The Canadian Investor - 6 Reasons to Consider Selling a Stock

Episode Date: July 24, 2023

In this episode of the Canadian Investor Podcast we start by discussing when we consider selling individual companies in our portfolio. Simon then goes over the recent news that one of Canada’s regional banks may be up for sale. Symbols of stocks discussed: LB.TO, SPOT, TDOC,  Blossom Social Event in Toronto, Tuesday August 1 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  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 to the show. My name is Brayden Dennis, as always joined by the distinguished Simon Bélanger. So this is going to be a better episode than yesterday's listening experience for two reasons. One, I don't sound sick.

And two, it doesn't sound like I'm in a tunnel because the audio is going to be better. But if you listen to Thursday's show, it sounded like I was in a tunnel. We just fixed it and posted the better version of it. So if you want to go back and listen to it, you can now. But let's do this episode, Simone. We have most of the episodes going to be talking about selling stocks, which we don't talk about enough. Yeah. Yeah, I know. I think, and we've talked about it a couple times, I think in our three and a half, almost four years doing the podcast now, but I know it's crazy.

Does that make you feel old or what? I think the gray in my beard makes me feel old. Fair enough. Yeah, but I think it's good because obviously people know we're long-term investors, but I think there are some very valid reasons why you'd want to sell a stock or trim a position. And I think, you know, sometimes I know for me is sometimes I just think I want to be a long term investor and that kind of conflicts with selling. And it's easy to lean on just keeping the stock when you're constantly think about the long term. But I think what we'll be going over today is there are some valid reasons why you should consider either selling or trimming a position. And hopefully that will help people making their own decisions in their portfolio.

Yeah, that's really good context, right? Because we talk so much about not selling, right? Is buy right and hold tight because there's so much news telling you when to sell a stock. I mean, look at all the major winners over the past couple decades. You've had massive drawdowns and the only mistake on any of them was selling them, even when you had those massive drawdowns because the businesses kept executing. However, we're going to talk about our sell framework today. And you'll notice a common theme is when those businesses are no longer executing or in a position to maybe not execute. And it has nothing to do with the price sentiment or the market sentiment or what people are saying on CNBC. It has to do with the actual

business framework and your framework as an investor. And I think that that's really important. Before we get into the sell framework, I told my pals over at Blossom Social that I would give them a shout out here for their event. So they're doing an event in Toronto. I'm sorry again for these Toronto events, but from the people who are from around the country. But there's another one here, Tuesday, August 1st at 6 p.m. at the Rec Room. You can go on Eventbrite and search Blossom Social or go on their app, download their app, Blossom Social. It's like Twitter, but for stocks. go on their app, download their app, Blossom Social. It's like Twitter, but for stocks, I'm on there and I will be at this event. I'll be talking on the panel. So that is Tuesday,

August 1st. We'll put a link in the show notes or you go on Eventbrite and type in Blossom Investor Social. All right, shall we do it? Yeah, let's do it. I have five points. You have a couple points after. Yeah, I'll probably chime in for a few of your points too so i think it'll be a fun one and then we'll finish with uh just going over the laurentian bank strategic review or putting itself up for sale and just bringing some a little bit of context aside from the headlines that people may have seen i love how it's called a strategic review it's always called that when a company is about to go i'm not saying that's the case here but you know when a company's like clearly on the path to bankruptcy it's always strategic review

yeah it's you ever see the office when michael scott says he's declaring bankruptcy yeah oh yeah if they ever run that show back he's gonna going to declare a strategic review. All right. So first one here is more, number one here is more of a reflection actually of your buy framework. And I think this is important because we're going to talk about our self-framework, but this first one is a direct mirror and an important process in your actual buy framework. It's something to have in mind when you buy a stock. And this took me, I didn't start doing this until I think my eighth or ninth year as an investor. And I wish I did this in year one, which is having a clear set of criteria

on the specific business that if X happens or Y doesn't happen, I'm willing to move on from the investment idea. So for example, I'm going to try to provide some examples as we go here, like real life things that I've done. For example, you know, and listeners as you know, I sold Spotify last year. That's with a P, not shop, but Spotify, the music player app. That's with a P, not shop, but Spotify, the music player app. It's an equity I held for around two years. I had a very clear vision for it, what it could be, and the drivers for making better unit economics on the business, namely margin expansion on the gross margins. gross margins. They pursue other mediums like podcasting, creating original content, this network effect, negotiating power with the labels, and a very highly targeted ads business,

