The Canadian Investor - 7 Rules From an Investing Legend

Episode Date: February 6, 2023

In this episode, Braden goes over Terry Smith's 7 investing lessons and how the flywheel effect can be so powerful for businesses that have it. We discuss the recent Fed increase and Simon goes over some of the reasons why India could be an attractive market to invest in the next decade.  Tickers of stocks discussed: AMZN, UHAL, CRWD, AXON, NFLX, GOOG, WSP.TO, ACN, TFII.TO, BLK, INTU, ISRG, RAS, WM, HD, WMT 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. Register for ShakepaySee 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

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And to everyone else, this market rally is insane. Yeah, yeah. I mean, it's kind of funny, right? The markets we're seeing right now are the past, I would say, three, four months. It's almost you have the markets, oh, inflation is not as bad as we thought. And then the next day, it's like, oh, but the economy is slowing down. So you have kind of that zigzag going on where when people focus on inflation, the market's going up. And then when they're focusing on overall reduced

earnings, I would say for the broader market and, you know, possibly a soft recession that we're hearing, then they go down. So it's very, very interesting, in my opinion, when you just follow the markets, you're thinking long term, but people kind of freaking out that are probably a bit more traders, if you'd like. Yeah. And there's one thing that we can guarantee is that the market is volatile. It has been volatile. It is volatile and it will be volatile in the future. That is the one thing you can absolutely bank on. And so, uh, act accordingly. No victory laps just yet after a rough year, uh, for 2022, but I saw on joint TCI.com year,

you had like a, what, like a 14% month of January. That's some serious rally. Yeah, but I mean, I think it's also my exposure to Bitcoin, right? It's not like my biggest position, but it's a decent sized position. All risk assets have gone ridiculously high. That's it. And I think Bitcoin is one of the best performing major assets this year. So clearly that helped my portfolio. But I have other like ASMLs almost like doubled since I bought it. The REITs that I was hammering on, I've been doing really well too. So just, I guess, good timing, but it's just short term, right? So really focusing long periods of time. It's nice to see the green, but I don't really get too caught up one way or the other yeah i was uh almost double digits myself and just looking back on my returns finishing 2022 um i'm in double

digits historically compound annual growth rate since uh since recording it And you can see all of that at join tci.com. We really appreciate the support. All right. My first segment of the day is about bad returns on the S&P 500. And then the following year, what has happened? I did a bunch of this type of content in the new year rolling around. I think my segment was called What Not to Expect in 2023. And some data historically around one year timeframe is one, both arbitrary, but it also tells you nothing about the following year in terms of performance. There's been no historical correlation between that. And I mean, why should there be? It is a completely arbitrary calendar year

timeframe. And so I'm going to look at some historical drops and the return the year following. In 1931, the S&P had a drawdown of 43%, and the next year was down 8.5%. In 2008, it was down 36%, and the next year it rallied 25%. In 37, it was down 35%. And then the next year, you rallied 29%. 74, down 26%. The following year, you had a rally of 37%. The list goes on and on and on. And those are huge numbers. We're talking like 30% on the downside, 30 on the next year. Last year, we had 19.4%

down in the S&P. We're up 10% in the month of January alone, basically. QQQ is like 15% on the tech sector. It is just wild. And it's a reminder that, yes, historically, the market has done around 10% on the S&P 500, but it almost never does anything even remotely close to that. I'm finishing this segment the same way I started it, which is it's volatile. It has historically been volatile. It is currently volatile. And it is the only thing you should be expecting moving forward. Yeah, volatility is the part of the game. I mean, the name of the game, sorry. And especially right now, right with what I was talking about, when you have these two competing kind of sentiments, where people feel really bullish when they're hearing like from the Fed yesterday that

the overall inflation seems to be cooling down, but then they switch on a dime the next day and essentially are feeling pessimistic or bearish when it comes to earnings being down. So you're going to see, I would say even more volatility than usual. That would be my best tip to people is just expect a lot of volatility, I think, probably for the whole year until we get even more clarity on inflation, but also the economy in general. Yeah, because there's just so many hikes so fast. It feels like every month. All right. Side note here. Today, Meta gained over $100 billion in market cap, which is absolutely mental. We'll talk about that later. Some small companies named Apple, Amazon, and Alphabet are also reporting their earnings in about an hour from now at the close of the market.

