The Canadian Investor - 5 Investing Myths and Buying US Stocks with CAD

Episode Date: June 19, 2023

In this episode we go over 5 investing myths that every investor has encountered. We also talk about the Bank of Canada overnight rate and what it means. We finish the episode with a look back at Canadian Depositary Receipts (CDR).  Symbols of stocks discussed: CBOE Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network 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  TCI meetup registration 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. Welcome into the show. My name is Brayden Dennis. As always, joined by the very charming Simon Bélanger, which is an interesting adjective to use for him if you were just listening to the call before we started recording. But that's for us

to know and for you to guess. Simone, we have some great topics today. I'm going to talk about five investing myths. You're going to talk about the overnight rate from the BOC. And then we're going to talk about CDRs, which we get questions about quite a bit. And then I will round us out with what to expect long term from the stock market. So make sure you tune into that long term. I'm going to provide data as per usual. But you were up first, sir. What do we got? Yes. I wanted to talk about the overnight rate because obviously, when the Bank of Canada raises rates like they did a couple of weeks ago, it's always the overnight rate,

but I think a lot of people don't realize what the implications are for that, what it means. So the rate sets the cost for Canada's banks to borrow money from each other at the end of each business day. That's because the banks are constantly exchanging money with one another, and sometimes they need to borrow money on a short-term basis based on the flow of money within their bank. So for example, let's say I buy some brakes. I need to change my brake pads for my mountain bike with my Visa card and my Visa card is issued by TD. The shop I go to banks with Scotiabank. So once I use my credit card to pay, the process isn't complete. At the end of the day, TD has to settle the transaction with Scotiabank along with thousands of other transactions between the two banks. So if TD has lent more money than money has come in, they can get additional funds by borrowing from other Canadian banks by using the overnight rate lending.

from other Canadian banks by using the overnight rate lending. Now, Canadian banks can also borrow or deposit money with the Bank of Canada. So the deposit rate is the overnight rate, which is currently at 4.75%. But banks can also borrow money from the Bank of Canada on a one day loan, which is called the bank rate. The bank rate is currently sitting at 5%. So this leads us to a next question. How does the Bank of Canada make or lose money? Well, to simplify it, the Bank of Canada has assets and liabilities. Its assets are Canadian government bonds, and its liabilities are deposits by the banks because the banks are depositing money there.

So the Bank of Canada owes them that money with the interest. Currently, the Bank of Canada is losing money. That's because it did a lot of quantitative easing, also called QE during the pandemic. And QE is just a fancy word to say that the Bank of Canada bought Canadian government bonds. It doesn't have to be Canadian government bonds, but that's typically what it is. We've seen, for example, the Bank of Japan buying things, I think like even equities from the market, but it's essentially the central bank buying assets from the market. And by doing so, they expanded their balance sheets with bonds that were yielding just a few percentage points because they were issued when interest rates were low.

So expanding their balance sheet actually means that, you know, lack of better word, they are printing money because they're buying those bonds. And in exchange, they're providing money to, you know, the Canadian government or whomever they're buying the bonds from. That's because, you know, they have to buy the bonds with something. It's that simple. And now with rates being much higher, the interest rate the Bank of Canada is collecting on those bonds is lower than the interest rates it's paying on those deposits that I mentioned earlier, since the rates are much higher right now. And because of that, that's why it's currently losing pretty significant amount of money, where traditionally it's been the inverse because interest rates were

steadily going down and the Bank of Canada was actually having a profit every year. There are a couple words that get tossed around a lot. QE, expanding the Fed balance sheet. around a lot. QE, expanding the Fed balance sheet. And you're right. These are complex words with very simple explanations. But in aggregate, this confuses a lot of people and rightfully so. And no, this is a good overview for, frankly, a pretty important topic to understand for basic, you know, how the economic engine works for central banks here in Canada with the US and the Japan example. It's basically the plumbing, right? It's the plumbing of our financial system. And it's just, you know, just important to understand. And people may think, okay, what happens if the bank of canada constantly has losses well at the end of the day you know ultimately it doesn't really matter