their acquisitions, mostly in the podcasting distribution technology. And I watched eight quarters of gross margins stay at exactly 25%. While the management team said, don't worry, the whole time, eight quarters in a row, we know X, Y, Z are going to happen. And now we're like, you know, six, seven quarters later posts X, Y, and Z happening. And it doesn't budge. It's because the Unicomics have the business, right? Like music, they're just kind of capped. And I gave them the benefit of the doubt and I still do give them the benefit of the doubt

because Daniel Ek and the team are truly exceptional entrepreneurs. But as I sit on the eighth quarterly call, two years later, looking at the numbers, it's still the same and I move on. Now, the important thing here is that I reserve the right to change my mind if the facts change. If the facts change, I can change my mind, I can change my position. But for now, I want to monitor those facts through my watch list and not as a shareholder. Through my watch list and a customer, but not as a shareholder.

Yeah, no, I think that's a really good point there. I did similar when it came to Teladoc, right? I didn't take any rash decisions, but I noticed that things, well, things were changing. They got a big boost from the pandemic but i held the stock i think a couple years before the pandemic and unfortunately there were signs that things like margins for example were coming down and there was increased competition and my thesis that they're all in one offering would give them a hedge over various competitors was not holding up as well as I thought. So I gave it some time.

And like you, I think I gave it almost like five quarters before I took the decision where things were not recovering as well as management said. And even the growth was slowing down, which was different than what management had said. So I lost some confidence in management too. And unfortunately, in the business, I decided to sell. So I think it's important to be able to change your mind and not being stubborn because your original thesis was probably very good, but it ended up not panging out. And I think being humble, it's a really important trait from investing.

And also shows that you're able to be cold and calculated decisions when it comes to that and not be emotional. It's great to be emotional in other parts of your life, but in investing, it's probably not the best thing if you want the best returns. True that. You know what it's like? The way I think about this is one bad quarter is like a Cy Young pitcher throwing one bad pitch. If the manager pulls them from the game and they're only on pitch like 58 because they threw up one bad pitch that someone took out of the yard, that's an overreaction from the manager. And you see it in professional sports all the yard, that's an overreaction from the manager. And you see it in professional sports all the time, don't we? Yeah. And you see it in professional investing as well. Not just, you know, retail traders acting like this way. You see it across the board. And I think of it like, you know, an MVP pitcher throwing one bad pitch across the plate and changing your position

or changing your strategy in that game because of one bad pitch when they could go lights out and strike four more innings out in a row right and and so that's the way you got to think about that is it doesn't make it the right move just to react on one bad quarter or anything. But monitor, right? Yeah, exactly. If that pitcher then, you know, his arm clearly is not working, you know, his command's way off, none of the balls are going across the plate, then there's something to change there.

But one bad pitch or two bad pitches, that doesn't warrant a complete change of strategy yeah and i i would the last thing i would add is we saw with the pandemic right these kind of black swan events i think it's important to to take things into context and i know a lot of people will have like hard set rules if there's like a decline in revenue uh they'll like sell the company and i think you have to also just put things into context a little bit because there were a lot of great businesses that had a down year in 2020, but that rebound and there were solid financially because of this once in a lifetime event. And if you're acting just on hard set rules, you could have ended up selling some really good businesses because of that. You might have sold your whole portfolio.

Yeah, exactly. Maybe except Zoom and Teladoc and all those stocks. Yeah, you would have been buying all the junk that actually had a growth year that year. 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. Number two is personally, I exit a position when I have strong conviction that the business is on the wrong side of a long-term secular trend. And long-term is important because if I think that they're on the wrong time of just a short-term issue, then that's not warrant for exiting the business. then that's not warrant for exiting the business. And you can make a lot of money buying unloved businesses,

unloved sectors going against the grain. And so often these things look really, really good in the short term. But on the long-term secular trend, if that business is in structural decline, there is a very, very good chance on a long horizon you lose money. Now, there are a couple examples of this, right? Like I sold Allied Property REIT in 2020. Oh, no. no that was yeah yeah clearly that was a very good decision if we look at uh you know the stock price at the time of of the pandemic happening and where we are today that's not to say it's not good value here i think it's a completely different thesis on today's price in completely

different thesis with what the the yield went from like you know, 1.8% to like 8.5%, you know, from here. And so, those are completely different stories. But even for me today, I still think office is on a long-term secular decline. It's not dead. It's not going away. And you have highlighted that with Dan. It's just not my style. And for me, I try not to own positions on long-term secular declines, even if it's not going... Obviously, office is not going to zero, but it's not a growth sector.

