The Canadian Investor - 8 Red Flags When Analyzing a Stock

Episode Date: February 19, 2024

In today's episode, we explore 8 red flags when analyzing a stock and why each of them can be a warning sign for investors. From declining revenues to unsustainable payout ratios, we break down key indicators that may signal potential risks in your investment. We then look at why less can be more in terms of the number of holdings but also from a trading perspective. Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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and I know you do to round us out, but I really like your first topic on the slate today, which is almost the most instructive type of checklist. It's like when you're finding a job, a romantic partner, or in this case, an investment. You got to know what you don't like to know what you do like. That's a good way to put it. And obviously, these are red flags. I think for some of them, it's not necessarily three strikes, right? It's more one strike.

It's more one strike. And if there's a valid reason, you have to like, you know, if there's a really valid reason behind it, maybe I'll still, you know, further investigate the company. But it's usually any of these. If I see these, it's usually. I'll chime in on a couple. I share many of them with you. But when I just hop on a company's financials, I can pull them up on FinChat and just kind of see right away or like, you know, look at the numbers, look at what they do. It's actually really helpful to have a process of things you just don't touch.

Yeah. In a pile that's like either too hard, you got to work out too much, or it just doesn't fit your criteria. So without further delay, let's get into it. Yeah. And I think that's a great point just because we all have limited amount of time. And to be able to weed out some companies just because you see maybe one or two of these red flags, it'll save you a lot of times. And if you don't have these and then you start reviewing the company and then five hours down the line,

you're like, okay, no, this is not for me. This will help you with saving some time. And these are not all of them. These are just some red flags that definitely come at the top of my mind when I'm looking at a new company. Now, the first one, I know you'll agree with that one,

is declining revenue. So this is pretty straightforward. If I see a company's revenue declining over two or more years, so I was very specific two or more years here because we saw during the pandemic, sometimes there's some unforeseen event, acts of nature, whatever you wanna call them,

but two or more years, that's a red flag for me. It's really unlikely I'll want to invest in that business just based on that. And like I said, I'm not necessarily saying I would automatically write it off. But let's just say that this is a big strike one. If I don't write it off, then it's most likely that I'm looking at the company as a potential like turnaround or value play. People who know my portfolio, you know it as well, Brayden. I do sometimes take some value play approach, but it's pretty rare in general.

Yeah, there are. I like that you specified a timeline here. You know, some people had some pulled forward growth. I think if you look at Apple like year over year, you know, they kind of have a replacement cycle thing happening now with their revenue. It's like, it doesn't mean you're going to sell the company or you're instantly not going to look into it. But if it's a declining, it's a melting ice cube, what I like to call them, then that's ding, ding, ding ding red flag yeah the one that comes to mind when i think about this as a red flag and it really panned out and i know

you'll agree with this because we've talked about this before it's blackberry because blackberry was supposed to always you know oh it's coming it's coming and it never really came dumpster fire yeah yeah there's a difference between a turnaround with a catalyst and a turnaround because the management team says it's possible. Yeah, exactly. Those are materially different. It's okay. John Shen, I'm sure, is enjoying his retirement. So he's the one laughing right now.

My dude better be on a beach or something. He's been just taking it for 12 years there as the CEO. No, exactly. The second one here, high dividend yield. So this one I wanted, like it is something that can be a red flag for me, definitely. And we had a question coming to our email, so I thought it was good to specify this. So my rule of thumb here is that regardless of the company, if I see double digit yield, that's a red flag. So that is kind of my rule of thumb. If I see 10%, it's a bit

arbitrary. I get it. The 10%, maybe it's a round number. That's why I use it. But this is really sector and business dependent. So for example, a tech company paying 5% would be a dividend. 5% for a tech company would definitely be a red flag. Whereas a utility paying 5% is pretty standard by itself and wouldn't be a red flag for me. It'd just be like, okay, that's actually like just looking at the yield without looking at anything else. This dividend, there's a good chance that it is sustainable. You and I were just talking about BCE, Bell, here in Canada, sporting a good old 8% dividend yield. Yeah, it's a utility. I get it. There are a lot of companies that sport high dividend yields and then get beat up, like this one, for a perfect example,

