The Canadian Investor - 8 Moats to Fend off Competitors

Episode Date: February 14, 2022

In this episode of the Canadian Investor Podcast we discuss the following topics: What drives returns in the short term vs. the long term How we approach starting a position or a starter position How compounding over multiple decades can lead to massive numbers 8 Moats that help fend off competitors The NY Times buying the Athletic back in January https://thecanadianinvestorpodcast.com/ Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Stratosphere 🚀 https://www.stratosphereinvesting.com/ Tickers of stock discussed: BB.TO, TTD, ETSY, AAPL, L, U, BA, AIR.PA, LULU, CNR.TO, CP.TO, ASML, MCO, See omnystudio.com/listener for privacy information.

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I'm Brayden Dennis, as always joined by Simon Belanger. Dude, I get so pumped for these episodes because yeah, I like talking earnings. I like talking news. I like staying up to date with stuff. But these episodes, when we zoom out and talk about the big picture and why we're doing it, these are the ones that actually get me really stoked. Yeah. Yeah. Same for me. They're fun. We can bring it different directions too, so it's never the same thing. Obviously, earnings change week to week, different businesses, but tends to be fairly similar with similar things that we'll look at. So, these are always fun episodes for us.

Before we do some coffee shoutouts, shout out to Canadian Olympic athletes doing their thing out there. I don't know how much you've watched. I'm a snowboarder. So, I tuned into all the slope style. how much you've watched. I'm a snowboarder, so I tuned into all the slope style. And the fact that these guys are doing on skis or on board five or sometimes six full rotations and three flips in one 70-foot kicker literally doesn't make any sense to my brain. Okay, let's give a couple shout-outs. We got Tasso. They said, I've been listening to your podcast for about a year and impressed with your talks and insights. Keep on podcasting. We'll keep on podcasting.

Alyssa and Deb Richard support the show. Thanks very much. Sundeep said, appreciate the Canadian view of the markets. Keep up the good work. Joe Miller says, keep it up, gents. Russ said, love the Canadian perspective. Keep up the great work. And Brad Dennis, my father, looks like he made his way in there and he said, keep up the good work, gents. He's a listener himself. So, we're fully caught up now. You can find a link to support the show and go to thecanadianinvestorpodcast.com. You know, it's funny that you mentioned your dad. My mom's probably the biggest fan of this show too. She never listens to an episode. Yeah. She keeps telling me, she was asking me the other day how old you were when we went for dinner.

Yeah. Do you think a lot of people don't know how old I am? For people wondering, I'm 26, turning 27 this summer. People can know that. I don't care. But yeah, if you're curious on the other side in your headphones wondering, that's how old I am. Yeah. My dad too, man. I think he listened to it because he's like, I have to support it. But he's like, I actually love it. And he keeps listening. So that's great. All right. I have a quick segment here called the three cases for long-term investing. I like to zoom out every once in a while, as I mentioned. And we get so caught up, Simo, especially with

our other types of show, which is like news and earnings. We get so caught up in the now, in the short term, in the market swings, in the weekly performance, the daily performance, the quarterly performance. And I just wanted to lay out three things that I think are really important. Number one, stock prices follow earnings or profits, whatever you want to call it. Stock prices follow profits. When in public markets, you get daily price action. It may not feel like it, but trust me, if you zoom out, stock indices move with underlying earnings of the index that it covers. So if you own the index via index funds or businesses via public traded equities, you are fairly confident that these companies will be bigger, better,

and more profitable in the future. Then you're off to a great start. Check one. Now in the short term research from credit suites that I pulled up here shows that in one month valuation and earnings, multiples drive almost all the returns. So when we talk about multiple expansion, multiple compression on earnings or sales multiples, in one month, Credit Suisse, that 17% of return decomposition is from actual growth and biz performance. So the remainder is actually from multiple expansion or compression. So you're seeing that in the short term of one month, business fundamentals actually matter very little, which is funny to think about, but it's the data. In 12 months, so now we're into a year, 43% of returns are from business performance. So even in one year, stocks move more off factors and momentum. In 60 months, now we're past that.