And for me, that's just the way I invest today. No, I think that's fair. And obviously, I think there's some really – I'm trying to think of a few example because they weren't the right kind of secular trend, but they bet too much on their, I guess, legacy keyboards, phone keyboards, and didn't really get onto the shift that consumers were demanding something without keyboards and yes there were still some that really loved those keyboards but it was a diminishing kind of percentage of the population and when they finally came out with their first phones that were not fully kind of keyboard and had a touch screen similar to an iphone it was just too late android and iphone really had the lion's share of the market share and they ended up having to pivot. And now, you know, BlackBerry is a shell of itself at its glory. So I think it's kind of a sort of a secular trend shift.

I guess it's kind of a secular trend within a secular trend, maybe. Or cigarettes. Yeah. So, you know, tobacco stocks that, you know, most of their portfolio is in traditional smoke cigarettes versus smokeless vapes and oral, those businesses will do a lot better than companies that are mostly just moving volume through cigarettes because that is a secular decline. The list goes on and on and on. And technology is one where within the technology sector, which is so broad, you've just pointed out different trends there. Absolutely. All right. Number three, an opportunity to own the best. An opportunity to own the best. Probably my most common sell decision, whereas there may be nothing wrong with the business, but an opportunity to increase the quality net-net of your portfolio or swing at a fat pitch to own the best in breed can justify decision-making.

And decision-making on the sell side or even on the buy side should be sparse with good low portfolio turnover in a high quality portfolio of businesses. But I just talked about last week how I sold Moody's for SPGI. I sold Moody's for S&P. a duopoly on the credit rating agency business. I felt ex-credit rating agency over the last five years, S&P has built a better asset.

And no sense diversifying and fighting my own conviction when there's an opportunity to own the best. So the thing I don't want to do is diversify, even though today you probably get wonderful returns from Moody's. I'm not going to fight my conviction. Yeah. I think for me, I also have an example of that. So it would have been a digital realty trust where I had close to 50-50. That was probably a couple of years ago at this point. And then I ended up selling that position and going for Equinix. Digital Realty Trust, I still like more as a dividend place. So definitely for income seeker that wants some exposure to data reads, you know, a way to get exposure to tech and also AI, but also get a good dividend.

I think digital realty trust makes a lot of sense. But for where I'm at, Equinix, from all the other perspectives, if you forget about the dividend for a second, for all the other perspective, growth, efficiency, and all that made more sense. So I ended up shifting my portfolio to Equinix. And by the way like talk about a stock that's been benefiting from the ai crazes like kind of under the radar is definitely equinix because it's been i mean it was trading i think in the low uh below 500 bucks a share yeah now

it's close it's beyond 800 um so there was definitely people being a bit bearish on the overall space. And I think, you know, late last year in October, I think October was probably the bottom, but tech was really, really in a downward spiral. And I think Equinix was affected by that too, but it's really rebounded nicely. I mean, I never panicked. I know, I think you own it too, right?

If I remember correctly. I own a small-ish position okay yeah so that's that's a good example when you do when you did that you texted me saying you're gonna do that and i was like why didn't you do that a while ago because i i shared the exact same sentiment that that equinix equinix balance sheet was way better it was growing faster it had better assets and better ties with the big cloud giants. Seems like just an obvious move. Yeah, dude, it got so cheap in the fall of last year for not like a huge reason.

I mean, look. I think it was a combination. You're going to need more compute space. If people are going to be buying all these GPUs, where are you going to store them? And we need more compute space you know if people are gonna be buying all these gpus where are you gonna store them uh and we need more more space you know they sell what does equinix do they sell space electricity and cooling yeah and that that's what that's what those gpus need yeah exactly and i mean i think it was just a combination of what i said but also just the market being down on the REITs in general.

They were still doing better than other types of REITs like office REITs. But I think it was just people seeing REIT and just not being really interested in the name, regardless of what kind of REIT it was. All right. Number four, one that I know you will resonate well with is called the sleep test. This is really short for me. Life's too short to be owning stocks that stress you out, position sizes that you don't feel comfortable with. I had a lot of people come up to me at the meetup and go,

how do you sleep at night with consolation software making up 55% of your portfolio? And for me, it could be 100 hundred percent and I'd still pass the sleep test. That conviction has been built up over a long, long time and them doing things that give me a lot of confidence. But if that was just handed on to someone else who doesn't understand the business, that would not pass the sleep test. And uh don't be owning position sizes or or even just businesses at all that don't make you feel happy because life's too short to be stressing out about your investment portfolio yeah i'm surprised i didn't get that question are people saying it for bitcoin because for me it's a pretty significant portion too but i'm like that

