The Canadian Investor - 5 Signs a Business Has Staying Power

Episode Date: January 13, 2025

In this episode of The Canadian Investor Podcast, we dive into the fundamentals of Porter’s Five Forces, exploring how shifts in industry dynamics create opportunities for savvy investors. Using real-world examples like TSMC and Delta Airlines, we analyze how changes in competition, bargaining power, and substitutes impact profitability. We also break down the complexities of bond investing, contrasting the benefits and risks of bond ETFs versus holding individual bonds. From liquidity to inflation risks and the influence of government policies, this segment will help you better understand the current bond market landscape. Tickers of Stocks/ETFs discussed: TSM, DAL 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 Dan’s Twitter: @stocktrades_ca 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  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. 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 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 or February. 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

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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 to the show. My name is Brayden Dennis, as always joined by the prolific Simon Bélanger.

Good sir, we are ready to rumble. Look at me, is this 1080p? Yeah, I know. 3.1k. What's going on? I'm gonna have to up my camera game. I will once I move to my new place and my podcast studio will look a bit better than it does now. Dude, I had just like the worst setup at home because the background of my apartment is this like floor to ceiling loft window just because the background of my apartment is this like floor to ceiling loft window

just right on the back of me. And there's no other orientation that I could have it. And people who know who do like a lot of zoom calls or whatever, if you do your background is all light and the foreground is all dark, quality is horrendous. Yeah. So here we go. I'm upgrading my game. I'm a real podcaster now. Yeah I'll be joining you soon enough. We're talking. I mean I'm

recording my basement. There's no heat so it's still like not too bad but it's like 14-15 degrees. You got a bomber jacket on. Yeah exactly and socks on and everything. I'll tough it out. New place will have heat so that'll be an upgrade right there. Look at us You know look at us. Okay, we're on the way up. No more dirt and ramen for the boys. All right today You're gonna talk about bond ETFs and leverage ETFs. I have just one segment as well called Porter's five forces before I'm sure you know you and Dan talked about it, but there's a lot of hope and optimism

for the future of Canada with someone looking at the country a little bit more holistically from an economic standpoint and talking real common sense. It's refreshing to have that. Of course, the news, Justin Trudeau is resigning as the leader of the party once they select a new leader. Yeah. A lot of news sources, especially US ones are like, oh, great news. This is, to know, this is to me more dragging of the heels and I'm not particularly fired up about it. I think people want an election now, not road and pony show with the soap opera that is the Liberal Party for the next six months. Yeah, I mean, at the end of the day, I think this was

the most likely outcome. I listened to a lot of different podcasts. I was kind of interested on pretty well respected people in the political world in Canada just to get their view. And the most common thing I heard was that, yes, they would prorogue parliament until likely until March, which is what I think they're doing now. And then so they can have a leadership race and

have someone, someone new at the helm of the Liberal Party. I mean, for me, at the end of the day, like I think people know me, I've always been an independent. I don't affiliate with any party whatsoever. I will, you know, when I vote, I looked at what each party offers, and then I kind of make a list of what's the most important things for me. And the ones that, you know, align the most, because you're never going to find something that aligns completely with your views, whether it's economically or socially, I kind of vote that way. So that's the way I view it.

I mean, I've said it time and time and again, for me, the most important issue is just reining in the spending and the deficits. I think that's the most important from a long-term basis. For the election I mean obviously I would like it to be sooner rather than later just because having whoever wins right I've said that all along whoever wins they need to have a mandate to negotiate with Trump. At the end of the day like whatever you think about Trump, he's not stupid. He knows that right now, Trudeau and the Liberal Party, they know what's going on in Canada. So they're not going to try and negotiate a new deal if they know he's not going to

be- They can sniff out weakness very easily, and that's what we have at the moment. So who knows how they'll approach it. Maybe they'll just kind of say like, you know what? Let's just do status quo for like four or five months and we'll negotiate with whoever comes in and has a mandate when there's an election. I think most likely, I think April, May

is kind of what I've read. Yeah, hopefully, man. Yeah, I mean, there has to be a confidence vote, right? So I think it's, and the opposition parties have to agree on non-confidence, so. That's the big thing, right? Like, needs to happen. All right, let's get into the show.