We have 58%. And in 120 months, now we're looking at several years, 78% of returns are driven from profit growth and not valuation expansion or contraction. Now, this is really interesting. So 78% of returns are driven from profit growth and not valuation expansion or contraction. Because of course, valuation matters, but your risk of making a mistake and buying an overvalued company, you bought Zoom at the top of the pipe cycle, your returns on that pick matter less and less as you go out the time horizon. So if you bought some COVID winner, which has carved itself out as some great business, a couple come to mind, like a Teladoc Health or like a Zoom. And you're sitting on a big drawdown right now.

But we'll know more about how the actual performance will pan out over a much longer time horizon because right now it's moved entirely on multiples, not on business performance. Yeah. I mean, it doesn't surprise me. Like you said, I was going to say last year was probably one of the best examples of moving on momentum and not necessarily the actual business, but Teladoc has done quite well as a business. The valuation got way, way out there. Let's be honest, it was trading at crazy multiples. It's gone down quite a bit down, but Peloton is probably the easiest example of the thing that it went to crazy heights. and you could probably tell that their expectations may have gone a little high in terms of the potential future of the business and

like the amount of pull forward where Teladoc, you can make a similar case, there was a lot of pull forward demand but I think Teladoc, what you're seeing is their business actually continuing to thrive where it's the complete opposite for Peloton. Right, yeah, that's well put. All right. So, that was number one. Number two is what I'm calling positive returns come to those who wait. So, if we look at a couple of different time horizons here, what is your chance of facing a positive return in that period? So daily, on a daily basis, the S&P 500 has historically been positive 53.1%. So flip a coin, basically, if the market is going to be up or down. And when I say the market, just the S&P 500 index. So flip a coin daily. In a month,

index. So flip a coin daily. In a month, 62.8% of months are positive. 68.8% of quarters are positive. And full calendar years are 73.9% positive. Okay. Now, if we look at five years, we're looking at 87.5% on a rolling basis. 10 years, 94.1%. And a 20-year rolling return of all of the periods you could possibly look at on rolling returns, there's never been a down 20-year period. You're at 100% chance historically of having a positive return on the S&P 500. And of course, as you go out further at 25 years, of course, it's 100% as well. So as you zoom out, your chance of success massively improves. And that's number two on why long-term investors win. Yeah. Yeah. I think the historical data definitely speaks for itself here. Not much more to add. I mean, I was well aware of that, obviously. Volatility, the shorter the

timeframe, the higher it'll be. And I think that just explains that the longer the timeframe, the smaller, almost non-existent. Yeah. Yeah. All right. And number three, which I didn't know what to call, but I'm calling it everything compounds. We don't go on here. Simone and I, we don't just go on here and preach long-term investing so we can sound all stoic. We do it because we like making money. Long-term investors win and create life-changing wealth over time. So even if you're in retirement and you're listening to this, you may still have several decades of compounding in today's world, several decades. So the optimism is key here. A $10,000 investment and then adding our current TFSA,

tax-free savings account, contribution limit of 6,000 a year at 9% average return per year is $594,000 after 25 years. So this is just using a 10,000 and the TFSA contribution limit of 6K. A little side note, tax-free savings account, use them for buying stocks. Don't hold cash in them. It's okay to have a little bit of cash in them, but what I mean is don't use them as a savings vehicle. This is such a big mistake I see. You have over a million on that little experiment after 31 years, one and a half million at 35 years and 2.3 million after 40 years if you have have that long horizon. And so that's based on 10K and adding $6,000 just in your TFSA. This is not using any other type of account. Now, just for fun, I had a little bit too much fun with this one. I can tell.

For a little science project, I did what Warren Buffett's hypothetical TFSA would look like. Now, I know the TFSA started in 2009 or whatever, but who cares? That's not as fun. Let me have my little math nerd moment here. Buffett has averaged a whopping 20% compound annual growth rate on his Berkshire Hathaway company between 1965 and 2020. And his returns beforehand were even better. So it's ridiculous. So Warren Buffett is 91. You can open a TFSA at the age of 18. Therefore, we have 73 years of compounding. So let's start with a $6,000 current contribution limit. Let's max it out at the 6K per year in a hypothetical situation. Do you have any guesses as to what Warren Buffett's TFSA would look like today? It's probably between 50 and 100 million, I would say. Yeah.