too i understand it well and i'm comfortable with it um it's not as high as a percentage i think it's around like now like 19 18 19 but i'm comfortable with that but no one asked me about it so i'm kind of i'm kind of surprised but um maybe we have more bitcoin than we think listening to this podcast yeah i guess so right they're like oh mine's mine's bigger no i mean like yeah it's a good point right because that's not a new position for you no exactly it's not like you just oh i'm really loving this bitcoin thing let me buy 20 of my net worth in it that's just reckless yeah so for me this stress uh the sleep test i mean i kind of approach it with like a philosophical kind of point of view here because obviously

stress can affect a lot of areas of your life in really negative ways i think you know i'm not a medical professional anything like that but i know there's countless studies showing that. I've seen my dad have a heart attack, I think it was like 20 years ago, because the main culprit here was stress. And obviously, if you're losing sleep over it, and if I'm losing sleep over it, it probably means either I need to sell that position or at the very least trim it if I still like the company. And for me, at the end of the day, it's pretty simple. I invest to create a better life for myself, my family in the future. But if I'm getting stressed

out about the position kind of defeats that purpose. So that's how I see it. Maybe it won't be the right decision and that position will keep growing. But at the end of the day, if it's stressing me out, I'm definitely I'm very comfortable with trimming or selling a position, even if it ends up giving great returns going forward because it just made sense for me from just a well-being perspective. Well put. All right, number five, egregious valuation multiples. egregious valuation multiples. If you are lucky enough to own a stock that goes parabolic when you owned Teladoc, the multiples become disconnected from reality. It's not a bad idea to take some chips off the table. And trust me, this is a hard one for me because I really try not to sell winners for no reason. But if the valuation has far surpassed reasonable expectations, I'm certainly open to it.

And I own stocks that have had huge run-ups here in 2023 and are very expensive, but they are not into absurd valuation territory. I was loading up on Intuitive Surgical in the low 200s, high 100s, and it just blew out earnings yesterday. It's like 450 or something. Where are we at? It was, okay, it's at 350 and so yeah we're at roughly 350 and so that's only a few months right and that stock was trading at frothy frothy multiples uh when i bought it in the in the in the lows of 2022 i'm expecting this stock to to be very highly valued given its quality, but it feels like it's moving. Shopify is another example where it feels like it's moving back into egregious valuation territory. And so they become questions for me of like, can I map out good returns from here? Again, that's not saying I'm selling either of those

positions, but it crosses my, it begins to cross my mind when I see things trading at 80 times next year's like gross, like gross profit, not even, not even, you know, net free cash flow. So that's something to consider. Here's an example. Aurora Cannabis traded at 215 times next year's forecasted sales growth in the legalization of cannabis. 100X the three-out sales number, the three years out sales number,

let alone profit, which was non-existent. Turns out, there's some execution risk here. And clearly, these businesses are zombies of themselves right now. This is a reckless way to invest. And if you're trying to make money consistently, exiting that position was clearly my suggestion to these individuals who I'm close with that owned cannabis at 215 times next year's sales. Of course, that fell on deaf ears when it goes up every single day for three months on end, but the party does end. So yeah, anything to add there? I mean, those valuation make Teladoc sound pretty cheap when it was at a peak, I mean, those valuation make Teladoc sound pretty cheap when it was at a peak.

Because it was trading at like, I think, 30 times sales or something like that. So, compared to that, yeah, really cheap. But no, I agree with that. That's why I ended up- I'm pretty sure they bought Livongo at like 30 times. They bought it. Yeah. Let's not realize that. Yeah, exactly.

Sales. Sales. But no, I think for me, that's why I trimmed it. Obviously, in hindsight, I probably should have sold my whole position, but I still believed in the company at the time. I thought the Livongo acquisition was expensive. And in hindsight, that definitely held true because they wrote off most of it. But I definitely kind of bought what leadership was saying in terms of having that one

solution, like I talked about earlier, not to go into that again. So that's why I decided to trim. And, you know, I think it's good to remind people you don't have to do, you know, it's not an all or nothing. If you still believe in the business, then, you know, just trim a little bit of your position, take some profits. And if it goes down and you still like the business, then, you know, just trim a little bit of your position, take some profits. And if it goes down and you still like the business, maybe you just kind of put some back in, right? There's different options you can do, but you hedge your risk definitely a bit, especially when those valuation get into, let's be honest, in bubble territory. That's right. There's a difference between a stock having a huge run-up and it becoming a bubble.