an hour from now at the close of the market. And so, yeah, lots to pay attention to here. And just what a spring of sentiment, right? How price can just change the entire narrative on a business like Meta today. This is a perfect example. Let's move on to, there was a hike, was it yesterday? I'm in a time warp here. Yeah, yeah, it was yesterday that the Fed announced a rate increase. And obviously, you're seeing this big jump yesterday and today. That would be the main cause here. And it's not as much like the actual rate hike. It's more what Jerome Powell says.

Because oftentimes, you'll see the market swings wildly has nothing to do with a rate hike is because one himself or one of his uh other you know lieutenants goes out and does a specific speech to hammer a point and then the markets kind of react one way or the other uh but of course um there's going to be a lot of earnings talk like you mentioned uh thursday i'm really excited because we're going to be a lot of earnings talk, like you mentioned, Thursday. I'm really excited because we're going to have some pretty big companies to report on. And like I mentioned, the Fed did the increase rate yesterday. And they also stated that they anticipate additional smaller raises to make interest rates sufficiently restrictive to bring inflation back down to 2%. Powell also stated that interest rates will remain

elevated for some time. So we're seeing a little bit of a difference now here between the Fed and the Bank of Canada, where the Bank of Canada was actually saying, well, we will pause with the prerequisite that we see inflation continue to trend out, whereas the Fed is using a bit of a different approach. They will not pausing, but doing smaller increases than what we've actually been used to. And the 25 basis points actually more in line with historical increases, right? In the past, it was more 25 basis point, not 50, 75 or 100. Yeah, it's like a normal 25 basis points announcement? Like, what year are we in?

I thought those didn't exist anymore. No, exactly. And I think there's a quote, I listened to the press conference, and one quote that really embodied what Jerome Powell said is the following, is inflation data receivable for the past three months shows a welcome reduction in the monthly pace of increases. While recent developments are encouraging, we will need to substantially

have more evidence to be confident that inflation is on a sustained downward path. So clearly, I think like we just discussed, the markets definitely rallied on that, on the fact that they're seeing inflation come down. But again, I think we're going to see the markets kind of compete with that. And don't be surprised if the markets actually rally too much. I wouldn't be surprised if Jerome Powell comes out and acts super bearish about something or actually very hawkish and says, well, basically, you know, markets slow down or we're going to have to increase the rates even more. He's done that before actually several times last year. Yes, absolutely. Okay. Well, hopefully we can have less and less of these more rate hike announcements on the pod because it is a recurring segment on its own lately. 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. Let's move on to what I'm calling the best flywheels. And I just have a working list here really quickly. I'm hoping you can

help me fill some gaps just as I'm talking. Maybe we'll think of some additional examples, just here brainstorming live on the pod. But I want to talk about some really good flywheels, something I've been thinking about quite a bit. And I've been thinking about it as a business owner as well, and trying to mental model, think of which companies do this really well. And so basically, the way I think of a flywheel is it's largely network effects, but it's not just network effects because there's also an element of compounding as well. So just to kind of back up and what a flywheel is, what a network effect is. A network effect is simply just the more people who use the product or service makes the product or service better. The easiest example is

always a social media because there's more people on the social media that makes the social media platform better in itself. And if there's more people using it, then it's going to attract more people. And so there needs to also be this element of compounding as well to build a true flywheel. And how you can think about this is it's basically strangers become prospects, prospects become customers, and customers become promoters. And then promoters reach out to strangers on your behalf. And so there's this flywheel happening without the business actually having to engage in higher SG&A costs for marketing or CapEx.