What if I was to tell you you're so, so wrong? Too low, huh? Yeah. Way too low. Like way, way, way too low. I knew it was high. I didn't know like how high to go. Yeah. Way too low. Like way, way, way too low. I knew it was high. I didn't know like how high to go. Yeah. Keep in mind, this is a 20% return. Yeah.

Well, that's why I was trying to. Let's pause here for a second. Expecting these returns are ridiculous. In my previous example, I did a 9% return, which I think is quite reasonable. Now, this is 20% return. Don't go out there and punch us into compound calculators thinking you're getting 20% every year because this is Warren Buffett. Yeah, this is Warren Buffett. It's like saying like, I'm going to start playing hockey.

Look how many goals Wayne Gretzky had. Look how many points Wayne Gretzky had in his career. It would be a completely ridiculous thing to do. The number is, and I purposely left it off the document here for you. All right, ready? $25,320,928,938.31. His current net worth is well north of $100 billion. So you can kind of make sense of it. Like he has over five times that number in his current net worth. Not quite five, but more than four times. I probably should have gone higher, but I don't think I would have gone higher than half a billion even in my most adventurous projections. And that goes to you and I look at this stuff all the time and human brains can't comprehend compounding

correctly and we continue to underestimate it. And so, it's just a fun little example here of the actual time horizon that a lot of people have, if they utilize it correctly and be patient, the results will astound you if you stick to it, basically. That's the whole concept of my little segment here. Yeah. Yeah. And definitely when you're playing with a retirement, well, not a retirement income

calculator, but a compound calculator, you can make crazy assumptions if you want. But if you're really trying to plan for your future and get a good idea, personally, I try to be more on the conservative side. So I tend to use even like 6%, 7%. That's the rate I'll usually use just to be a bit more conservative, even though I know I can probably achieve closer to 10%. That's just my nature. I like to be on the safer side when I'm trying to make projections. But yeah. Also, that's like you going into planning. You're not going to want to have some plan that requires you to be the best investor of all time.

That's not going to work very well. Exactly. So just I think it's just a good note for people just to keep that in mind. And like Brayden said, don't go putting 20% a year thinking you're going to achieve that every year because you're probably setting yourself up to fail. 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.

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reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor

and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Switch to a completely different topic. We'll talk about starting a position. So I had a question from Ron on Twitter at rfirt11, F-I-R-T-H 11. So he reached out to me and asked what we meant when Brayden and I start talking about starting a position or a starter position.

I'll give my take on it. I think you'll probably have a similar take than I do, but I'll be interested in hearing what you say. So when I decide I want to start a position in a company, I'll look at what percentage ultimately I want that position to become in my portfolio. Clearly, I'm not necessarily factoring on the growth that I can have in multiple years. This would just be the starting position in terms of the investment when I think it's a complete position. For example, say my portfolio is $100,000 and I want a company ABC to be 5% of my portfolio, which would mean a $5,000 investment. So the way I would approach this, it would be to divide that $5,000 into four or five installments.

And let's say I choose five of $1,000 each. My starter position would be the initial $1,000 in this example. By spreading out this way is you actually end up doing what we talk a lot about dollar cost averaging. So you don't rely on investing $5,000 one shot, hoping you pick a good time because we know market fluctuate. And by dividing it into five installments in this example, you're actually going to average out your cost. So that's the way I personally do it. Another situation where I'll do a starter position, and I know you've done this, is when I love a certain company, but the valuation is

really out of whack. It's extremely high. We're talking here like nosebleed valuations. I think you did that with the trade desk, right? You kind of have that starter position. I did that with the trade desk and Unity. There you go. The exact thing you're talking about right now. Those are like, I'm embarrassed to say, but like 50 times sales companies, right? Yeah, exactly. And I think there is value in doing that. Obviously, when you do that, you do it with a very small portion percentage of your money because by doing that, you achieve a few different things. First of all, you'll limit your risk if there's some big swings

because 50 times sales we know will be extremely volatile and there could be a compression on those multiples and you could be facing a big drawdown and that limits your exposure right there and limits the risk that you're exposing yourself to the other advantage here is you get exposure to the company and if it keeps growing and the multiples never come back to a more reasonable level well you're going to benefit from that. And the last thing is you have that extra incentive to actually keep following the company closely, listening to those conference calls, looking at those earnings. So I think there is some value of doing a starter position for very highly valued companies. So for me, one of the example, I know we talked about the