I'm gonna talk about Porter's Five Forces, which is a method of quantifying a moat, or quantifying a business quality. I think that this is really important. You and I talk about a business being high quality, low quality, wide moat, has competitive advantages, but the Porter's Five Forces is a albeit imperfect but really good way to kind of assign different values to you know

threat of entrance, how much competition that there is, these kinds of things. So I'm gonna go through them and then we'll go through two examples for a company which I believe has a wide moat and one that has a moderate to low moat. All right, the five forces are as follows. One, threat of new entrants. So how is it for competitors to enter the industry? Two, bargaining power of suppliers. How much influence suppliers have over pricing and terms? And then on the other side, the bargaining power of buyers. What are their terms? What are their pricing power that they have over the company?

Four, threat of substitutes. So what's the availability of different products that fulfill the same need? And five, industry rivalry. Measures the degree of competition among the existing firms in the industry. So these are the five forces. Generally, it's quite easy because a very profitable company or very profitable industry, all of those things will be measured as low. Low threat of new entrants, low threat of substitute products, low threat of bargaining

power from buyers and suppliers, which is three and four, and low rivalry among the existing competition. Signs of a unprofitable business or industry, low margin typically, high threat of new entrants, high threat of substitutes, high threat of bargaining power of buyers and suppliers and high rivalry. So that's the five forces. Any comments on them and then we'll get into an example. Yeah, no. I mean, I think it's a great way to look at it. I know what example you're gonna use. Like it's kind of funny. I've always... I always come back to Apple.

I don't know why just because Apple is such a fascinating case on where they're at in their... as a business and I was kind of looking at the bargaining power of buyers and that's starting to shift in my opinion for Apple products where buyers are like, eh, you know what, like, don't need it right now. Like I don't need it as much as I used to because your product is not improving as much or you know, the Apple AI, I mean, is from what I've read a bit of a disaster from people who have used it.

So I've seen a few example from a friend of mine disaster from people who have used it. So, I've seen a few example from a friend of mine that I won't mention what it was but I send them a few texts and they summarized the text. Oh yeah. And oh my god, like I'd be in jail if you'd be like, I'm like, oh wow, it really completely misunderstood what I said but... FBI, don't look at the AI summary. Look at the real text.

Yeah, exactly. Well, I mean, you'll laugh but it was basically when I got, you know, the injection for my back and I'm like, oh, I'm gonna have like soon enough like the back of a teenager and anyways, I'll let people think about like, you know, what they actually summarize. Yeah, exactly. But it was definitely completely different than what I wrote. Yeah. Yep.

I'm pretty sure myself and the listeners can fill in the gaps there. 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 RRP 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 questtrade.com for details. That is 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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians. We are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for.

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I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, if the Canadian bank is delivering these amazing ETF products, please check out the link in the description of today's episode for full disclaimers and more information. Okay. Let's go through, let's go through two examples. The Apple one is funny too, right? It is an interesting company to think about right now.

It still did pretty tremendous, I mean, all big tech did. Nice to own last year. And you're right, and it's hard to put on this scale because I don't really think that people are evaluating alternatives, but they are evaluating buying frequency. That's the core issue with Apple. They're not going, oh, I'm switching to Samsung.

They're just going, oh, I'm not gonna be on this upgrade cycle that I used to subscribe to. That's how I look at the business right now. Yeah, and the bargaining power of supplier may be something that kind of starts hitting Apple a little bit too, right? With the tensions happening with China and so much of their supply chain,

and also I think from what I've read, the demand from Chinese for Apple products has also gone down. So suppliers may end up having a bit more power depending on where they're located with Apple as well. Yeah. All right, the two companies are TSMC AKA Taiwan Semiconductor, ticker TSM, and Delta Airlines, the large US airline carrier.

Now very two, you know, very different businesses of course, but I think worthwhile to look at in terms of using the Porter's Five Forces. Again, you want all of them to be low. High is not ideal. You don't want high threat of new entrants, for instance. You want low threat of new entrants. Okay, so Taiwan Semi, for those who do not know, the foundry business is, they're fabricating semiconductors for the

designers so you know big customers lark apple and video those kinds of names the designers and typically a very typically you know consensus wide-moat business across the board threat of new of new entrants, low. The semiconductor industry requires substantial capital investment. Absolutely substantial capital investment. Ridiculously complex supply chains and lots of wideboat businesses in their supply chain all along the way.

So creating a new foundry is a huge barrier to entry. And knowledge and knowledge workers that are trained, but also, you know, that have the education, but also are continuously trained on all the improvements on all the new machinery like that. I think a lot of people forget how specialized he was workers are and how difficult it can be to just replicate that very easily. Yeah, it's like the most complex science experiment mixed with the most elite manufacturing execution.