And you have this kind of organic flywheel. Because strangers are attracted. Prospects engage. Customers are delighted. When they're delighted, they become promoters and then they find new strangers to get into the flywheel of growth. And there's many ways I can kind of take this, but some flywheels have come to mind. Costco is the easiest example. So let's start there maybe. It's more members, lower prices, customers are delighted by lower prices, and it attracts new customers because the more members there are, the lower the prices are, the more they grow their network of warehouses, the more

customers they are, the lower the prices are, the more they're delighted, the more they're attracted. And so this just goes on and on. And similar with other big box retailers, Walmart, Home Depot, they benefit from these scale effects, which is a profound competitive advantage. Anything more to add here conceptually before we start brainstorming some ideas? No, I like the Home Depot reference just because I've noticed something with Home Depot is there's a lot. They do a lot of partnerships where they're the exclusive provider for a certain product, certain brand. And they can really do that because they have a tremendous presence and they're the leader in the field. So that comes to mind. But for sure, for Costco, even for Walmart, I mean, Walmart or I think your next name, know a tremendous presence and they're the leader in the field so that that comes to mind but for

sure for Costco even for Walmart I mean Walmart or I think your next name kind of goes with that Amazon I'll kind of jump the ship a little bit but just the logistics network that these two have it'll be really difficult to compete in retail and I think it's one of the reasons I really love Amazon right now is I think the market is a bit bearish on the retail side of Amazon because they've had some headwinds after the pandemic and they overexpanded and so on. But I think long term, that's a bit of an undervalued part of its business. Yeah. It feels a little short-sighted to bash on them for spending the capex that they did because that's going to come back to life. It's going to come back down to normal. And you're right. How do you compete? Logistics is a perfect example. I had that lower here in my list. Trucking, logistics, last mile delivery like i'm thinking like old dominion freight line or like canadian toronto stock stick toronto stock exchange listed tfi international

ups fedex uh even the rails like how how it's really hard to compete with, no pun intended, the network effect of their like routes, the network routes that they build. And they do compound on each other in terms of efficiency. So that's a good flywheel. Amazon's like a classic example of this. example of this. One I was thinking off the dome here is U-Haul, a little bit of an underrated public company as well, U-Haul. And the reason for that is the business gets better because if there's more locations, you can do more of those one-way trips. There's going to be more inventory. The locations are going to be more convenient for your move, as well as every time the service is used, you become a walking billboard to attract new customers into U-Haul. You don't have to drive very far across a major city center

and see six U-Hauls of just people using the product, just driving around, you know, like moving. Yeah, no, exactly. And I mean, obviously, you know when someone's driving a U-Haul. First, I mean, it's clearly branded. And second, they probably have no idea how to drive it. So that's how you know. Exactly. Yeah, like there's like the mirrors just don't exist for them

apparently uh i remember the and they're all played at what arizona i think i don't know yeah uh no so true good point just be careful uh they don't see you because they don't look in the mirror those you know what those things i thought they'd be super hard to drive like the big ones it's actually a lot easier than i thought like i thought it was gonna be really difficult it's really not um crowd strike anything in cyber that uses artificial intelligence for threat detection microsoft uses this a lot as well. Payments networks, of course. I mean, even PayPal, Stripe, Square, even those names in there. But of course, Visa, MasterCard, Amex as well. You don't accept it. You don't have it in your pocket. You're dead. Netflix and streaming services as well. The more users they have, the more they can create better content, which will attract more users.

More people will talk about the content. And this goes for any content business, YouTube as well. It's a classic example. Well, Netflix is a good point, too, because they can use their analytics to see what is actually working, right? What people are watching. And yeah, people tend to forget that. It's not just the amount of people, a subscription. It's they can actually know if they poured, you know, hundreds,

like maybe not hundreds of millions, but, you know, tens of millions of dollars in a show. And, you know, there's no uptake. Then they will probably not do a second season. But if there's a show that, you know, they did pour a lot of money and it's very popular and people are keeping their subscription for it then clearly they'll keep making seasons of it yep good point a couple more examples here i would even go as far as say like consulting services