because it's going to be backed by the government of canada and if they do make profits i know in the u.s they return that to the treasury when they do they have profits with the fed i'm not 100 sure what they do in canada but i suspect they return that to the government of canada you can't hear this kind of information and think hmm how does this go on forever like you know what i mean like the more you learn and the more you understand said plumbing i'm not that i'm uh you know the eternal long-term optimist but the more you learn about said plumbing i'm not that i'm you know the eternal long-term optimist but the more you learn about said plumbing you wonder about the quality of who installed the plumbing they're not getting rusted the pipes yeah you're like you're like so these pipes need to get

replaced and the shoddy contractor that I hired to do the plumbing, like, who is this guy? Is this the right guy? Is this the right girl for the job? Those are the questions that I often leave with. Yeah. No, I mean, and it's, that was just a quick overview, right? But a lot of people just don't really, they hear those words and it's easy to, you know, just kind of brush it off. And, you know, I've listened to really experts on the subject. And it's funny, because sometimes even the expert kind of disagree whether it qualifies as money printing or not. And I don't want to get into that debate. But at the end of the day, I think more of the disagreement kind of enters,

it's just whether that money stays on other banks' balance sheets, for example, instead of being kind of distributed in the economy, and whether the, you know, expansion of the balance sheet, like I mentioned, whether that directly results in inflation, or it has to be tied to fiscal spending, which is just a fancy word to say, you know, government spending money. And, you know, government spending money. And, you know, whether it's through programs, whether it's direct money to the citizens, whatever it is, but a combination of the two that has been shown to be very inflationary, whether expanding the balance sheet alone is or isn't, there's more debate around that.

I'm going to move to a topic i am calling five investing like moving on yeah five investing myths and the this has come from five things that were written down in a tweet by margin of safety capital or margin of safety investing on twitter his name is actually also simon not simon no but he puts out good content i saw that tweet too it was uh it's hard to disagree with yeah yeah yeah and you know what like a lot of people write really great stuff on content on twitter but he also uses stratosphere and like openly promotes it on the online. So we like him, we like him a lot. And he does write good content. So go follow him at MOS underscore investing. So he writes so much nonsense, investing wisdom is out there, quote unquote wisdom. And he wrote five things that basically are just like kind of said to be true. But when you look under the hood, they're not always good.

And so that's why I'm calling them five investing myths. So he says one. So he's saying these are not obviously true. Buybacks are automatically good for investors. And this is very true, right? Where it's like people say, you know, they're buying back stock as like an automatically bullish sign when frankly, it depends. And he says here, it depends on both the absolute value of the buyback, which is based on the future of the business and relative return of other capital allocation decisions. Exactly, right? Like,

there are a decision tree of metrics that the management team, the CEO, the CFO, and the management team can make to grow the business, reward shareholders via buying back some stock, pay a dividend, do M&A. There's all these things that they can do and they have to weigh the pros and cons. If you're like Apple and you're just gushing cash and you possibly can't deploy it fast enough, then yes, you're going to bring it back to shareholders. You're going to pay a growing dividend and you're going to buy back an absurd amount of stock. But that's because they're pretty limited. That doesn't mean all companies should be doing this. What do you think? Yeah, no, I totally agree. And even if you forget about the other forms of

capital investment that you can do that you mentioned, even if you just think about buybacks and dividends, and we've talked about that before. I mean, buybacks can be better. Dividends can be better. It really depends on the situation. There's a lot of variables involved. I mean, one of the advantages of the dividend is it's returned over to you. Buybacks, you're relying on management to assess that. Yeah. Like Simon mentioned that the value, the future value of the, like the business is currently being undervalued compared to its future value. That's essentially what you're, you're saying, whereas at least a dividend, there's less, um, you know, there's, you have to make sure that the company's sustainable and all