Those skills both need to be masterful when it comes to TSMC or an ASML. Yeah. And one thing I'll add, like you, so remember Chris Miller, Chip Wars, one book that I highly recommend or if anyone, you know, follow him because he's great at like he follows this industry very closely. And one thing I listened to him recently on a podcast, I can't remember which podcast I was on, but he was saying that one of the advantages of TSMC is that they have multiple factories in Taiwan. So if there's one factory that has downtime, and with Taiwan being having such good infrastructure when it comes to public transportation, they can

literally like send workers very easily to another factory and avoid any major disruption in manufacturing of chips. So that was something very interesting that never thought about it, but it could be like another mode for TSMC here. Right, like the risk, the geopolitical concentration risk is actually their strength if the boat isn't rocked. Yeah, yeah, exactly. That's it. I mean, it's an advantage and disadvantage all at once, but it is something I was like,

oh yeah, I never thought about it that way. Now on the Delta side, threat of new entrance is what I'll call low to moderate. And the reason is the airline industry does have hugely high entry barriers, substantial capital requirements, stringent regulatory standards, typically very unionized environment. But it's a fairly low threat for people to come

compete at scale, that's why I say kind of lowish, but there are always new low cost providers popping up here and there for sure. That's a tale as old as time. I don't have a lot of pricing power, which we'll get into in the later points of Porter's analysis, but it's low to moderate

because you can't just easily spin one up, but it's a, it is easier than spinning up the next TSMC for sure. Yeah, yeah, exactly. And I was actually curious out to, I just asked Chad GPT how many airlines have gone bankrupt in the last 20 years. And there's definitely quite a few as well. And I think that's probably it's a, you know, there's not as much of a threat to entry. Like obviously it still requires

substantial amounts of capital, but I think one of the disincentive is how difficult of an industry it is. I think you have to really think about it twice. Yeah, definitely. It's like, are you sure you want to join the, potentially join the pile of dead bodies of companies under here?

Like, are you sure about that? All right, number two, bargaining power of suppliers. So the suppliers feeding TSMC, bargaining power is low. While TSMC scale gives its leverage, certain specialized product suppliers hold more power due to limited specific materials or equipment. So this one, I think overall is low in terms of suppliers. TSMC is the big dog. They have scale. They have more power over the suppliers than vice versa in my view. Yeah, yeah, exactly.

I'll do it. It's hard to, I wonder how much power Boeing has currently because they've been plagued with so many issues that I do suspect at some point, a lot of the clients will be like, look, better give us some good pricing on this, on these parts, because you know what? Next order we're making, it's not going to you,

it's going to Airbus. Yeah, I do wonder, like that's a great segue to Delta, right? Like Boeing and Airbus, their suppliers, typically, historically have had massive control or influence over pricing and contractual terms to a delta. Does that change over time, with this kind of duopoly environment with one gaining market share over the other?

That's where money is made with the Porter's Five Forces, I think, is if something's changing from a moderate to a low is when a business takes off. Or when it goes from a moderate to a low, is when a business takes off. Or when it goes from a high to a moderate, while everyone else thinks it's still a high. That's where the money is made, in my opinion, is when there's a change in the ecosystem of that industry where something used to be a medium and is now a low, right?

Like that's where things get really interesting. Yeah, yeah, no, I have nothing to add there. All right, bargaining power of buyers for TSMC. Major customers like Apple and Nvidia do have significant influence due to their large order volumes. So I'm putting it as just a moderate, not a low. And it's not a high because there's just

limited choices of foundries. Like they're not gonna go to Intel. Like Apple's not gonna go back to Intel, that's for sure. I mean, they might if Intel, you know, it's new leadership, it's been a while, right? So they might, but again, Intel does not have the track record that TSMC has for manufacturing. Or the technology to deliver what they want.

Yeah, exactly. So they're trying to catch up. Will they? I don't know. They're spending tens of billions of dollars. They're definitely trying to catch up, but I don't know, again, TSMC is number one and there's everyone else. Like it's, I think.

Yeah, exactly. Yeah, nothing more. It's basically that. Yeah, they have technologically different product and far, far more advanced. Yeah, never say never. Of course they can go back to their old foundry, but like that doesn't seem probable

in the short to medium term, in my view. For Delta, bargaining power of buyers, pretty high, if not the highest possible that any industry I can think of. The buyers being you and I who wanna go buy a seat on a airline, customers can easily compare prices. I can't think of any industry where customers can easily compare prices on a dime with aggregator websites and make decisions super quickly on what has

become a commoditized service. So bargaining power of buyers is very high. Yeah. Yeah. And I mean, sometimes it's not just price, but again, I agree with you. Like, you may be willing to pay a bit more if you don't have a layover somewhere, right? Like stuff like that. But again, everything has a price. And if you pay, I don't know, $500 for a ticket with two stops,

one stop, let's say, to get your destination versus a straight one way, but it's a thousand dollars more than I think a lot of people will opt for the layover and saving a thousand dollars. So no, I totally agree. I mean, that's what I do when I book a flight. I don't really care which airline it is. Yeah, I have a rule.