And when they're a bubble, it's not that hard to know. The amount of hype sentiment about the stock become completely disconnected from the business. And it does become quite obvious from my view. And some of the AI stocks today exist that same characteristics. And so, of course, we're never trying to just sell winners for the sake of taking profits here. I think that that's generally a mistake. But sometimes the egregious multiples no longer pass the sleep test, right? And then they kind of work hand in hand. Yeah.

So a note about selling winners that I want to do here before you have a couple here. How often, Simone, do you and I hear in person, I bought this junior miner, it's just an example. I'm down bad on the stock. It's now a penny stock. If it just goes up back to where I bought it or halfway to where I bought, some arbitrary percentage of back to where they bought it. This is a gigantic mistake, probably like one of the most elementary mistakes you can possibly make. Investment returns on a go-forward basis don't give a shit about your price anchor. It doesn't care about you bought the stock at 10 bucks and now it's worth 50 cents because the stock was bought at 10 the business

is worth nothing it's heading into bankruptcy or strategic uh it's heading into strategic review it's heading into strategic review that's such a pr word by the way that's like such pr yeah yeah yeah or or prbs who's counting uh? It has no bearing on future returns from this point forward, from right now. And there's no logic to this. Oh, I'm just going to sell it at half of what I bought for. It's a completely behavioral investing bias that needs to be avoided at all costs. Let's go through an example. If you have $1,000 in a stock that used to be worth 10,000, so you're down 90% that math, ask yourself, if it was just in cash, would you go back into that position? Would you expect better returns from that position that you currently hold in this junior mining company that you made a mistake on or a high quality business or an index fund from this point forward.

That's the conversation to have internally rather than some arbitrary price anchor, because that makes no sense on math. And the market doesn't care that you bought it at 10 bucks and now it's worth 20 cents it just doesn't care uh so i see this too often and uh it's a mistake that comes up time and time again yeah and i mean i'm gonna go with a little bit of a poker analogy here just because i've seen like i played a lot of poker in my life whether it was online or in person and one thing that you see a lot of people doing my life whether it was online or in person and one thing that you see a lot of people doing is they get into this mindset that they're pot committed into a certain hand so just pot committed for those are not familiar with poker just means that

you know you've invested a lot of your chips in this current hand and some people will say okay if you put like 50 percent or even two- of your chips, regardless of what's happening, you should be willing to put the rest of your chips in, which, you know, as a general rule, it's probably not a bad thing because for the most part, you're rarely, you know, drawing dead, meaning that you don't have any ways of winning it's pretty rare that this happens but sometimes i mean the writing will be on the wall and it's clear that you may have a less than five percent chance and you're better off folding and using the remaining chips especially if you're in a tournament where you cannot rebuy and using those on a hand in the future because you're gonna have better expected value or better returns on that. So I think, you know, anyone familiar with poker will be able to relate with that. And the way I try to see it for me is just expected value.

So basically, expected value is just assigning probabilities on different types of outcome. And then you think, you know, for example, let's say I, you know, I'm looking at the at Apple stock and this is just an example. So don't add me saying it doesn't make sense. And I just assign different variables. So I could say there's 25 percent chance it'll go to four hundred dollars, 25 percent chance it'll go to two hundred, 40 percent chance it'll go down to one twenty five and 10 percent chance something catastrophic happens and it goes down to $50. And then you just multiply those, the prices by the percentage that you assign to each, and then the sum of it will give you the expected value. And obviously this is a simplified way of

just explaining it. You should have a good reasoning behind these various outcomes. And it's not a perfect science. It's going to be objectives and your projection on where you think the company will go but this is just an example to say that you know are you expecting overall bet you know good or better returns on that stock you currently own right now or is another company or another investment better returns i am the worst for that in poker the pot the pot what did you call it commitment committed yeah i get so this dude i i have a fatal flaw in that game of poker i'm actually pretty good at poker it's like i i know cards and i know math okay but oh boy, do I get pot committed. Yeah.