that stuff. And, you know, that's, I don't want to go into that, but at least with a dividend, as long as it's sustainable and the company is reinvesting enough to make sure that the dividend is growing in the future. I mean, there's less, I feel like a discretion on management. That's probably the way I would put it. I mean, you know, you get it and whether the company, you know, kind of continues to grow or not, it's less relevant in terms of you seeing the impact from that decision. Right. If you think the business is undervalued and you're actively buying shares and the management team agrees and they're saying, hey, look, we're going to keep

buying back stock if the market is treating us at this multiple, then yes, they're saying, hey, look, we're going to keep buying back stock if the market is treating us at this multiple, then yes, they're probably good. But what I would categorize these five things that Simon wrote as things that are just automatically dismissed as good when it depends. They can be good. They can be bad. And to automatically say the rule of thumb as these are all good is very elementary thinking. And I think that good to bring up because many new investors will automatically think that these are good things no matter what, like the company's buying back stock. It's like, that could be good, but did they also buy back stock at the peak and have a horrible track record of buying back their stock when they think it's undervalued?

It was actually not, right? Yeah. No, exactly. I mean, I think too, like investing in general, there are things that are black and white, but most things are not. Most things are gray. That's right. 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. Number two. Now this one's extremely gray because I mean, well, I'll just read it and then we can make our decision. High revenue growth,

myth number two, high revenue growth is always good. It says growth that actually produces earnings and cashflow, so profits without costing more than the growth is good. Otherwise, high revenue growth can be bad. Now, this is interesting, right? Because typically, of course, you always want the top line of the business to be growing. But what he's saying here is if you are acquiring a customer for a hundred and the customer lifetime value is 10 bucks, then you just did value destruction at the, you did growth at the cost of value destruction. And I think that we've seen a lot of companies do that because the market rewarded growth at all costs. And now we've seen that swing back the other way

and say, guys, we can't spend $100 to earn 10, right? Like that does not work forever. And eventually the tide goes the other way. But typically, yeah, I mean, revenue growth is good. Yeah, but it's always's always like you said it's more nuanced and it gives me ptsd from 2020 and 2021 where it was all about top line growth light speed comes to mind light speed comes to mind i mean not all of it but a lot of the nasdaq probably would not a lot but a decent chunk of the NASDAQ would probably fall in that bucket too, where it was growth at all costs.

You know, we're losing more money, doesn't matter. We'll be profitable at some point in the future. No path to profitability. A lot of managed. Because they're investors. That's what they wanted. They rode them from seed stage to IPO. That's what they wanted. not what it came out to be for many of these high growth tech companies when the the you know there it wasn't fixed costs staying the same for increased revenue growth that was a dream that

was sold by you know the the beautiful business model of software as a service many of that didn't come true some of it did but not yeah and that's where you see macro having a very big impact on certain types of companies because the money was you know it's not hard to get financing it was you know like people were lining up why because they could they couldn't get anything on bonds on anything that was. So people got out on the risk spectrum, had tons of money to invest. Obviously, VCs were part of that, too. Some have had some pretty tough, probably what 2022 was a wake up call, definitely for some VCs that things has changed and making sure that the companies that they backed were actually thriving to be profitable and not still living in the 2020-2021 environment. Yeah, the low interest phenomenon.

Number three, myth number three, dividends are always great. Say it for the people in the back. Canadians love their dividends and they think that they're always great no matter what. Here, I mean, if you listen to this podcast, you'd know that that's absolutely not true, but let me make it very clear for you. Okay. So Simon says, dividends are one way to get a return, but they aren't free. Thank you. And taxed. They're double taxed, basically. And as an investor, you need to reinvest at good rates of return. Whereas if the business has reinvestment opportunities with higher returns than a dividend, it's a costly choice. I agree. Now, dividends are a costly luxury for a company that has the ability to reinvest at a higher rate than you ever could.