If I fly for business, no stops, if possible, of course. Can't go everywhere in the world without stops. But if possible, but if I'm flying personally, I don't care as much, especially when it's the personal bank account, not the business bank account. All right, number four, threat of substitute products or services for TSMC. Low. There are advances, this goes back to the Intel example,

the Samsung alternatives. There are a few alternatives, but substitution for a certain type of technology that only TSMC provides with these like, you know, low single digit nanometer wafer, there is no alternative. So I would say threat is very low. This is kind of what speaks to what makes the company

so great in my view is the threat of substitute products. For Delta, moderate. I mean, there's always an alternative, albeit maybe not as convenient. There's always an alternative, whether that's a road trip, boat, train, you know, plane, train, automobile. There are alternatives, you know, not as convenient probably, but there are always substitutes. Or hitchhiking, you know, free of charge. Yeah, if you can. Thump the thumb, side of the highway. Yeah, exactly. And at least I haven't looked at it recently,

but I know they do. Another thing too to overcome for an Intel, for example, with TSMC is, it's not like TSMC is not spending money on capital expenditure on new machines, new technology. The latest and greatest. The latest and greatest. It's not like they're just like at the top and not doing anything. They are continuously spending.

If ever you, I encourage people to look at their cashflow statement and just see the amount of money that the SMC spends every year, it's always in the tens of billions. It's always in the tens of billions of dollars, yeah. Yeah, and like goes back to thread of new entrants. Who's raising that capital in terms of a new entrant, right? For what's required, just to start, right? You know, that doesn't even include what that, you know,

perpetual investment looks like that you're mentioning. Industry rivalry, moderate, you know, for TSMC, there are the competitors in the foundry market and they're vying for market share. It drives intense competition into technology development and pricing as we've discussed, which is a very net good thing for, a technology as important as this one.

This is one where if I had a time machine to invest, when it became clear that their business was becoming so much better than the rivalry and their technology becoming so much than the rivalry from a high to a moderate. You know, the time machine is where this, the money on TSMC has been really, really made. Is when, you know, Apple cuts the deal with,

with they cut off ties with Intel, moved to TSMC. That was like the evidence of the industry rivalry moving from a high to a moderate. And I think where a lot of money is made for a company like this. Yeah, and I think the transition of having, multiple more and more like very well capitalized companies getting into the chip designing space so if you're kind of new

like think about Meta, Apple, I think Amazon even is designing their own chips now so all these companies are designing their own chips to fit a specific purpose so Apple designed the M1 or the M series, now they're like M3, I think, but they designed it to be kind of tailored to the MacBooks or the new iPhones. They really tailored it for optimal performance for what the users do on these laptops.

Try to run a top of the line video game on your MacBook Pro. Good luck. That's not what it's for, right? It's not a gaming PC, but do pretty much anything else and it'll be fantastic. Yeah, exactly. No, good point. And to wrap this up, industry rivalry in the airline industry for Delta here. I mean, intense competition and especially intense competition from low cost carriers, which drives the bigger guys to go for price commoditization. And so it's, you look at all of these and it's a way to, I love these types of frameworks because Simone, you and I talked last episode about the art

of investing is looking at structured numeric data and analysis of qualitative things about these businesses that make them great or poor investments or what makes a great company versus an okay company versus a low quality company. This helps you put a framework between margin profile and business characteristics that they might have. Because all of these things being low are signs of a profitable company. And you'll see it in the margins. You will see it in the margin profile.

It's a great way to connect the numbers on the screen to the actual qualities of the business. And I think the ultimate way to make money here is when there are significant changes to the direction of the forces before its consensus. Like if a company has perceived low bargaining power with customers, and then it goes to high, low pricing power to high pricing power,

at risk of stating the obvious, Nvidia is the clear, clear example here. When their GPUs were the clear leader and the competition was far behind use cases that were emerging for their GPUs, what happened next is nothing short of remarkable with gross margins, okay? I just pulled up a graph here of Nvidia's gross margins.