trade desk, but for me, it was Etsy. So I started a position, it was about 20-25% of what I wanted the position to be because it was pretty highly valued at the time. Well, I ended up never adding money to Etsy because it even got more expensive than that. But it's a company I still have on my radar to add more as the multiples actually come down a little bit. If they never come down, well, I still have some exposure. What I'm noticing right away is that looking at what we're talking about today, everything's flowing really well. Because what I just mentioned before is that according to Credit Suisse, in one year, more than half of return decomposition is from multiple expansion or compression. And so this is exactly why we do what you're talking about. This is exactly why,

because there is risk to every single investment and there's more risk, there's more valuation risk, there's more risk that you paid a bad price in the short term. And so there's risk to every investment. And if you don't know what they are, then you don't know the company well enough. And so I think that this starts to help curb that problem because no investment is risk-free, but position sizing is how you can really actually operationally manage that in your portfolio effectively. Yeah. Yeah. Well put. Yeah. All right. Shall we shift to the moats?

Let's do it. Talking about moats. Okay. I'm pumped for this one. So this came up because I shared my investment framework, which is, by the way, you can find it. There's some cool little graphics and some colorful icons. That's at stratosphereinvesting.com forward slash about. Again, that's stratosphereinvesting.com forward slash about. And so I have six points here. The reason that we made this is because a lot of people are asking what goes into our coverage universe. And I said, okay, this is a basic six point checklist, and then we're going to expand on it more. So number one is growing top-line revenue and cash flows. Very simple.

We want to see that the company has historically actually grown over time. We're not trying to buy melting ice cubes. Number two, which we're going to expand on in a second here, which is a recognizable moat that is durable and we suspect will be intact for a long time. That's number two. Number three is underpinned by secular growth trends. It's a lot easier to be right when you're underpinned by secular growth trends. Number four, has pricing power. How often do we talk about that? This is a non-commoditized product or service. Number five, demonstrates consistently high returns on invested capital. Number six, management is aligned with long-term performance and execution. So that's that list. Now, number two was a recognizable moat that is durable and we suspect

will be intact for a long time. And so we thought we should do a little list here of types of company moats and what makes certain companies very durable. Do you want to kick it off with number one? Yeah, let's do it. So the first one that came to mind for me, especially in this day and age is network effects. So we've talked about it very often, and it's pretty, it's very important for software companies' platforms. So I'm thinking here, obviously, the example we'll all think about is Facebook. It's an easy one that comes to mind,

but you can find examples elsewhere. Visa MasterCard has some dual network effects because merchants accept it widely and users use it widely as well. So you have that dual network effect here where one kind of feeds off the other. PayPal is a bit similar. When we talked in the earnings about PayPal, they have 34 million merchants, for example, and a big user base. So the more merchants accept it, the more the users will want to use it as well. And network effects are also very strong in online gaming. An example is there's millions of people playing Fortnite at any given time. I

think the figures I saw were three to four million. Would people still play Fortnite if there was a handful of people playing at all time? I'm going to say probably not, right? And I've played games back in the day where they were really fun and well-made for the time. And I enjoyed playing them when I was like a teenager, but eventually I stopped because you could not find a game with enough players. So, you know, it'd be a first-person shooter where you could play in teams and you'd have two, three people playing the game. It kind of gets boring instead of having a full game of 15, 20 people playing, right? So I think that's a really good example for games in general. Yeah, that's a good one. I mean, network effects is probably one of the most pure moats that you can speak to. You're talking about Etsy before. That's another

good one because you have a double-sided platform network effect or like a marketplace like Etsy is a perfect example of that. Anytime you have a two-sided network effect, that's my favorite network effect. You gave the most classic example, which is Visa and MasterCard because there's a network effects also between the merchants and the consumers. And so getting both counterparties to be involved in switching to something else is a huge pain point and it speaks to the network effect. All right, number two, low cost producers. Now, businesses that can deliver goods at the lowest cost because they have superior economies of scale. So you could kind of say like economies of scale is another word for this one.