accenture and wsp and the reason for that is almost like skill and expertise starts to compound in your workforce like the assets of these companies is employees and and and skill and expertise starts to compound in your workforce. The assets of these companies is employees and skill and labor and talent, especially in consulting like Accenture or WSP, some of these names, right? Like professional services. Those skills start to compound as they get more wins under their belt. And that attracts, retains, and builds confidence in attracting new customers as well. We're not going to hire an agency to help us grow our podcast or help us manage the operations of our podcast. Who's never done it before? No, exactly. It's just idiotic. that's a little bit more off the board i don't know if

it fits well but maybe it does waste management again logistics intuit products quickbooks mailchimp they get better as they have more data especially like book automate automated bookkeeping if they they're getting millions of transactions come into the platform a day, they're going to get better at recognizing them. BlackRock and Vanguard, more fund flows, lower fees, attracting more fund flows, lower fees. I don't know if that's good for their business, but it's certainly a flywheel. It is certainly a flywheel. And then I'll round it out here with robotic-assisted surgery as well.

Intuitive Surgical, Stryker, Medtronic, these names. There is a network effect within the hospital system. And not only in the stickiness, but if you're a surgeon and you know how to use the DaVinci robotic assisted surgery system on replacing new hips with intuitive surgical product and platform and software and tools, good luck getting them to switch. We're talking about surgery. We can't just be, oh yeah, sure sure I'll just wing it on this new thing anyways that's just just some some brainstorming if you have any other ones I'm all ears yeah I think the only one that probably comes to mind right off the bat is like an axon that is a pretty good one I'm just thinking about you know if you're a police officer you've used a platform how integrated it is how seamless it is and to say you change to a new police force that doesn't have

it you'll probably be a pretty big proponent to push and encourage them to actually get on that platform because um from what i've seen uh you know it's very sticky and the different police forces do enjoy that platform. It's also – I like this example because anytime you have a B2B solution like Axon that you're talking about and you have a – there always needs to be in these enterprise sales like Axon to police force. there always needs to be an internal champion. In every type of large enterprise B2B SaaS, there has to be an internal champion. Sometimes they're high up, sometimes they're in the bottom, sometimes it's coming right from the management team. Whoever it is, there always needs to be an internal champion who wants to see this go through, which is obviously highly incentivized from the company that's selling that.

And it's really easy to be a champion right now for more accountability in the police force. So it's just like, it works really well to have that internal champion and the chances that they make it happen is quite high. And I like those kinds of businesses. Yeah, exactly. So no, that's the only one that came to mind. So I guess now we'll switch over to the next segment here that I have. Not very long.

My last segment will definitely be longer. It kind of goes with the Fed increase and the Bank of Canada increase as well. I wanted to clarify terms that people will probably be hearing quite a bit. I have been hearing quite a bit these terms. So disinflation and deflation. So I just wanted to clarify what they are because it can be confusing if you hear them thrown around. They mean completely different things deflation is a decrease in price levels that means that the prices are going down so in other words the inflation rate would go down below zero it's also possible to see some types of goods showing deflationary uh showing deflation while others are not and one that comes to mind an easy example

that i'm sure people can relate to is technology, but specifically if we take the example of TVs. So TVs have become slimmer, they have better definition and have a larger viewing area than they used to. And you can get a TV that's much better than a top end TV of 10, 15 years ago at a fraction of the price that you would have paid then. So I think that's a perfect example of deflation in a type of product. And disinflation, on the other hand, is simply that inflation is slowing down. So there is still inflation. It's just a slower rate than it previously was.