In 2015, they were at 55%, which is still for a hardware company like them. It's fantastic. Very, very good, okay? It ticked up to 56, 58, 59, 61, 62, 63, 64, 72, 76. That is the last 10 years of data points of gross margins for Nvidia. Up and to the right,

and even more so aggressively accelerating to the right post 2022. And the AI era. This is probably where it starts getting dangerous though. I think a lot of people will bake in those margins and they're probably peaking right now. That would be my bet, not too big or my prediction, not very bold, but I would think it's pretty safe to say

there's a high probability that margins are peaking right now. Yeah, it could be very well that the case, but because new competition comes online, which is exactly the point of this exercise, right? It's an amazing way to analyze profitability without just numbers and a table on a screen, but numbers and a table on a screen

with context of the business characteristics, what's happening in that industry, what's happened with the technology that they develop, what's happening in that industry, what's happened with the technology that they develop, how much bargaining power they have over buyers that they used to not have, you know, substitutes that used to be there for suppliers or buyers that are no longer there for the use case that they're looking for. Those dynamics are what happens and why a company like Nvidia goes from a hundred billion to two trillion. Yeah, and what's so fascinating with Nvidia is that

their buyers are potential competitors down the line too. I think that's what's so fascinating is that you have the Amazon, Google, Alphabet, Meta, X, I guess, Elon Musk and his companies. They are deep deep pocketed. Like clearly Nvidia has you know quite a significant you know advance on those companies but if there are companies that have the resources to really make a push towards eroding that dominance from NVIDIA, you know, it's this code those companies and then down, you know, for

those who have maybe a bit less resources like an AMD but more expertise in the space I would say than probably the other ones. It's just so fascinating because the potential future competition, and you don't know maybe they won't, is just they have the funds to do it if they want to throw a lot of money at that. Yeah, I definitely see both sides of the Nvidia conversation, no doubt. I mean, trying to compete with them right now,

today, January 2025, good luck. I mean, it's immensely impressive what they've built, the advantage that they have, building kind of this software ecosystem with CUDA on top of it. There's really no substitute and clear path for a substitute right now. I fully see that, but never is a long time, man. but never is a long time, man. Like Bezos being back at Amazon for the sole purposes of AI, man, that makes me want to own some Amazon stock. Like don't bet against Bezos, man. He's a stone cold killer and he is back.

He did that Andrew Ross Sorkin interview and they go, why are you back? And he goes, AI. And they're like, what do you mean? He's like, AI, that's the only reason I'm back. It's like, okay, all right. You wonder also a side note, what kind of supplements he's taking.

Seriously, I want the gear he's on. Yeah, I mean, it's, I won't say anything, but like, you know, getting bulkier and more muscular as you get older, yeah, it's, let's just say, you know, the supplements I would like to see the ones that he takes. But I guess the one thing I wanted to show is when I was talking about TSMC, right, the capital expenditure, this is in US dollar. I converted from, so don't worry about the top being in Taiwanese dollar. It is in USD here.

It's massive, the capital expenditures that TSMC has done. So for 2020, 2021, 30 billion. 22, 35 billion. 23, 31 billion. Look at that build out. Oh my God. Yeah. And of course, you know, it's been a build out for the last few years, but even the years before that, they were well north of $15 billion.

Yeah. Like it's insane to think how much of- Yeah, pre air quotes build out, you know. Yeah, it's crazy. 11.1 billion US. And they're the leaders. And I think that's what I wanted to emphasize. They're the leaders already.

They're spending that much. Can you pull up that chart for ASML? Sure. I'm so curious. For those who want to see Simone's screen share, you can go to jointci.com. It's our Patreon. We post the video.

We got a brand new 2025 video setup going here. Super professional, but you also get to see us sharing different things on FinChat and using the platform. Okay, quickly, you've already pulled this up on FinChat for CapEx on ASML. Yeah, so it's not as big, definitely not as big, but they spend a lot in R&D. That's what they do. I think a lot of... Oh this is just CapEx. Yeah if you pull up R&D it's probably like another 10 billion or something insane. You can

search it on the metrics there. Research and development. Yeah R&D expenses. Perfect. Yeah there you go. That's uh, so the R&D when combined with capex Let's just say last year Yes a bit more than six the year before closer to six point five the year before that Probably closer to four high fours, but it just goes to show and they have the technology that no one knows how to replicate Yeah Yeah, no kidding. It's kind of crazy to think, but it's our point, right? That's what we're talking about is just, you know, think about TSMC or ASML.

Like if you're a new entrance, let's say TSMC, because, you know, clearly there's other players that are building up like Intel. Like you not only have to match the investments for TSMC, you have to do more than matching. So it just shows how much money is required for these businesses. I'm raising a fairly significant finchat round of capital right now.