This can be quite powerful. It becomes extremely difficult to compete on price when you have one of these types of moats. I like thinking examples like Costco due to the fact that their business model actually works on a growing member base. This gives them a flywheel of superior unit economics and scale, which is optimized for low gross margins. That means they're able to give their customers the lowest possible price on a per unit basis because that's their moat. That's their competitive advantage. Other ones that come to mind are like McKesson or Cardinal Health. These are drug distributors that have the worst margins ever, but that's their competitive advantage. Because who's trying to compete with that, right? Like there's going to

be no margin for any new player to come in. Well, even grocers, right? Grocers are a great example. Like there's a reason why there's just a handful while, why like three or four in Canada, major grocers that you can see, maybe not across the country, but in several areas in the country. And then you may have some small local ones, but for the most part, it's the metros, the Loblaws, the Sobeys are the big ones there. They have so much bargaining power and economies of scale that good luck competing with them. It's not impossible. It's not an impenetrable moat and none of them are, but they give you superior competitive advantages. That's just better to have it than not. Yeah. Now moving on to the next one, a business that would be very capital intensive to the point

that it would cost so much for a competitor to come and try to compete with these businesses that it really discourages a lot of competition. And I don't think there's a better example personally than airline manufacturers. Here I'm thinking Airbus and Boeing. And I know there's Embraer and there used to be Bonbazie as well, but they were never on the scale of Airbus and Boeing. It's really a duopoly here. And just think about the money that it would take,

the amount of capital that it would take for a competitor to first build a prototype, get it approved by regulators, set up a supply chain, get sufficient orders to be able to start production. It would be in the probably hundreds of billions of dollars in terms of investment. That would be my guess. And who's funding that in this day and age? When VCs want to take, you know, $100,000 investment on a scalable B2B SaaS company that can become $150 million company a couple years, who's funding the next Lockheed Martin? No one.

Well, yeah, and you have, even if you do, there is no guarantee that it will work out. And that's the biggest issue, right? I like, you know, Jeffrey Bezos, Jeff Bezos, you know, he would have the money, but does he want to risk it? Like there's no guarantee this would work. So I think that's a great example. Now we'll move on to the next one, one of yours. Yeah, switching costs. Now switching costs are one of my favorite modes, and especially because I like software so much. This is a big part of it. Now switching costs are defined as like expenses or inconveniences, huge time commitments, or potentially massive overhauls of your existing business systems just to switch from one product or service to a competitor.

Now, business-to-business software is a great example of painful switching costs. Think of enterprise software or cloud providers. These are perfect examples. Switching your company's payroll provider, huge pain in the ass. Switching from your Microsoft suite that you have all your files on, you have your Office 365 set up with all your whole company. No one wants to switch. Or how about switching your cloud infrastructure provider to a competitor. Trying to do this while running your business is like trying to swap out an airplane engine mid-flight. It's extremely difficult. Now, you can also incur a ton of additional costs, hence switching costs.

And it gives you such a significant business risk by switching that it just makes no sense to do so. So businesses with superior switching costs end up having gigantic customer lifetime values, or LTV, that's what people call it in software. And each customer cash flows for a really long time on these never-ending recurring revenues, high margin. It's just the perfect business model. And their moat is really captured by they have such high switching costs. Yeah. And one example that comes to mind, and you'll laugh, is BlackBerry and the enterprise segment they had for the longest time.

The businesses were the last ones for the most part, where they actually switched over to iPhones or Androids or whatever they were because they were so ingrained. Exactly. Eventually, they did switch because they realized it was being faded away or their employees were just pushing for these new kind of smartphones. But that's just one that came to mind because way before that, the iPhone and Android were in the consumer's hand. They had overtaken the consumer market. But it took a lot longer for the business side to actually do that switch as well. I never thought of that.

And that's a really good example. And that's exactly what happened to me. My first engineering jobs, I had that absolute dad mode BlackBerry attached to my hip in the holster. Dad mode BlackBerry attached to my hip in the holster, but then back at my desk in the drawer would be my iPhone that I used as my personal phone. Then came the rollouts of the iPhone, and then all the business customers were switching to iPhone. And that was a significant change for Apple. And obviously, unfortunately for BlackBerry, but I don't think a lot of investors saw that in the thesis. They're like, okay, well, they still have the enterprise customers, but that doesn't last forever.