it approaches like double digit dividend yields. There is tobacco stocks approaching double digit dividend yields. I think Altria and BTI sport 9% dividend yields. And I guess the underlying thing here is, is there something seriously mispriced or is this truly a red flag? At least the alarm bell should be going off for investigation is a good way to frame it. Yeah. And even using the BCE example. So if you look at just some of the comparison in Canada, just based on the yield, they're significantly higher in terms of yield compared to their two biggest competitors like TELUS and Rogers. So I think that's just an indicator. Of course, like you mentioned, I think this is definitely more of an indicator where you need to dig further. You know, I have allied property read that currently yields over 10%, but I've researched that company. Yeah. It's, it's gone back down. I think it's because of the CPI print that was higher than expected in the U S and then everything, anything that's related to that is down today, but that's an example. I own it,

but I know the company very well. My premise is that it's overdone. And over the next few years, up to five years, things will turn around and the market is just being overly bearish. But again, I could be wrong. My premise could be wrong and I could end up losing money there. But there's a valid reason and I did my research.

And I think that's important for people to understand. The yield to me, it's always an indicator because the higher the yield, it just means that the lower the price of the stock is. So if you're kind of new to investing, it doesn't mean that the dividend necessarily increased. It just means that the stock has gone down in value, therefore making the yield higher. So it's the market basically telling you something and then it's up to you to decide whether the market is correct or wrong. Now, the next one here, I just see Brayden nodding so I'm gonna say that he agrees with me so unsustainable payout ratio. So this again is related to dividends so if I see a company that

has a unsustainable payout ratio from both a net income or earnings perspective or a free cash flow perspective, that's a red flag for me. Of course, if it's a one-off year and the company has not had a history of having an unsustainable dividend, I'll definitely take that into account. But if the company is constantly paying more than 100% of its free cash flow, and that's the one I tend to focus a bit more on, it means that they're either using debt or issuing shares to finance a dividend. It's one of two options because they're not able to cover it with their operations. And when that's the case, the company is typically on the path to a dividend cut unless they make drastic changes to the business elsewhere. And exhibit A, and we'll see if i'm right or not i think it could take some time but

bc is definitely paying has been paying more than 100 of free castle for i think it's three years now i know they'll try everything to not cut it but at some point in the next five to ten years if they don't right size the business, there may be a point where they just have to bite the bullet and cut it. So that's real important. Anyone who's investing in dividend companies should always keep a close eye on the payout ratio. Yeah, totally. This is related to number two, right? You got to look at them together. And as you mentioned, as a percentage of free cash, knowing that free cash is chunky. So you do got to consider that. But a traditional payout ratio you'll find on 99% of, you know, analytics websites will use earnings like net income.

We'll use earnings like net income. And just note that more than the unsustainability of the payout ratio is just really around like the capital allocation. There have been growth stocks that I have found that one that comes to mind. Dude, I haven't looked up this name in a long time. Remember New Flyer, the electric? Oh, yeah, yeah. Meta's payment. New Flyer, the bus company. The bus company.

What happened to the, NFI, I think was the ticker. Yeah, NFI. I haven't looked at it in a long time. It's the electric bus maker. Yeah. The company's, it had a rough couple of years there. This is a name where it's a growthy name. And the fact that like revenues were up into the right all the way from 2013 to 19 stock.