And if you think about this very logically, Simone, it's not that dividends are bad. Let's go back to the Apple example. They have so much cash, they can't deploy it fast enough at a high rate of return. So they take some of it by backstock and pay a growing dividend. Wonderful. However, for many businesses that are not at the mature stage of $3 trillion in market cap, and for businesses that have a lot of growth opportunities that are not in their late stages of maturity. You want to own businesses that can take a dollar of capital and turn it into more by reinvesting it into the business. This is the whole concept of return on invested capital. This is the whole concept of investing.

And if the business you're investing in doesn't have that opportunity, investing. And if the business you're investing in doesn't have that opportunity, then the hurdle rate at the business is very low by definition, or it could be lower by definition. And so the concept that dividends are always great and that they're free is a myth. They are taking the cash off their balance sheet and putting it into yours. The business is now worth less. The enterprise value of the business is now lower because they've taken the cash from their balance sheet to your balance sheet and got taxed along the way. So say it for the people in the back. You know, dividends are not always great.

No, exactly. And I think, look, I love dividends as much as anyone else. But you really that's why the companies that do dividends the best are the ones that can pay a dividend, have a low payout ratio. They can pay a sustainable dividend, ideally grow it over time, but still reinvest money in the business to make sure that it grows. And that's really where I like to look in terms of dividend plays is I want to make sure there's still growth. And I'm going to go and say a mini bold prediction for the next year that you'll see it even more where companies are stuck with their dividend. And what I'm saying. They turn into zombies. the stock price will take a hit when it is clearly the right decision for the business. But they've been paying it for, you know, 5, 10, 15, whatever the amount of years.

And they are making terrible management decisions because of that fear of cutting the dividend. And Exebite is clearly, you know, the one that comes to mind is Intel. You know, it's clearly they debated that they probably should have cut the dividend i mean they should have completely stopped paying it to be honest um i still i think they still pay a small dividend but they should have cut it like a year and a half two years ago intel has become the the dunk on stock of this podcast oh no but my god it's dude how many episodes in a row do we just like roast intel uh i think it's become the official yeah but i think it's the best example for that right you have a

company in a space that's hyper competitive that was dead set on keeping its dividend and because of that now they're way behind all their competitors and for whatever reason they still want to pay that dividend i mean it basically just guarantees that i mean not guarantees but the probability that intel is still alive in 10 years from now i think i would not bet that that they will be they might still be but they won't they'll be a shell of themselves would be my prediction. Number four, disruptive technologies are always great investments. We're looking at you.

We're looking at you, Kathy. Much better off looking for things that won't change compared to things that will change in an established, over an established market. Now, I'll have to push back on Simon on this because this is two different styles of investing, and I think both are valid. One is just trying to always be on the right side of disruptive technologies. Typically, the reward for your speculation is much higher than buying CN Rail and CP Rail, which are duopolies that the future probably looks more of the same than different. So I would say that these are much different styles of investing, capital creation or wealth creation versus wealth

preservation. That being said, I tend to agree that there are a lot of growing businesses that the future looks more of the same and better for them without a disruptive market. If you're coming in straight on the top of a speculative disruptive market, you have very little insight into what 10 years looks like from here. Very little insight. And so maybe you're rewarded for that, taking on that additional risk. But you have to be in and out of stuff more often. You have to look more like a trader than a buy and sit on your hands and do nothing investor. And so I don't think there's anything wrong with that style, but they're very different. Yeah. I mean, I think that there's a higher risk reward, right? So your

outcomes are much more wider ranging if you're going to invest in something that will be a disrupted technology. You know, it could, you know, it could be a multi-bagger, like it could go to zero if you're really about what Simon's saying in terms of looking at businesses that have been there, done that, still have a bright future, then you have a much narrower set of outcomes. And those outcomes will kind of skew towards definitely still having money and having some decent returns. Obviously, the floor will be higher and the ceiling will be lower. That's probably the best way to explain it. If you're in sports, it's just, you know, it's those boom and bust prospects, right? Those are the disrupted technologies. Whereas you have prospects that are not as sexy, for example, like Sidney Crosby, right? Sidney Crosby was never going to be the most talented hockey player you've