No, exactly. Now, one that's really important, brand power. So this is a mode where a company's brand is so powerful that it can really limit competitors or sometimes there will be competitors, but they won't have the same pricing power as them apple and lululemon are probably the two best examples i can think of so obviously there's other smartphones you can get an android you can get other types of computers when you're looking at apple or pc there's headphones that you can get other alternatives or even smart watches etc but people love the apple product the way

they look and most importantly they love their ecosystem and how powerful yet user-friendly they are and that's super strong for apple and lululemon on the other hand is pretty similar right i think was it must been like now like eight or nine years since all the major athletic clothing companies trying to get into the athleisure or the yoga wear. And they have products. They still do. They've been having products for quite some time now. But they don't have the same pricing power as Lululemon. And I know I'm speaking for my wife, but she has a few other brands.

But 95% of her ath at leisure is Lululemon. So I think those are really good examples. But I'd be careful with brand power because we've seen companies like Kraft Heinz, or even Campbell, like all these goods, these traditional brands that people were used to, they're really seeing their market share being eaten by like in-store brands, especially I'm thinking about grocers here, alternatives that people are essentially used to, they're really seeing their market share being eaten by like in-store brands. Especially I'm thinking about grocers here, alternatives that people are essentially like, you know what, taste the same, just cost like 25% less. There's not as much brand loyalty.

So you have to be careful and make sure that you have a high degree of confidence that the brand power is very strong. Yeah, this one I'm always very cautious with. And I'm glad that you brought that up because what can seem like the strongest brand of today may not be the strongest brand of tomorrow. It's happened time and time again. You talked about athletic wear. What's hot now might not be hot later. And so, these are the kinds of questions you have to ask yourself. So, I am very cautious with this one. I'm trying to think like... Well, Tesla is probably a good example too, right? People will tend to really love their cars,

even though there might be a nice alternative in terms of electric car. But yeah, I mean, I think you have to be careful. This is always one you have to approach with caution because it can go away. It can go away. Yeah. There might not be any structural friction for customers to switch to something. What the new hot thing of the day is compared to like a network effect or a switching cost. Those may exist. Like with Apple, Apple kind of checks all these boxes, right? That's why it's one of the best companies in the world. All right. Next one here, intellectual property and secrets. With intellectual property that a business owns, it's similar to what you're

talking about with their brand and goodwill on a balance sheet. But these can seriously give businesses supreme competitive advantages over competitors. Think of Disney or why these large tech companies are buying gaming franchises. Most of these games have very valuable IP, intellectual property, that they want because they can monetize them in other ways given their scale advantages and distribution. So having that diverse set of really valuable IP can be extremely competitive for your company. Now, some businesses are built on secrets and patents, R&D expertise, and intellectual property from that perspective. So this can come in a variety of ways. Let's think of a drug company that owns exclusive rights for a life-changing

drug that's on a patent for 20 years. As far as I know, that's the max on an exclusive patent for a drug. But say you have it for the next 20 years, some life-changing pharmaceutical. And so, that is obviously a huge competitive advantage over your competitors is that you're going to be the name in town that gets to own all of the profit center for that drug for the next 20 years. Yeah. No, exactly. And I know we've touched a little bit on BlackBerry, but one of the ways that BlackBerry was able to survive in the past five to seven years is first, they had cash on the balance sheet and they got investment from Fairfax Financial amongst other investment. But the other thing is they've been selling patents. Yeah, Prem WhatsApp.

That's right. That's the name I was looking for. But they've been selling patents. They sold one recently for $500, a legacy patent. So it just shows that, you know, the power of Avendale patents. Wait, did you say for $500? $500 million. I may have said $500.