Right now, we seem to be in a disinflation period. So it's currently, you have to keep in mind, you have to put these things in context because, you know, it's great that we're seeing disinflation because it means inflation is going down. But keep in mind that it was also at an extremely high level and we're still seeing inflation around 6% for CPI. I probably will be around there in the upcoming months. We'll see what the prints are. But obviously, if you're seeing disinflation that we're seeing right now compared to disinflation from a 3% starting point going down to 2%, there's a very big difference. So you have to put these things in context. But

it's just to help people if they do hear these terms, disinflation and deflation. These are two completely different terms and mean different things. Yeah, it's a good summary because there are things that are deflationary versus real disinflation. And again, this goes to the jargon of of financial discussions and really they're not complex topics like how often is there like really smart sounding jargon in financial news media and just circles you hang out with and they mean like the most simple things ever like that is 99 percent of financial jargon but they're used and and we're here to to kind of demystify it like the tv examples is perfect right everyone has seen and experienced that in their lifetime of very deflationary pricing like how often i mean how much was like a

you know 55 inch flat screen 10 years ago like three thousand dollars yeah yeah probably that i mean you had a thousand dollars yeah i think my parents got like a plasma one back in the day in like the early 2000s and i think they had paid like three thousand dollars and it was like it was 1080p but i remember that you know the color wasn't that great and it was still like pretty heavy flat screen and now like i'm sure you can buy like a similar size in terms of viewing area for better quality for like probably six seven hundred dollars and it's yeah you know above and beyond better it's a smart tv like there's all these extra stuff on and so that to me that was just

the easiest example in terms of yeah people they look back exactly yeah you have like a product that's like five times better for one-fifth of the cost that is that is deflationary in in it in itself and and theoretically innovation and technology is supposed to be deflationary in itself. And theoretically, innovation and technology is supposed to be deflationary. Yeah. Of course, theory and reality are not always the prize that you get for the computing power is you know leaps and bounds above what it was 10 15 years ago so that's why you have to keep in mind things being relative like in terms of the cause that you're paying for the computing power it's gone way way down it's it's moore's law moore's law in itself being deflationary, which is just the power of

computing just gets so much better. 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 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. dot 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, for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win

since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, let's move on to Terry Smith. Seven lessons from Terry Smith. I promised on the podcast, God, I don't know when, but probably months ago, that I would do a little lessons learned on reading Terry Smith's letters. Terry Smith is the founder and chief investment officer of a large fund called Fundsmith. Their ethos is basically buy great quality companies, don't overpay, and then try to do literally nothing. And the try to do literally nothing is the hardest part about running a strategy like this because sentiment and the need to tinker is just

what haunts investors of all sizes, big, small, experienced, new. It is the hardest part. Now, Fundsmith aims to do the following seven things. I have seven lessons and seven things that they are trying to accomplish. I actually learned quite a lot from reading it. I think it's a pretty valuable exercise to go through these mental frameworks and just grab little, this is the point of the podcast, right? You grab little points of data, little points of knowledge and wisdom and sprinkle it into your strategy. So Fundsmith aims to buy and hold. We should, quote, we should treat our investment career like one of those tickets you get for a tram, which is spent once it's been punched about 20 times. As that's the number of great investment ideas we're likely to find at a price we can justify investing in. So they're saying,

we might only get 20 fat pitches on the history of the fund. And so one, be paying attention. And so one, be paying attention. And two, that's the hurdle rate for quality, the hurdle rate for decision-making. If you finish your career and you're not going to be happy that investment decision is on your 20 punch card at the end of the career, then maybe you just pass. And I think that that's useful to think about. Number two, invest in high quality companies that can sustain a high return on capital employed in cash. It goes on to say, accounting gap income statement is not equal to cash, and so act accordingly. Number three, invest in businesses whose assets are intangible or difficult to replicate. To me, this just means there's got to be a moat that is obviously hard to replicate

from a competitor who can enter. It seems pretty self-explanatory. Number four, avoid companies that need leverage. I could probably do some better work on here with some of the names I own. The companies may well have leverage, but they don't require borrowed money to function. Number five, must have growth potential. Very simple. You know, want to own businesses that are going to be bigger, better, more profitable in the future. Number six, only when we believe the valuation is attractive, we invest. Only when we believe the valuation is attractive, we invest. Quote, we have seen many investors who invest in high quality companies,