ever seen. I mean, you can look at other hockey players that you would see pure skills. You're like, oh my God, this guy is amazing. But the whole package and the ceiling, I remember when he was drafted, it was basically, well, this guy will at least be this and he could actually be higher but you know it's just there's less of a range whereas you know certain prospect they just they're boomer bus right they could be in the the khl in a few years from now like they could be the next superstar yes super wide range of outcomes by the way sydney crosby is such a tank that guy's quads oh yeah like people don't give him a credit for like how much he reinvented himself as a hockey player to be so uh you know to have so much duration in the league because he is a literal like tank like his quads are the size of my toys and i think what he's elite at is his work ethic

i think that i've heard someone say that i'm like okay yeah that makes sense because you can't stay that good for that long if you're not obviously he's very talented but if you look at a player like connor mcdavid like connor mcdavid's wows you sydney crosby he does doesn't necessarily wow you but he does a lot of things really well yeah i mean he he does wow but anyways we're going on to um no no uh this is a another tangential i think Work ethic. Have you seen the new Arnold Schwarzenegger documentary on Netflix? No, I haven't. It's a three-part series. Me and my girlfriend just started it last night.

We just finished the first episode or almost finished it. And talk about work ethic. An absolute machine. Arnold Schwarzenegger. The one, the only. Arnold. It's on Netflix. Go watch it. I'll finish it and maybe we can talk about it on the pod because there might be more interesting takeaways than you think. All right. Number five. The myth is, this is the last one,

value is a low multiple of trailing earnings. Historical financials can be very informative if the business is likely to look the same going forward. But for many, it's not going to happen. The future is the only thing that matters to your future returns. And I wholeheartedly agree, I have this issue, many investors do. It's very difficult to tell the future. In fact, it's almost impossible, but you can have some predictions. Looking backwards, everyone has that information, right? Everyone's dealing with the facts that have happened in the past. And sometimes you can over-index on it. And this can be a mistake. For instance, if you look no further

than the 80s, the top 20 companies by market cap, globally, none of them are top 20 today. And so the future often looks very different than what it looks like today, especially with the ruthlessness of capitalism and business. So don't over index on past performance or past valuation multiples. Like a business that's trading at five times earnings, but earnings are going to be half of what they are next year. That's an expensive stock. And that's a hard concept for people to wrap their head around at first. Look, last year, Simon, the business did $10 in earnings per share and the stock trades at 50 bucks. So that's a five times PE. But next year, it's only going to do $2.50 in earnings and maybe less the year after that, a 5PE stock might be the most expensive stock on the market. And that concept is very hard to wrap your head around

at first. Yeah. And then when you start looking at forward PE, obviously a lot of it will be estimates or based on guidance from the company itself. So obviously, there's a margin of error there. But yeah, I think that's one of the mistakes I've made when I started my investing journeys for sure. And one of the most common mistakes I've seen people make is they get hypnotized by that low PE. And we get requests from people, even like people on twitter all kind of mention banks and what the pe is like for canadian banks and i just mentioned look there's some real headwinds like maybe they won't be as affected as i might think but you know this year next year it probably will look very different than the trailing 12 months and you have to keep that in mind because then

it throws all that valuation work you might've done based on the past out the window. It doesn't, it just doesn't apply anymore. Yes. And this is the challenge, right? Because how do you guess the future? It's just basically a set of predictions and using analyst estimates. If you, if you go that route, which have their flaws and their errors as well, of course, because the people making the estimates are just humans too, right? And they cannot know everything about the future. No one can. And so this makes the art of valuation challenging and more art than science in many ways. valuation, challenging and more art than science in many ways. But it's really important to not index on low trailing multiples, because a five or a 10 PE stock, sure, it might give you some