And I think I'm all hot shit. And then I see these figures like this it's like a rounding error I feel like such a wimp no you know it is it is what it is but yeah that's definitely a humbling number to look at no exactly so yeah no is there anything else you wanted to add for that segment like I'm before we move on to the next no let's let's's, let's, let's, let's move on. 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 RSP 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 on the way. 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. So not so long ago, self-directed investors caught wind of the power of low cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see

because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world. Well, folks online are regularly discussing and buying ETF tickers from asset managers in the U S. Let's just look at ZEQT, for example, the BMO all equity ETF.

One single ETF you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products.

Please check out the link in the description of today's episode for full disclaimers and more information. Let's talk about bond ETFs. I think that this is a fascinating... Yeah. It's kind of a topic that's always broke my brain a little bit. And you'll probably explain why. Yeah, so I mean, we've talked about bonds from time to time, obviously we invest more into equities, Bitcoin as well, something at least I have more exposure

to that, for the purpose of this segment, I'll focus on longer duration bonds, whether you're looking at sovereign debt or corporate, well, sovereign bonds or corporate bonds or corporate bonds, the biggest advantage and disadvantage to bond ETFs are the liquidity. So I think it's important because a lot of people, and it's also a downside at the same time, so it's important to know that it can cut both ways. So you can quickly buy and sell those ETFs if you need money. It's easy to buy bond ETFs with just a few clicks. You do it just like you sell those ETFs if you need money. It's easy to buy bond ETFs

with just a few clicks. You do it just like you'd buy a stock with your online broker. The problem is that because they are so liquid, the ETF fluctuates in value in order to align with the current yield being offered by the market. They also constantly, you know, when bonds come to term, they basically roll them over constantly. So that's why it gets a little tricky sometimes with bonds. So if bond yields go higher, the value of the bond fund will go down. If bond yields go down, the value of the fund will go up.

So I know if you're newer to investing, I know it's a little bit, can be a bit confusing, but it's inversely related. Now the downside here is that you can't hold bonds to maturity and get your capital back. Bond ETFs like I said they constantly roll over over bonds that mature into new ones. Most bond ETFs also provide a whole lot of diversification so if you're looking at corporate bonds they'll have debt from hundreds of different companies oftentimes they'll group them together so they'll group them let's say investment grade they'll have debt from hundreds of different companies, often times they'll group them together, so they'll group them let's say investment grade, they'll group those

together or they might group junk bonds together. So even if one defaults, you won't really see an impact on the return significantly. Now if you contrast that with buying the actual bond and holding it to maturity, first it likely won't be as easy as a bond ETF to buy individual bonds. So I did some research with Questrade and you have to contact them by phone or email to place an individual bond order. I don't think this is out of the norm.

I think that's probably pretty common when it comes to buying just a specific bond from a company. It shows you how far the demand retail or just markets generally have demanded for equities and not demanded for some of these, what are largely basic fixed income instruments? It's kind of crazy to look at. Which is also crazy. People think the stock market is big,

like the bond market is much larger than the stock market too. So sometimes people will be like, oh, I feel like, you know, if they're new, they might think, oh, the stock market is just so much bigger. Actually, no, the bond market is much, much, much larger than the stock market.

And the private equity market is much, much larger than the public equity market. Yeah, yeah, a lot of people just kind of forget that because they're used to the stock market. But if you buy a bond, you might be able to find a buyer if you want to sell it, but it definitely won't be as liquid as a large bond ETF. So you're kind of trading off the liquidity here.

The advantage here is that if you want to hold it to maturity, you get your capital back plus interest. The problem is that the company or government in question can always default on their bonds. So if you're going to own the individual bonds, you're likely going to want to own more than just one. If you're going to own corporate bonds, you'll want to understand the company well. So basically as if almost you were like buying the company to hold it as a stock, you basically want to make sure that the company will be solvent to return your capital once the bond comes to maturity. So you should not just be randomly picking bonds.

You should do your research for that. For government bonds, obviously at the end of the day, you have to trust whichever government issues it. Can I interest you in some high yield Argentinian government bonds? I bet you they've been doing pretty well those bonds. They probably, yeah, I mean, they used to be a dumpster fire, but ever since Mila took over. I don't know what they are now, but it's me neither. Yeah, but people I think Historically, they're trading at like, you know multiple double digits Multiple tens of in the yield, but I think they also defaulted twice in the last 20 years. So that's what you get

Yeah. Yeah, exactly. Usually government bonds what happens? it really depends on which country issues them right and one of the issue they kind of get into is they, they issue bonds in US dollars, but they can't print the money. So, you know, if the US dollar really straightened, they can't really get US dollars on demand, like the US government would be able to essentially print the money.