yet still underperform because they consistently overpay for those investments. Yep. I think pretty much ditto on that. Number seven and the last one here. not to be fixated on benchmarks. Even a year is a short period to measure results by. And then here's a quote of the day from Terry Smith, way with words, and I just love the way he puts this. Quote, a year does not have its foundations in the business or investment cycle. It is in fact the time it takes the earth to go around the sun and is therefore of more use in studying astronomy than investment. That's what we said in the first segment there. But he says it way more eloquently

and beautiful and probably in a wonderful, wise man English accent. So you're going to just naturally sound smart with that. Yeah, no, no. I think this is a good overview. For me, I'll probably double click on valuation because that was one of my biggest learnings from 2021, 2022. 21, 20, 22, clearly with low interest rates, you know, high risk assets were more attractive because you couldn't get any interest on your money, right? So that's something I haven't made. In my opinion, I've been pretty good overall in the valuation, but I definitely put some

money in things that were a bit overvalued at the time. And I've learned from that. So I think as long as you learn from it. And the other thing I wanted to double click on, just in case we have new listeners, we usually do at this time of the year. So GAP, when Brayden mentioned that, is just generally accepted accounting principles, is accounting standards for companies that are in the US or Canadian companies that are also registered in the US. In Canada, if they're only listed in Canada, it's IFRS. So that's the international financial reporting system.

If I remember correctly or standards. Yeah. I have the standards. So just so people are aware when you see this side, when you hear that, you'll know what people are talking about. Yeah. Yeah.

Good point. Because his whole segment or his whole point here from the Terry Smith letters is generally accepted accounting principles on the income statement to like net income does not equal cash that the business is generating. And so that's a very valuable lesson for people who are just learning accounting. You don't got to be a CPA. You don't have to know your way around every single little piece of all three statements. You should start working towards learning them. But a very important one to learn right away is that net income does not equal cash being generated by the business. And so it's important to recognize that. Yeah. And when you look at a financial statement, probably just a last thing to add. So if you see non-GAAP, it's because these are not generally

accepted metrics. I would say sometimes it can be very useful. REITs have these specific metrics that are used for REITs, which are real estate investment trusts that are very useful. But sometimes these non-GAAP metrics are definitely head scratchers because they try to make – You've got to look at what they strip out. Exactly. So they try to make things look better than they actually are. So that's something that as you look at more financial statements, you'll kind of get used to it. But yeah, something very useful that you'll need to get used to if you start looking at financial statements. For a lot of industries, when I see adjusted EBITDA, I'm cool with it. And then there's some industries,

I see adjusted EBITDA, I'm like, what are you adjusting for? I see adjusted EBITDA. I'm like, what are you adjusting for? And it's never a lot of them. They adjust in different ways, right? So it's not always adjusted. EBITDA is the same thing, right? So you have to look how they adjust it.

Usually, like they have to tell you what they do. So, you know, you'll find the information, but just something to be aware of if you're on your starting your investment investing journey. So now my last segment, I was talking last week about investing in merging markets, and I was going to do three separate segments. We'll start over here with India. And I'm going to talk about regions that could benefit from, you know, a slowing of foreign investment in China, specifically companies potentially shifting their productions away from that. And I thought India was a good point to start, especially with the news that we had that you went over. I think it was last week.

What was the name? Adani Enterprises, the Indian company. Yeah, the Indian company. So I thought it was fitting to start with India. So before I get into the numbers, and this will be a bit more macro, but it makes sense here because I'm going to talk about investing in India as a whole, probably the way that you would do with a India specific ETF. So that's why it's going to be a bit more macro. It took me a couple hours to do this research. So hopefully people will enjoy it. So first, let's go back to 1991. That's the year where India's economy opened to the rest of the world. Before 1991, it wasn't easy

to do business in India, you needed a license pretty much for every type of business that you could operate, it was extremely long to get approval for these licenses. So for example, if you had a car factory, the government would tell you what kind of cars you could produce, how many you could produce. So not exactly the friendliest of environments for companies wanting to operate in India. Can you imagine if Elon was told what he could and could not do for Tesla? Oh, man. I think just in general, there are certain types, him included, that reverse psychology is required. Yeah, exactly. You tell me to do something, and I'm motivated to not do it. Yeah. And so what happened is in July 1991, the then Prime Minister, PV, and I'm motivated to not do it. Manmohan Sai, change all of that. So licensing was abolished for most types of businesses,