margin of safety in the short term. But it does not make that stock cheap or inexpensive or undervalued whatsoever. It's just one data point. Yeah, exactly. And, you know, like, especially for cyclical industries, and there's a lot of them, right? Even when you think about banking, banking can be cyclical too. But a lot of cyclical industries, oftentimes the best time to buy a business will be when those trailing 12 months metrics are high, because that's when the business is actually starting to turn around so yes the last 12 months is not looking great but they're actually starting to turn around and this is when you actually should start investing in the

business if you like that business it's what yeah it's counter of intuitive cyclical cyclicals are cheap when they have a high p yeah yeah that's it typically as a rule i i think i think as a rule you know cyclicals are at their cheapest when the p is the highest and it makes completely sense because they're cyclical and there's two numbers in the PE ratio. It's not just price. No, exactly. It's divided by earnings and that changes. And the PE will usually be at the highest when the earnings are at the lowest, right? At the lowest, exactly. It's the denominator. 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.

All right, let's move on to the NeoExchange segment here. This one came, I texted you, it came a little bit as a surprise. So I guess it's CBOE or C-B-O-E. I've seen some commercials, so I guess they call it CBOE Canada, but it's a global exchange firm. So had Breezer on Twitter reach out to us a few weeks ago asking if we could talk about NeoExchange. Obviously, we've done it a couple times in the past, but I think last time, what was it? Like probably at least a year ago at this point.

I met, I don't know how much I can disclose. Like, I don't know if we're, I'm not under an NDA with him or anything, but I've been talking and getting to know more, a guy that CBOE bought his company for like in the hundreds of millions of dollars. And yeah, anyway, so I'm noticing now there's a lot of connections to this company. Yeah, exactly. So anyways, that was interesting because essentially CBOE Canada, when I started researching it for the NEO exchange, CBOE Canada, when I started researching it for the NEO exchange, I hadn't realized that CBOE global markets in 2022, in June, they actually bought NEO exchange. So CBOE stands for the Chicago Board Option Exchange. They operate several exchanges, including BATS global markets.

You might see it when you look up certain stocks, you'll see BATS. They're listed in the U.S. under ticker CBOE and have a market cap of $15 billion. Now, CBOE Canada, or I don't know, I'll probably use both interchangeably, they offer different type of services. I will focus today on the Canadian Depository Receipt, CDR, but I'll definitely revisit them in the future because as I was looking on their platform, they have some very interesting traded offerings, which really piqued my interest and I think will be an interesting segment. And Brayden, I actually think you'll like this because they also have a kind of private platform as well for, I think, more early stage companies that are still private to get financing. It's just at a glance, so I could be completely off, but that's what it sounded for me. So yeah, go ahead. Is that an offering from CBOE or from NEO? Yeah, CBOE Canada. Yeah.

Okay. So anyways, it'll be interesting to go back because it is investing related, but it would have been too long of a segment. Now get back to CDRs they are listed on CBO Canada although you might see it from your broker still showing on their NEO exchange but it's still you know it's been fully acquired and the shares are held in custody with CIBC Mellon for those of you not familiar CIBC Mellon. For those of you not familiar, CIBC Mellon is a joint venture between CIBC, everyone's familiar with them, and the Bank of New York Mellon, which is a G-SIB bank in the US. I think primarily the Bank of New York Mellon, they're primarily kind of custodian services. And to get back to CDRs, are advantages and disadvantages so I'll just go back and I'll give some perspective over here so advantages if you're investing with smaller

amounts you can get access to companies listed outside of Canada for a fraction of the cost for example a CDR of Google or Alphabet costs approximately $21 Canadian versus $820 USD if you buy an actual share. And I know some online brokers offer fractional shares, but what I've seen, it's very limited in terms of number of stocks that you can do that with, and it's not available on all brokers. So definitely an interesting option if you want to build a portfolio of individual companies, but don't necessarily have, you know, tens of thousands of dollars, maybe you're just starting out, it's a it's a very viable option. And then the second advantage, which can be a disadvantage as well, is currency hedging. This means that you're less affected by currency fluctuation, which can impact your returns. Anything to add

