets, like emerging markets is exactly what it means is a market that is emerging because of an adoption of technology, large population growth, those kinds of things. So think of India, which is like, you know, large population growth, and also a population that is now finally getting connectivity, basic infrastructure like power. They all have smartphones, you know, like they are riding a wave and emerging. So that market and their GDP is massively increasing. Other ones are like China, you know, some of South America, these less developed countries that are emerging economies. So, you know, China is the classic one that was the emerging market of the last 50 plus years. So that's all it means when you hear emerging markets. It's nothing more complicated really than that. Yeah. And the developed markets you'll have on the other end, right? Canada, US, so North America, you'll have Europe, well, Western Europe. You also have your Japan's in that. Australia. Kind of established Australia,

exactly. So usually, you know, they're the more developed, like you just said. South Korea. South Korea. And you'll have definitely more, you know, potential growth for emerging markets, but also emerging markets tend to be much more volatile. So that's something to keep in mind. Exactly. Now, the last one on the more volatile. So that's something to keep in mind. Exactly. Now, the last one on the list here, so diversification slash concentration, because obviously one is basically the opposite of the other. Diversification is the process of spreading the funds

in your investment portfolio across many different assets, or if you're only into stocks, many different stocks. Diversification and allocation go hand in hand. So allocation, like I just mentioned, and I'll give a very easy and pretty extreme example so people can wrap their heads around it. So you have, say you own 10 stocks. One of them represents 90% of your portfolio and the rest represent 1% each.

This is an extreme example, but clearly you are not diversified and are extremely concentrated into that one stock, even though you own 10 stocks. On the other hand, if you had 10 stocks equally weighted at 10%, you'd still be relatively concentrated, but much more diversified. And you'd still own those 10 stocks so i think it's important to put these things in context because i've seen people talk about diversification and it's all out of whack in term of percentage yeah it's the old don't put all your eggs in one basket recommendation which is like be diversified because you'll blow up if you're wrong on the one that you're

really concentrated on, which is the opposite of being diversified. I always say concentration can create and destroy wealth. It can do both. Most people who are very, very wealthy were very concentrated into one or just a few things, whether it's an entrepreneurial stint, whether it's an investment. But you've also seen those same entrepreneurs potentially blow up, lose all their wealth, or almost lose all their wealth multiple times during their career. multiple times during their career. And so concentration is more risky, but can reap greater rewards. Diversification is better to protect wealth. Again, my opinion on this and portfolio allocation, which go hand in hand, is match your concentration and hedge for the fact

that you will probably be wrong many times in your investing career. So act accordingly. Well, but yeah, I think that does it. Was anything else you wanted to add before we wrap this up? No, I think that's good. That's good, man. How are you doing? How's the sleep going?

Pretty good. Pretty good. I think my daughter may have made a little guest appearance. I heard some crying in the background towards the end. Oh, okay. It's okay. We'll get her on the pod soon crying in the background towards the end. Oh, okay. It's okay. We'll get her on the pod soon. She's going to be on. Yeah, exactly.

Send her this episode, 2025 investing terms that you should know. Start playing them in the background and then like kind of passively, she'll be like a wizard with this stuff. Yeah. Like her first 25 words will be registered accounts, free cash flow, and basis points. Those will be the first. No, I'm glad you guys are doing well. Thanks so much for listening to the show today. We are here Mondays and Thursdays like clockwork, no matter what rain or shine, two of us hashing it out, bantering, giving as much

knowledge as we can into your ears. And if you haven't checked out stratosphere.io, it is the company I'm the founder of. Simone is a investor in and it is financial data. And we have all of these metrics that we discussed. Every single one of them is a metric that we track historically for 10 years and 10 quarters. Now, my favorite thing about stratosphere.io, not that I get to work on every day, but the fact that you can visualize all of those metrics too in nice bar graphs, whether you want them annually or quarterly. Because dude, I want to spot a trend

with KPIs and revenue and just track that over time. I want to track the metrics that I care about for a certain company and just keep up to date with it visually as well. I'm a visual person. So that's my favorite thing about it. So check that out. That is stratosphere.io. If you're looking to get the research and the paid plan, use code TCI, and that's going to give you 15% off. Use code TCI, stratosphere.io. Thank you so much for listening. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.