the rupee was massively devalued to encourage exports, and many industries that were state operated were then open to the private sector. So that was a big, big shift. And since 1991, GDP growth for India, which has often been shadowed by China clearly because we were used to the double digit growth especially in the early 2000s. Well India's GDP growth actually it's nothing to sneeze at. So it's been above 4% for almost the entire period since 1991 with just a couple of years dipping below that in the 3% range. Obviously excluding 2020 we'll give them a pass on that because all the GDPs dip in 2020. And then for several years, it also reached 8%.

So for those unsure what GDP is, I know it's a term that's being thrown out there a lot and we do sometimes, I guess, take for granted that people know what it is. It's simply the total monetary value of all finished goods and services produced within a country's border. Now, currently, India is actually the fifth largest economy in the world, slightly in front of the UK. However, GDP is a bit of a misleading, I find,

indicator by itself. I think it's much better to look at GDP per capita because then the population comes into account and it's a much better metric because even for a country like Canada, the GDP may be increasing, but if our population is going at a faster rate, the per capita might actually go down. So the GDP per capita sits at around $2,200 currently in US dollars. And for context, for the US, it's $70,000 per capita. Canada is $52,000 and China is $12,500. So that's to give you some context here how early India is in its growth trajectory. And in other words, the GDP per capita has plenty of space to grow. Even if it only reaches half of China's current level, it would be a 3x from there. So clearly it would benefit the economy as a whole.

Before I continue, anything to add? in two seconds of India's progression from basically having hardly any electricity access, especially in rural communities, to 90 plus percent access available. All households back electricity access was at around 25% in the year 1980. Today, that is almost 99%. In urban households, it's 99%. In rural households, it's hit 96%. Again, for a rural household, it was 15% in 1980 to now 96% in the most rural places of India. This is the most fascinating graph you can find. And it just shows how far they've come in just a short period of time. Yeah, no, exactly. And everyone knows that India has a massive population. It currently sits at 1.4 billion, right behind China, and it should surpass China in the next few years.

That's because China's population is stagnating because of their one-child policy. To be clear, it's no longer in place since 2015, but it was in place for 35 years. So clearly, you know, on the one hand, you know, it takes time for people to make babies and grow older. But on the second hand, it also has to, when you have a policy that's so rigorous for 35 years, it also takes time for people to change their perception on certain thing, right? So that's been a big knock on China is the stagnation of their population. And I know I've listened to Chinese, um, kind of China, uh, specific podcasts that are talking about this. I've heard that more than once.

And from what I gather is the CCP is well aware of this, but there's just so much you can do, right? You can't, you know, force people to have more kids. They have to want to do it. You can't force people to have more kids. They have to want to do it. Now, another key fact here is that India, you touched on India's urban and rural population. So their urban population has gone from 29% in 1991 to 35% today.

Not a crazy increase, but still a pretty decent increase. And for context here, China is at 65% of its population in urban areas. So there's clearly a lot of, you know, still a lot of pace for people to actually move to urban areas. And according to an NIT report, an Indian governmental agency, poverty levels were 33% in rural areas and 9% in urban areas. So clearly, as people move to more urban areas in India, it should help the growth of the country in terms of the economy. Now, the last thing I wanted to touch here that's important for investing is foreign direct investment or FDI. The data here is based on Invest India, another governmental Indian agency. They looked at two periods for FDI from 2007 to 2014 and 2014 to 2021.