I don't know what happened to business after that. Clearly nothing good. But this was a growth stock. It was an electric bus maker. It was investors were excited about the name for all of those reasons because it's in the right space. It's in the electric vehicle market. It has this kind of tailwind. It's growing like a weed. And then they'd pay out like 70% of earnings to dividend. It made no sense for a company growing at that pace. And you are hoping a company in that position,

even if they can cover the dividend, you ask yourself, if I was running the company, why would I be paying out shareholders all this cash when I can reinvest it and become the premier global manufacturer of electric buses? This is a growing industry around the world. And so that story never matched up. The stock, it looks like the story never matched up accordingly. And so just think about these kind of things logically. Should this company growing this fast be paying 70% of their free cash to the dividend? Probably not. And that never made any sense to me. Yeah. And it's always useful to just pick back on what you're saying. Also, compared to what peers in their sector industries are paying in terms of payout ratio, because

you'll see utilities like the best utilities, the really sustainable ones will have a similar payout ratio. I haven't looked at utilities any time recently, but it could be like more around 80%, 85%. It's going to be higher because they have more stable cash flows, whereas a tech company, a Microsoft, it's probably around like 10, 15%, right? It's not very high or an Apple. It's going to be low. And again, if you see a tech company paying like 80%, 85% of its free cash flow, that would have alarm bells going on for me. I'm looking at this name right now. The dividend yield got up to almost 6% before they slashed it in the March ending quarter of 2022. So they finally figured it out. The payout ratio was exceeding

100% of net profit for 2020, 2021, and 2022 before they cut it. So this stuff's not hard to find. It's hiding in plain sight. Yeah. And especially companies that have a history of paying a dividend. It's hiding in plain sight. Yeah, and especially companies that have a history of paying a dividend. Unfortunately, the tendency for management teams is to wait until like essentially the writing is on the wall and everyone knows. So it's easy to spot like just I would say for most people like trust yourself when you see something that's not really lining up, that's out of whack, like the numbers are the numbers, right? If you have like three, four years in a row where they're not covering the dividend, I mean, sooner or later, something's got to give. And that's something that should be part of your toolkit, especially if you're looking at dividend stocks. Hey, Meta's a dividend stock

now for all the dividend, bro. So there you go. You finally have a tech name you can put in there. That's right. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all

North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. is questtrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away.

Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. That is Airbnb.ca forward slash host. So the next one here, debt to equity ratio that is constantly increasing. So you can look at it in other ways as well. So

there's all different kinds of financial health or debt metrics you can look at, but if they're steadily getting worse, that's something that is a big red flag for me, because I want a company that's able to be sustainable over long periods of time. And when these debt ratios are getting worse and worse, especially if this was happening like prior to 2022, if the company was getting debt ratios that were getting worse and worse, imagine how difficult the company would be in a tough spot right now. So these are like, this is pretty easy. You can do use debt to equity. You can use like interest coverage ratio. If you want to see how much of their profits are going towards the interest expense, there's all different kinds of ratio, but if they're steadily getting worse, that is a big

red flag for me. Again, if I see this, I need to understand why this is the case. And there better be a good reason for it, especially coming from management. Perfect. So now we'll go on to the next one here. So number five, management constantly misses to the downside on guidance, or doesn't execute on a long term plan. So this is not that hard to spot. You'll have to put a little bit of work because typically you'll have to literally listen to like at least a few calls, probably four or five.

Typically I would recommend Q4 earnings calls or investor presentation days because then management will do a kind of a recap of the year or the investor day. Typically they'll do that for like unveiled or capital allocation plan over several years. But if they're constantly missing on that, that to me is a big red flag. And actually, I don't think I would invest in a business where I see that being the norm. And again, the same old true if management misleads investors, right? So the one that comes to mind is Intel.

And we were just talking about dividends. So Intel, last year, we covered that. They reported their Q4 2022 result on January 26, 2023. And then less than a month later, they announced they were cutting the dividend. And to me, like everyone knew that the writing was on the wall. But to me, the fact that management did that in that fashion, it I would have zero trust in that management team. That is my perspective. Maybe someone else will disagree with me and that's fine.