So you have to, when you're looking at government bonds, you have to realize, are they issued in the currency that they can lack of the better words print or they issued another currency if they are it's usually in US dollar which poses additional risk because it's you add in some currency risk but it can the governments can always print money so if you buy a US government bonds, for example, you're likely, I think there's a high likelihood that you'll get your money back, very high likelihood,

but it's not a 100% chance. There's a reason why there's credit default swap, which is essentially insurance against the US government defaulting. There's a reason why they're not priced at zero, because there is a risk. It may be small, but there is a risk, risk but again chances are they will just print the money but the problem with that is if you hold it to maturity, yes you'll get your money back

but your real returns may or may not be higher than inflation and if they are lower than inflation it just means that you've lost purchasing power and you know that's I like to look at things in real terms and at the end of the day if you're not keeping up with inflation at the very least it's probably not going to be a great investment so there are some issues with bonds currently and I don't know if you wanted to add anything before I finish with this here no I'm loving it so there's a case to be made that the US Treasury bonds, the five-year plus in duration have actually been kept artificially low by the US Treasury

or, you know, so I guess technically Janet Yellen for a few more weeks, I guess it's the 20th, January 20th that the change of power goes over. The reason for that, and I've been looking into this, listening to some people that are much better versed in this than me, is that what the US Treasury has done is when they're, you know, governments never pay their debt. They just reissue debt constantly. They roll it over constantly,

so there has to be a market for that. But what they've been doing is they've been issuing more debt in the form of treasury bill or short-term bonds. So let's just say less than a year that's been the bulk of their issuance. This means there is less supply for longer dated bond with a smaller supply but let's just say that demand is fairly constant. You increase the value of these bonds and therefore lower the yield. So it's actually a way to actually control the yield on longer duration bonds. So

there's actually a pretty strong case to be made that US bonds and the US 10 year which is typically the one that people will look the most at in financial market. There's a case to be made that it should be like much higher than it is right now, 5% plus if the US would have kept a similar issuance of you that in the longer duration form versus the shorter duration a year or less so that these are things that governments can do to kind of skew things people think that it's a free market i don don't think that's complete fallacy. The bond market is not a free market whatsoever. Governments and central banks constantly

intervene in different ways, whether it's a quantitative easing where they actually will buy bonds with newly printed money and then they'll just put it on their balance sheet. There's a way to control that. You look at Japan, they do yield control where the central banks, essentially what they do is they have a yield in mind for the longer dated bonds, and they will buy all the bonds necessary to get to that yield. So you end up with the central bank owning most of the government bonds. Yeah, they have a few levers they can pull, no doubt. I'm confused about this point. Can you explain this many your note here says macroeconomists say that the 10 year would be 5% plus if they had not significantly reduced the issuance of longer dated treasuries.

Yeah. Yeah. Because they're what's happening right is that longer dated treasuries let's see you know a bond that was issued 10 years ago is coming up to maturity. So instead of issuing another 10 year or 30 year bond, whatever it is, they're just issuing it on the shorter end. So they're reducing the supply of actual- Yeah, exactly. Of the long dated ones.

Yeah, which is, you know, if there's less supply and the demand stays, let's just say the demand staying constant. Right, cause the price up yield down, okay, yep. Yeah, yeah, exactly. The denominator and numerator flipped, I'm like, explain this to me, okay, I'm with you. So it basically keeps, like, kind of this imbalance

between the supply and the demand for US 10 year. Yeah, so that's, and you can see that pretty easily. Like you don't have to look like you can just Google this. You'll be able to see it pretty easily. And the other thing with bonds right now is the credit spread for corporate bonds is actually the lowest it has been in the last five years. It's very low whether you look at junk bonds

and you can get these credit spreads very easily I'll just show my screen here for a joint TCI. You can get it. You'll see that the bond This is the credit spread and the credit spread there's different credit spreads but the one I'm looking at is the basically the difference in yield between a BA corporate bond so I would say kind of midway in terms of investment grade compared to the US 10 years. So the lower the spread typically is the better the markets are doing. That's kind of a general interpretation. When the credit spread starts spiking, like you can see here at the beginning, which is when the COVID like March COVID kind of started and markets panic and they were asking for a super