Between those two periods, FDI has grown 65%. The total FDI inflow in 2021-2022 was the highest ever, sitting at just shy of $84 billion. And clearly foreign investment is increasing in India, which should lead to a growing economy for years to come. And like I mentioned when I last talked about emerging markets, I think India should benefit from an increasingly less friendly business environment in China. I think they're going to be a big beneficiary from that. And people were bullish on India for the past decade. I just think that the Chinese question and what's happening there and the uncertainty with CCP and the fact that they can just change on a dime, right? Just their policy completely, you know, from one day to the next, that's essentially what we've learned in China. There's, I think it's going to be a really good

decade for India, just based on the research I've done here and other things I've read. Personally, I would probably go the ETF route for now, just because I'm not as familiar with Indian specific companies. And like we mentioned, the whole Adani enterprise situation might actually be a good opportunity here because it may make people a bit more bearish to the Indian stock market in the short term. So if you do choose the ETF route, make sure that you check what exposure it has to Adani enterprise and its subsidiaries. I looked at a couple and they did not have that much exposure to it. They had them in the holdings, but it was

in the low, like below 1%. So nothing of note, basically. Yeah. The whole Adani news that I touched on on our last episode, so go ahead and listen to that if you haven't done it, is causing, is like routing the entire market. And this happens, right? Like you get basically global fund flows, global investors scared out of owning anything there. And then it just contagion piles onto each other like a snowball via fund flows out the door. And then that could be your opportunity as long as you're not investing in the stuff that's actually you know potentially fraud um there is a lot of high quality stuff there i'm sure so you you want to go when there's blood on the streets is when you want

to buy these assets right like that's that's the whole game but we're playing like you know the best time to buy to buy chinese tech was when you and i came on here and said it's uninvestable like you know what i mean i'm not saying for the long term i just mean on the short-term performance i mean that tencent has doubled since then for me i think god didn't sell it but uh you know it's he gotta go in his blood on the streets. Yeah, exactly. And the China situation, I think, is slightly different where you have one company here in India that, yes, it's a pretty large company. And it may scare people off. But you have, you know, I think in China, it's just systemic where they you just don't know what to expect.

Right. I do agree with you that it was the kind of the most bearish at the time but again don't i won't be surprised in three months from now the ccp does an about face and i don't know maybe they impose new covid restrictions or new restriction on certain type of businesses or investment they go and de-escalate the trade war fight with the US. Like there's so many things that could happen so quickly with China because it's just unilateral. Whereas if you have a democracy, for the most part, you know something is coming because it has to be voted, you know, enacted and so on. So yeah, I think there's different situations. Clearly, in hindsight,

it would have been better to hold. But yeah, there's just the political risk is just too big for me in China. Did you know that India has half a billion active users on WhatsApp? No, I did not know that. I'm not surprised. Half a billion active WhatsApp users in India. And as I travel, I'm like, dude, the whole outside of North America just runs on WhatsApp. It's like how every reservation I've made here in Costa Rica has been via WhatsApp. have made here in Costa Rica has been via WhatsApp. It's like, hey, Valentine's Day, can I get a table for two via WhatsApp? And you're just messaging the owner. And it's completely normal. It's like what's expected. It's always good to expand your surroundings in terms of what you're exposed to in the companies across the world half a billion active users in india on whatsapp and uh

you know at some point they're gonna start churning the the revs on that thing i've been saying that for how long though i don't know i've been saying that for probably 10 years yeah for five years yeah they'll fund their their buybacks and uh the the metaverse with it yeah exactly yeah they'll fund the misly timed buybacks and uh 100 billion capex on reality labs that does it today for today's episode this was a fun one i thank you all for listening if you have not checked out stratosphere.io it is man we we just released a big update that's going out in an hour uh just a little bit easier to use better functionality uses like tab systems you're never lost uh in the application it's really easy to use you can use code tci for 15 off because

someone have you been using the dashboards at all have you set up have you set up the dashboard yeah i did set up a couple weekends ago yeah nice an earning season that just comes with a feed of all the companies you own and just a link right to the the earnings press release like the stuff that you and you and i will be talking about on the pod just right from the horse's mouth from the company right inside the app app. You don't leave the app. You don't go to the company's investor relations site. All right, let's hop off so we can digest the market mania happening in after hours in approximately one minute. We got some behemoths reporting. Let's let's go tune into that. Thank you for listening. We'll see you in a few days. Bye bye.

The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.