$500 million. They sold it for, they just took just took an Apple Watch in the transaction. That's their 1984 patent Nike was trying to claim. Yeah, yeah, yeah. That's ridiculous. 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

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regulations that make it difficult for anyone to enter an industry one of the easiest example that comes to mind for me are utilities and railways railways are also very capital intensive so you can say there are two modes here but regulation makes it very difficult for anyone to come into space. Well, first, if you think about it, if you want to build a new railway, you're going to need federal governments, provincial or state level governments to be able to approve these. And as soon as one of these bodies doesn't approve it, I think it's pretty much set in stone that it's not happening. So there's a reason why we have not seen any railways being constructed in Canada. And I don't think there's been much done either in North America anytime soon.

And we're also seeing regulators being very conscious of competition in that sector. We saw it with the KSU acquisition from Canadian Pacific, where CNR, Canadian National Rail, actually had the top bid, but had to drop it because it was getting obvious that the regulators would not approve it. And like I mentioned, utilities are also highly regulated. I know you know this space a bit better than I do, but that's another space where it would be pretty hard for any newcomer to enter. Yeah, it works both ways, right? Regulators do their best to make things not too monopolistic out in the free market, right? But then there's a lot of ways, and especially around real assets like utilities or like railways or like real estate,

there's a lot of regulatory pressure on new people coming into the space. And so, that helps the incumbents from continuing to dominate the space that they exist in. So, it kind of works both ways, right? But yeah, regulatory moat can be extremely difficult to go into. Like who's building a new rail system? Who's getting approval for that? No one. And before, right, I talked a bit about Airbus and Boeing. Well, there's a heavy regulations, obviously, around that too. So it's not just a pure investment. It's getting... As soon as there's public safety involved, right? So that's why real assets are really protected from that perspective. All right. Our last one here on this little section, which is what I call a monopolistic

toll road. Now, if you Google types of moats, you're not going to find this one, but I think about this one a lot. So what I call a monopolistic toll road, it's very similar to what you were mentioning with like a railway. You just have no other option to get that product or service from someone else. And so you have to pay the toll road fee for using the monopoly. Think of a toll road, like a physical toll road that goes under a mountain, goes under the mountain from go to point A to point B. You're out in Denver, Colorado, and you got to get out to the mountains and there's only one way to get there. And you got to go underneath this mountain that took them 10 years to blow out the rock, to get regulatory approval, do the construction, and then cut the red ribbon. There is no regulator

that's going to allow another competitor to come blast through that mountain again and build the road right beside it. There's just no way. Public safety involved and why? The big question, why would anyone do that? There's no toll road that's going to be built beside it. This is what I call a monopolistic toll road using that exact example or what I call a bottleneck business. There's just no other name in town. Sometimes this can come in the form of duopolies, monopolies, or oligopolies, where there's just no other options. If you think of the credit rating agencies, Moody's and S&P have 80% of the market share there, and you have to get your bonds rated. So who are you going to go to that kind of funnels market share that way. Look at the telcos, look at utilities, look at a

manufacturer of EUV lithography machines, ASML. If we want more chips to be made, there is a monopoly on EUV lithography in that supply chain. And that monopoly is owned by a $250 billion market cap company, ASML. It's a Dutch company that no one knows about. I talked about it on this podcast recently, but that's an example where if you want to play, you got to pay the toll. And a lot of companies keep collecting that fee year over year, recurring revenue, and it's a beautiful place to be. No, no, that's perfect. I mean, I think you would almost think some of the cloud providers like AWS or Microsoft Azure or Google, they may even become that eventually,

where it's just like... I think that they already are. And I thought about including them in my example here, but you're right. They absolutely are becoming that. They're becoming a tax on the growth of the internet, right? Yeah. And you got to pay the toll if you want to play. Yeah. So now we're moving on to our next discussion. So I've thought I came across this in early January because I am a subscriber to The Athletic. It's mostly through the app, you can access it through your browser as well. So it's just sports content, no ads.

You pay a subscription for it. Are you a subscriber, Braden? Man, I don't subscribe to any newspapers. No. I subscribe to lots of information services like what Stratosphere is. Yeah. But actual newspapers, I don't know. Yeah.