to that? Nope, that's good. returns. Anything to add to that? Nope, that's good. Yeah, and that's what they list on their website. But I just, you know, as always, I want to give a balanced take. Now, disadvantages, there are extra fees, and I'm glad that CBOE is mentioning it on their website. So CIBC earns revenue by providing currency hedging on CDRs. They mentioned that it's around 0.50% per year, so half a percent in terms of the average. Now, currency hedging, it can be a good or bad thing, but historically, it's not worked out that well. And they put that as a plus. And sure, it might help volatility.

But in terms of total returns, it's actually not really true, at least historically. So they sell it as a good thing. But I'm more kind of skeptical on that. and you do past 10 or 5 years and you compare VFV.TO and VSP.TO. VSP is actually the hedged version of the Vanguard S&P 500 Index Fund and VFV is the unhedged version. So over 10 years, you've seen that the returns are very different. So the unhedged version has provided 274% in total returns, where the hedged version has provided 167% in total returns. So that's a compound annual growth rate difference of like almost 400 basis point, which is really massive.

And then if you look back at five years because I was looking at the 10 years and I was well aware that the Canadian dollar has kind of trending down over the last 10 years so I figured that yeah you know the unhedged version would have quite an edge here but over the last five years it's been more up and down. And even then, over the last five years, the unhedged version returned 67% versus 53%. So you see even in an environment where the Canadian dollar fluctuated a lot more versus the US dollar, the unhedged version is still pretty far ahead in front of the hedged version. Any comments on that before I wrap up here? No, I get this question all the time. You and I get this question all the time. Should I do

the CAD currency hedged ETF versus the non? And I always say, don't, no. One, usually you pay a higher fee. Not all the time, but sometimes you'll pay a higher management fee. And two, you are betting on US companies in USD in this scenario. Why hedge it? You're already earning your income in CAD, your house is in CAD, your bank account's in CAD. Why hedge to CAD? I want to de-hedge off CAD. And so that might come in the form of owning this in US dollars, which is a different listing entirely. And that's my quick thought here. I'm just doing the math on the difference between that performance on 10,000.

It's going to be pretty massive for sure, yeah. Yeah, so $10,000 invested in the hedge version, you end up with... What, over 10 years? I did the math wrong. Yeah, over 10 years. it's a difference of 24 000 dollars right um we're doing public math which is always which is always due for destruction probably yeah i think that probably makes sense i mean it's still going to be massive right because they know it's it's it's it's not no okay

on ten thousand dollars it's the difference of one thousand seventy dollars over that time okay yeah which is ten percent of your investment so you have i'm pretty sure i'm doing this yeah i'm like is that even right i think it should be straightforward right just put 10 10 times 274 percent and 10 time or 10 grand times 167 percent and what's the difference i did that and um public math is uh always uh i think i did it right oh it's over a thousand dollars it's pretty big it's a big difference let's just leave it at that before uh you know i have had a long day doing public math out here that was a bad my mom is um is she's retired but she's an accountant and i would always laugh at her because mental math was never a good thing she would always have her calculator so um you know

it's all good and on the spot yeah you always get like you want to do it quickly and yeah so it's it's all good mental math is is really challenging and i i get that because i get roasted like aren't you an engineer like like didn't you like do math for a degree and i'm like yeah but what's seven times nine? I couldn't tell you. Where's my calculator? Well, okay. So to get back at non-math stuff, I just wanted to go over final thoughts here. So CDRs, I mean, I'll give it to CBOE and NeoExchange. I mean, they started with five in July of 2021, and now they have 41 offerings. There are some in communication services, pretty much almost, I think, almost every sector,