If I'm going into the end and I've already used all my chips, I can't back down from that fight. Yeah. I might have like, you know, a pair of kings and it's not looking very good, but I'm going for it. Well, that's a pretty common thing in poker is people get hypnotized by starting with like a pair of aces or kings or especially aces and then you know the board will come out and if you're

anyone else in the hand and you're not playing everyone can say okay like aces would be completely crushed here like there's no chance it's good like literally there's like you know you need one card to make a flush type of deal and you don't have it with your aces but people get so hypnotized by the aces and i think you can relate that to investing where you may have a really good company that you invest in you invested in a couple years ago and then there's a complete shift in the business and then the writing's on the wall but you know you're maybe back to one of our early points is that you're so stuck on your initial assessment that you don't want to sell the company have you ever tried to count cards or try to learn uh no i i mean i know the principles behind it i mean i looked into it

just for fun but it's it's pretty complex and um you almost need a team to be able to do it well so you need to be more than one yeah i went down a youtube rabbit hole like literally yesterday about counting cards and it looks like intense the teams they form all this stuff like and it's like borderline illegal but like not really yeah I mean it's not but it's the casinos don't like it so if they notice you're doing it you know you probably will not have a good night that night but yeah people it's for blackjack so I think blackjack they have like 10 decks you know in one kind of shoe that they call so it's really that's why it gets really complex it's not like you

have one deck to account yeah yeah if Yeah. If it's one deck, then people would clean the casinos out. But yeah. 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, last one here. Yeah, so the last one here is time. So I think people may think, okay, why are you selling because of time? Well, you know, I don't know about you, Brayden, but my life is way different than it was five years ago. Things change and I just don't have the same amount of time to dedicate to, you know, owning individual companies and the work that's

required and the time that's required to stay on top of it. For example, you know, I wasn't co-hosting a podcast five years ago. I didn't have a daughter. I didn't own a house. I was renting. I can probably talk. Did you have any gray in that beard? I think it was starting, maybe. I had more hair, that's for sure.

I had more hair, that's for sure. But it just goes to show that a lot of things change, and that's normal. Life changes. You know, you get older, things change. lot of things change and that's normal. Life changes, you know, you get older, things change. And my point here is that five years ago, I would have had no problem keeping up with 20 plus stocks in my portfolio. But now if I'm being really honest with myself, I just don't have the time to stay on top of more than 15 individual companies. So to me, that's a very valid reason to sell a position. Obviously, it gets tricky when you have to go through your portfolio and deciding which position to sell because it's a bit harder.

You have to essentially go position by position. And I think just make a list of, you know, all your top holdings in terms of conviction. And then the ones that end up near the bottom of the list then you end up selling and that's what I did so I sold the ones that were more at the bottom of my list so I could focus on the companies that had the most conviction in and you know still assign some money to index funds I think it's a really good alternative which requires not a lot of times an investment compared to individual companies. I have been ranking my conviction on portfolio companies for years and years now. And I try to match the position size with that conviction.

And if I see just the one just slipping, slipping, slipping down, it's at the bottom of the list. You're right. I think we talked about life's too short to be stressed out with a stock. Life's also too short to be managing 40 different individual positions. The time requirement for that is net, net doesn't outweigh the benefit of just owning an S&P index fund

and enjoying everything else, not spending a second. Yeah, I've heard people in the investing space saying you should own 30 to 50. And I don't know, I think realistically, if you're owning like, let's say the top end there, like 50 stocks, I don't think anyone can really stay on top of all 50 names. I'm not saying they don't know the 50 names decently well, but it's so easy to, you know, that position that's gone down to 0.5% of your portfolio. I mean, I've heard people saying like, oh, I actually forgot I had that company. And that's probably a good indication. If you forgot you had it, you might want to consider either adding to it if you still like it or selling it or selling something else. Yeah. Changing your focus a little bit

makes a lot of sense. And I'm not totally convinced if you have an equal weighted 50 stock portfolio, that there is enough alpha generation to justify the time commitment, right? And alpha generation is, for those listening at home and not familiar with the term, is a very fancy tool, a fancy word for beating the market. So if you're not generating enough beating of the market to own 50 stocks, I can't justify it personally. All right, let's go to the strategic review. Strategic review, we've been talking about it. People are probably excited now. So for those like, so yeah, like we mentioned, Laurentian Bank is doing a strategic review according to their official press release. And for those not mentioned, Laurentian Bank is doing a strategic review according to their official press release.