high premium for corporate bonds versus the US 10 year. Well, that's why like credit spreads are jumping. And when you see credit spreads jumping, it's usually around like financial crisis or like, you know, let's just say areas of turmoil. If you're thinking about the markets, like that's usually what's happening. And it's really a head scratcher. I would say that it's so low right now. I think a lot of people are wondering why the credit spreads are so low, but it is something to keep an eye on because what's happening right now is you're, you're not

getting much of a premium for holding credit corporate debt versus government debt in the US. And you can look at credit spreads in Canada too, right? You can look at the government of Canada credit spread, the five-year versus Canadian company that would issue debt in Canadian dollars. So the difference between that credit spread, it's typically, like I said, it's just comparing government issued debt to corporate issues. Corporate. Yeah. Yeah. That is fascinating. Yeah. It's crazy. It's been like- Trending lower and lower. Yeah. It's basically been going lower to the right, I would say, for those who are not on joint TCI that are just- What's the common speculation on this?

and not on joint TCI that are just sad. What's the common speculation on this? I'm not a fixed income expert by any means. So my green assessment of this is, well, there's a long list of things, but is the demand for the equity more so than holding the debt in terms of that demand pushing this even more. It's like, okay, I'm gonna hold government debt,

but I'm gonna own that company's equity. Why would I own the debt? I mean, I think what this says is there's a pretty high demand for both equity and corporate debt, because the credit spread is so low between the corporate debt and the government debt is that I, my interpretation is that I, my interpretation is that there is plenty of institutions most likely out there willing to lend to corporations.

That's why the credit spread is so low between corporations and the U.S. government debt. That would be my interpretation. Yeah. Oh, right. This is actually a lot of demand for the corporate bonds. For the corporate bonds. interpretation. Yeah. Oh, right. This is actually a lot of demand for the corporate bonds for the corporate bonds Yeah Yeah, because when you think about it, right? Like why would the spread be so low is because there's there's likely high demand for that compared to

the us 10 year Right. I think I flipped the denominator in the numerator for two segments of your analysis here. But you know, that's all part of the show here. Yeah, that's fine. I know bonds and I'm not a bond expert, although I am quite interested. I read a lot on it. But yeah, essentially it's, you know, the lower the spread is, the lower the risk premium that, you know, institutions will require to basically, you know, issue, to basically issue by corporate debt.

So I think what's happening right now is probably the most concerning thing is it could be a sign a bit like the equity markets that the markets are being complacent right now. That they're just thinking this is just, this is, things are right now. That they're just thinking, you know, this is just, this is, you know, things are different now. You know, things will continue like this indefinitely. So it's fine if we get a low credit spread, you know, we're kind of projecting that this will just keep going on forever type of deal. So it's credit spreads, I don't have much room to go lower, I would say right now, if you look at historically. Again, I'm not an expert, I'm not a macro analyst

or anything like that, but it looks like there's not that much room for them to go lower than this. No, especially not off this figure that you're sharing. Okay, very cool. Thanks for listening to the pod, folks. We have, you know, it's this time of year lots of new listeners coming on to the show and we appreciate you very greatly. If you have not if you're if you're here in Canada and are interested

in the real estate market, we have a sister show under our podcast network called the Canadian Real Estate Investor. And Dan and Nick are fantastic. They are real estate as a personality, which is exactly what I want in my real estate podcast. And they're, you know, these guys are on TV. These guys are the real deal now. They're on TV all the time too, Simone.

Like we got some real famous guys on the team here. Yeah, and Dan will come on the podcast as a guest towards the end of the month. I'll be recording an episode with him. Dan Foch, not to be confused with Dan Kett. Yeah, exactly. So for the folks. Yeah, because I think our plan is to look at

what 2025 has to offer for real estate investments, whether it's different type of real estate, but also we'll look at some REITs for 2025. So I'm recording this this week, it will probably be released towards the end of this month because I'll be moving and you'll be traveling. So we're trying to get a few recorded in advance and I thought it'd be a good idea for Dan to come on and people who have never heard him. Dan knows this stuff really well, but also I know, like we've talked before, Canadians love their real estate. So if you're interested in investing in real estate, maybe not the traditional way, maybe through REITs, we'll be looking at that and what 2025 might have in store. Absolutely.

So check out that show and then they'll be on this show later in the month. We mentioned a couple of times our page on jointci.com, it's $9 a month. You get our monthly portfolio updates and our faces for radio on video. And finchat.io is the data and analytics platform we use for all things on this podcast.

It's a company I started three years ago and excited to keep building it for you and the world. We'll see you in a few days. Take care. Bye bye. The Canadian investor podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.