financial, industrials, consumer discretionary, healthcare, energy, consumer stables, information technology. Obviously, a lot of them, that's where they started. But yeah, you can really get some pretty interesting names without having to have a lot of money to invest. And I think that's great, especially for people that are just starting and may just have a couple hundred dollars a month. That's a pretty good option for people, assuming that they have pretty low buy fees with whichever broker they're using. But for me, and I know for you, you're in the same boat as that. I mean, I would always go for the US one. I think for me, the only way I'd go for the CDR is if I just had very small sums of money. If you have enough to have a diversified portfolio, buy the US company

directly. You're saving on the fees and you can always do Norbert's Gambit to convert Canadian to USD and have even lower fees there. And the other option is you can always go with an ETF route as well. So that's always an option. Obviously, if you're looking to pick individual companies, it's different. But that's the way I kind of see it as a whole. I think it's a pretty innovative product. I think it's a good thing that it's in the Canadian market and something that's available for people.

But just keep in mind, it's not all positive. There are some pros and cons, some drawbacks and some positives. We are already overweight Canadian stocks. The stats are out. Canadians are home biased and overweight Canadian stocks. We love owning these no growth, high dividend yield TSX names. If you look at what Canadians are holding in their brokerage accounts, don't be over indexed Canada. And that's not to say that I don't want to bet on Canada. I think Canada is actually a pretty good place to bet on

given the population growth, given struct structurally where we are resources all those things i i am very bullish on canada but don't be over indexed canada more than you already have to be right like that's i i think that that that's a silly capital allocation decision. If you're looking at like geographical diversification. Yeah. That's, that's our take. Yeah, exactly. I like to hedge my portfolio, but not in favor is something that I already have a lot of exposure to.

I think that's the best way to put it. Yeah, no kidding. Oh, Simone, should we do this last topic how are we doing already 45 minutes so maybe we keep it uh for next time and we can also look at the same time if td has their uh has released their what canadian homes in their brokerage i think people like to hear that yeah yeah yeah it's um I forget what they call it. The direct investing index or something. Uh, they're getting lots of free ads from us. Wow. From that, that piece of content that they put out. Good for them. The, this topic that I was going to discuss, I think I have put it on the dock, taking it off the dock for next time, put it on the dock now four times. the dock for next time put it on the dock now four times so it's going to be now the fifth time and maybe we'll do it first next episode so that it eventually gets uh gets discussed but uh thank you so much for listening to the podcast folks we really appreciate it you can follow us on the

twitter machine at brado capital for myself and at Fiat underscore Iceberg for Simone. If you want to follow the podcast, the show, the network on Twitter, that is at CDN underscore investing. That is at CDN underscore investing. If you want to support the show, you can go to the Patreon page at join TCI.com. We post our monthly portfolio updates and videos. You get this, no ads. You get this on video. Exactly. And on video,

no ads uploaded a bit before the episodes come out too. So you get, you get there here and see our beautiful faces. Maybe I think on, on average about a day before it comes out on the podcast machines, whatever they are. Are you able to see if a lot of people are watching them on Patreon? Yeah, I think for the most part.

I mean, our subscribers seem to enjoy it. I think we've gained a lot of subscribers, so people clearly want the video. Yeah, I think it's part of it. So it's just an extra perk right for for people so um yeah they get to see our portfolio and then when we don't mess up too badly and we show our share screen because we're still struggling i think with selecting the right button but it'll get better it'll get better and then you can see when we actually have graphs and things like that we don't have to you know explain it so you can visualize it i just noticed on the patreon page sometimes i'm on the left you're on the right

and sometimes it swaps and i have no idea why have you noticed that i didn't notice like every every post we swap oh yes the videos i've noticed. I've noticed that. Yeah, I have no idea. I have no idea. What decides that? I have no idea. Does the platform just flip a coin? All right. On the same recordings too, like same day recordings. I don't know. You just swap. If anyone knows Riverside, let us know. What gives? Thanks 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.