And for those not familiar with Laurentian Bank, I mean, if you're outside of Quebec, you may have heard the name, but you're probably not overly familiar. A bit like Canadian Western Bank, right? Canadian Western Bank is more in the West. I think they have some branches in Ontario, but I think it's typically Alberta and B.C. in Ontario, but I think it's typically Alberta and BC. But Laurentian Bank, ticker LB.TO, and it primarily operates in Quebec, but has some commercial and business banking outside of Quebec. Laurentian Bank confirmed last week that it was undergoing that strategic review following a report from the Globe and Mail saying the bank was up for sale. Once that came out, the stock was up like it was crazy. It was up like did you see that it went up like yeah if you do

like over the last two weeks you'll see a pop at some point that's when the news came out of the strategic review um laurentian bank because people are seeing that like the equity can be saved essentially yeah i think so i i mean they've been beleaguered, not necessarily beleaguered, but definitely facing some challenges for quite some time now. And I'll go over that. But Laurentian Bank is currently the ninth largest bank in Canada. And according to that Globe and Mail article, what has spurred the strategic review would have been the fact that they receive a bid from a rival bank. But it was mostly from anonymous sources. So take that with a grain of salt. a rival bank, but it was mostly from anonymous sources. So take that with a grain of salt. And Laurentian Bank hired JP Morgan Chase as a legal advisor. Sorry, and a legal advisor. JP Morgan, for those not aware, they ran the sale of HSBC Canada last year to RBC. And I think that

sale is still pending regulatory approval. And Laurentian is currently in the midst of a turnaround plan that was launched in December of 2021 on their investor day, which included the launch of LBC Digital, a personal digital banking platform. And they've been struggling since 2017 when it was uncovered that they had originated mortgages that were later sold to a third party, which had borrowers that were misrepresented. So that's not great because essentially it questions the quality of credit for those borrowers. So that's why the and their underwriting practices, banks will do that sometimes or financial institution, they might originate the mortgage, but then they'll sell it to a third party. It's

very common in the US ass as well um so that that obviously has been weighing on the stock and since the start of 2017 until this announcement of a possible sale laurentian had a negative 20 percent total returns compared to 50 percent for td and 110 percent for national bank so it's not it's not been the best performing bank stock in Canada, that's for sure. And for those thinking, oh, it's just a tiny bank. You've net lost money year over year after the div. That's pretty tough. Yeah, and I think a lot of people were probably chasing that dividend.

Unfortunately, that's probably what happened. Or believing in the turnaround plan, which I think they've somewhat, they're still in the midst of it, but they've accomplished some of the things that they were saying they would do. And for context here, Laurentian Bank has $50 billion in assets, which is definitely dwarfed by Canada's big banks. The smallest of them is National Bank at $417 billion in assets. So just to give context here, it's a relatively small bank. And if we look at the US, the Silicon Valley Bank, for example, I think they were at, what was it, $250 billion when the collapse happened? sounds about right yeah so even that's a little high maybe i think it was around there yeah yeah big big stock for sure yeah so it just goes to historic

run-up for about three years before its demise yeah and just goes to show that even our regional banks are not like they're not that small in can, but it's not part of the big banks. And I was also curious. So I looked at their deposits because that's something I think everyone should take note at the deposit flow for a bank if they own the stock. And they were down four percent from January to April of this year, but up five percent on a year over year basis. So I think that's, you know, that's not too bad. I think that's something I would keep an eye on. Their net interest margin has actually been pretty stable over the last 18 months. It's been hovering between 1.77% and 1.88%, but it looks like it might be trending down. And their

CET1 ratio, which is just a ratio that shows how liquid a bank is and its capacity to be able to absorb losses on that can happen really quickly that's at 9.3 percent it is lower than the big banks but it is you know it's normal for a smaller regional bank like Laurentian Bank here and from a profit standpoint it's been up and down for the company they were significantly down um in the past couple years in 2021 they were a dollar per share in eps and it came back up to five dollars in 2022 and trailing trail 12 months it's 4.7 dollars so it's not i mean overall i think it's kind of you know up and down for laurentian bank it's not, I mean, overall, I think it's kind of, you know, up and down for Laurentian Bank. It's not like they're firing all cylinders here.

And the last couple of things I'll mention is their loan loss provision increased three basis points as a percentage from 15 basis point to 18 basis point. It might not sound like a lot, but it's a 20% increase. So it's not the dollar increase, but that's the amount they put aside for their total loans. So that's a pretty, I know it's just three basis points, but when you're going from 15 to 18, that's a quite significant increase in loan loss provision. So I don't know if there's some trouble brewing on the horizon. I mean, they're a bank. We know the pressures that the banks are facing right now in the current environment. But the other thing, too, in terms of suitors, probably looking at one of the larger canadian banks i was reading an

interesting article as we were preparing for this from andrew wellis from the global mail again where they're handicapping the race for lower-inching bank and essentially it looks like there's just a couple of potential soothers i think t TD would be an interesting one because they had their takeover bid from a US regional bank that fell through. The name's escaping me. But aside from that, I mean- That was a few billion or something, right? Yeah, exactly. So it would be, I think the purchase cost from what I've seen would probably be around 1.52 billion for Laurentian. So TD would definitely have the funds. Some of the other banks, Royal Bank-