So The Athletic, I mean, it's essentially an app. Just focus on sports coverage. And if you're a sports fan and you find really great coverage, I definitely recommend it because it's really good. So they actually got acquired by the New York Times, which is also a publicly listed company. I think a lot of people may not be aware of that. And the transaction was announced in early January. And like I mentioned, I've been a subscriber actually for probably four or five years now. I really love their Habs and Blue Jays coverage and especially the Habs. It's led by Arpen Basu and Marc-André Gaudin. They do phenomenal work. If you're a Habs fan, I highly recommend it. Times revenue is very interesting to look at. So whatever your thoughts are about the New York Times, that's not what I want to get into. But the facts are that they really stagnated for years in terms of revenue. And then you actually see the revenues increase from 2016 onwards, especially

specifically 2016 to 2020. And that's a lot of people say it's because Trump won the election and say whatever you want about Trump, but he is a polarizing figure. And a lot of people started subscribing for the New York Times for that reason. And it's interesting to look at their revenue just to compare it to his tenure. And the goal of this segment, it's not to do a deep dive on the New York Times, but to show how valuable that subscription revenue is. The Athletic was found in 2016 by Alex Mather and Adam Hansman, and their subscriber base had grown to 1.2 million by December of 2021. So it's hard to say exactly what their total revenues on a yearly basis would be, but I did some research and based on their subscription, about $50, $60 a year, my best guess would be $60 to $70 million in revenues

per year. So essentially what the New York Time here is trying to do is have a company that can reach as many people as possible with different subscription offerings. With the addition of the Athletic, the New York Times has now reached 10 million subscribers and they believe that the total addressable market, or TAM, to be 135 million adults worldwide. So whether you like them or not, that's not my point here. My point is that New York Times has done well growing its revenues when many of its competitors in a similar space

have either died or are going through really tough times. I don't think we ever talked about the newspaper industry on the podcast. I'm trying to remember. I mean, it's not something that we're overly interested in. I think we, have we? I don't know. Have we ever done it in a news roundup? I feel like we may have. It's possible we had, but it's just very fascinating how they were able to transition to this subscription revenue from a traditional newspaper. Clearly, they had the name recognition where a lot of newspapers wouldn't have been able to do that. But I just find it interesting that now their stated goal is to really grow those subscribers

and reoccurring revenues. Yeah, no, it's funny, right? Because the valuation strapped to recurring revenue are completely different too, right? If you have recurring revenue and you're looking to raise around from private markets, say you do $10,000 a month and you want to raise money, but it fluctuates. Some months you do 15K, some you do five. On average, you do 10K in monthly revenue. Now, if you go compare that to company B that says, oh, we have $10,000 in MRR, monthly recurring revenue for our software, and that number grows, we might not do 15K in a month, but we always do 10 and it's growing. And it's on a subscription. Venture capital licks their chops and they're ready to

strap on huge sales multiples. They don't care if you're profitable. They don't care about all that stuff. And so what you're pointing at is a very real thing. Yeah, exactly. And just the fact that a newspaper has managed to done that, and I'm sure there's other examples in the field, but it was just interesting, especially with the purchase of The Athletic, the clear direction that they're taking. I mean, they've been taking that direction for years, but that's just a reinforcement here. Did you see that the New York Times bought Wordle? Yeah, I saw that too. Yeah. And that's what they're saying. They're really trying to focus to have almost an offering for the widest range of adults as possible. Again, it wasn't a deep dive. It was not my point. It was just to kind of bring up that point of reoccurring revenue and how companies now are searching for that.

Which company was it we were trashing because they're saying we have 95% of revenues, mostly reoccurring. Yeah, it was Lightspeed. It was Lightspeed. Oh, yeah. It was Lightspeed. One of their press release. Yeah. Oh, that's so funny, eh? Yeah. It's like, okay, it is or it isn't.

Exactly. Is it mostly reoccurring? Anyways, great episode there, Simone. Thanks for listening to the podcast, guys. We really appreciate you very, very much. Go give it a rating. Go give it five stars on Spotify. Killing it on the ratings lately, but we couldn't do it without you guys. We appreciate it very much. Go to thecanadianinvestorpodcast.com. You can leave us a message. We try to get all of them. You might get lucky when I'm on the email and I respond right away, but we really appreciate that. You can check out all of our old episodes as well there. And you can go ahead and check out Stratosphere Investing.

It's my company, stratosphereinvesting.com. It is the place to be for long-term investors. And it's a really good price, especially when you use code TCI for 15% off. Thanks so much for listening. We'll catch you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.