TD had 13 billion set aside for the acquisition of First Horizon Corp. Yeah, exactly. It's First Horizon. I was forgetting the name, but the article essentially says Royal Bank, it's unlikely because they're still trying to close the HSBC acquisition, which I'm not sure it would look great from regulators as they're also trying to gobble up Laurentian Bank. And also the HSBC was $13.5 billion. So it's a lot of capital. Some of the banks may also be reluctant to issue equity, for example, if they don't have enough cash on the books to be able to meet their liquidity ratios. So they would have to get financing somehow and most likely equity. CIBC has had its issues with regulators.

So it's a bit it's unlikely. Bank of Montreal has made a big acquisition in 2021 with the Bank of the West in the US. So I think they're arguing that it's unlikely as well. Bank of Nova Scotia has a new CEO and they're trying to right size their business. So that's another one where it could be a bit more questionable. And then there's National Bank. But National Bank has a big presence in Quebec. So in terms of the synergies, we'll have to see.

So it really leaves TD and the other player potentially Desjardins. But Desjardins also has a massive presence already in Quebec so whether it makes sense for them so to me it would probably be a bank that's looking to broaden their presence in Quebec not necessarily one that already has a very established presence there yeah I like this overview it I don't have any major hot takes about Laurentian Bank or who's going to be the best suitor for this. What I do have is an important takeaway here. You've plotted the performance of Laurentian TD and National

side by side on a total return basis. So that includes the dividend. And I saw on the Twitterverse many, many Canadian income seekers, you know, the fire types, the dividend income types all over Laurentian Bank for the past five years, hyping it up, talking about, you know, adding to it on every single dip. adding to it on every single dip. Hey, it keeps dipping. You keep adding on every single dip and just completely blind to the fact that the business is subpar against the other banks. And this is an example of my sell philosophy that I talked about, which was number three, an opportunity to own the best. What are you doing messing around with junky stuff? You lost money holding it for 10 years while it paid you like a 7.5% dividend. It's not guaranteed money just because they pay you out in cash. If the equity loses 10% a year, net net, you've caggered negative 3.3% of the last 10 years to be exact.

And so this is an opportunity, this is an example where chasing yield and being blind to the business fundamentals, when you see those dividend checks hit your brokerage account, is honestly probably one of the most rookie investing strategies I've ever seen. And you see it everywhere, especially in Canada, who are just dividend obsessed, dividend like injected in my veins type strategy. It's a pretty good way to lose money from my view. Yeah, exactly. And I don't think there's anything wrong if someone made the assessment, like it's a good turnaround play. They'll assess, they'll put a small portion of their portfolio, you know, your banking

on the turnaround, whether it works out or not. Depending on your timing, you might actually be up on the stock, right? Because they really kind of crash after 2020. And then that turnaround plan, I think I was mentioning came in in 2021. But, you know, there's a difference between putting a position there and continue adding to it when the progress is not necessarily going as well as you'd expect. So I think that's something to keep in mind. But I will also put that article from Andrew Willis from the Globe and Mail because obviously I just want to give him credit. I had a quick look through the article.

Those were the big points and kind of put in also my take on it too. But it's, I mean, it'll be interesting what happens. One thing too that does raise some questions is why why now because a lot of the banks are not necessarily you know their financial positions are not as good as they had been in the last previous you know let's say six months to a year ago prior to that so there's some questions in terms of why does it make sense for them to go now and typically you know mergers and acquisition happening in the middle of summer they're not as frequent too so that's another thing that you kind of wonder so maybe there's some more worrisome underlying reason that they're doing this that

obviously we're not privy to but something to to keep an eye on. It'll be really interesting. And whoever steps up, what regulators will have to say to. Thank you so much for listening to another episode of the Canadian Investor Podcast. So happy that you're here on Mondays and Thursdays. If you have not checked out our Patreon page, where you can see, Samal's got a little beautiful, sexy graph on the screen right now. He's got the Canadian Investor Podcast logo in the back of his screen.

I have bed heads, but nice summer glow, but with bed head, but with the summer glow, you can see it on video on our Patreon at join tci.com. And then always pinned at the top is our latest portfolio updates. We talked a bit about positions we've bought and sold through the years. Makes it sound like we sell stocks all the time from today's episode. We're looking at like an eight, nine, 10-year period that all those positions have been sold on. So it's very, very low portfolio turnover. And to see that in action, it's always pinned

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