But the fact that when it was so obvious to everyone that they wouldn't say it on their Q4 call, I think that is just plain misleading investor. all i think that is just plain misleading investor and unfortunately i would not touch i i would not touch intel until the current co is gone in current management and maybe when they leave if the business looks good i would consider it but currently i would never consider intel for that main reason there is a very easy way to look at like guidance, beats and misses. You can look at the analyst tab on FinChat and just compare like, we're talking about meta, just compare a meta to a Snapchat in terms of execution on consistently beating expectations or consistently disappointing on expectations. There are companies that consistently surprise. And the companies that are great,

almost consistently surprise for multiple decades sometimes. Yeah, to the upside. To the upside, yes, to the upside. There are, like, it's just kind of that, like, winner's win mentality or like, you know, the best talent or the best management teams continue to impress. They continue to spin up new businesses. They continue to spin up new optionality and find new growth when no one had it pegged. Like no one was writing, underwriting Amazon web services into the Amazon story, but generational type

leaders like Jeff Bezos continue to surprise. And this happens time and time again. This is why investors, if they're betting on seed stage companies, they're not even really betting on the idea or the traction. They're just betting on a few people. They're betting on the co-founders. This is the reason that I sold Unity a few years back. Unity is a gaming engine company. I think they've kind of fumbled the bag over the last couple of years. And John, what the heck's his last name? He was the former EA CEO. He just always kind of rubbed me the wrong way. And then he wasn't liked at EA, by the way, and he's now gone at Unity. So again, these people continue to surprise on the downside as well. It kind of rubbed me the wrong way. The capital allocation

decisions, the zero interest rate phenomenon acquisitions they were doing didn't make a whole lot of sense. And it just seemed like the vision was all confusing. So just you are investing in the management team to be stewards of your money and treat it as such, right? That's the way to think about it. Yeah, exactly. and treat it as such, right? That's the way to think about it. Yeah, exactly.

And when you have management companies that exceed expectation, to me, it's just basic. I mean, even in customer service, like I know a lot of people I'm sure have worked in the customer service space. There's a saying that goes, it's just under promise, over deliver. You can literally give the same exact service to a client. But if you under promise

and over deliver, they'll be extremely happy. And if you over promise and under deliver with the exact same service, they'll be pissed off because you're setting expectation. And I think it goes the same thing for managements here. And the good ones who constantly exceed expectation is because first, they know their business well. And second, they are most likely going a bit more on the conservative side to make sure that if anything unforeseen happens, they do have a margin of safety baked in because they weren't overly optimistic. That's the way I see it, at least. Isn't the saying that happiness is just the delta between expectations and reality? Yeah, I think so. I think that goes for a lot of things.

Yeah. And I guess the next one is kind of related to that. And I know you love this one, by the way. I love this one. I think we talked about a couple episodes ago. So management changes the KPIs. So KPIs are key performance indicators. So that's something

you'll hear often. And if you go on FinChat.io, you'll see Braden's team has different KPIs for different companies. Now, this is a red flag, but more one that needs to be further investigated. Maybe I would give them like just say a foul ball instead of a full strike here just because sometimes there are some good reasons why they are changing that but most of the time when this happened is because they're trying to use a metric that reflects a more positive life on the business you know is that bad or good i think it's more of a case by case basis but if you see them constantly changing those kpis that's an issue a company that we talked about, like Apple, when they keep saying the number of units that they were selling every year for iPhones, and then they changed that and said, we'll only talk about the total iPhone revenue.

The market didn't like that. I mean, at first glance, it's not great because obviously it's telling you one thing. It's because they expect the number of units to either plateau or start declining and they want people to look at the total revenues in the big picture of thing i think it's fine from an apple perspective but again that's just an example that even for apple they were clearly trying to shift expectations when it came to iPhone sales. I have up on the screen for you to peruse. Okay, yeah. This, do you know what company this is? Parks and Resort, that must be Disney.

This is Disney. Okay, I just saw media network and Parks and Resort and I'm like, this must be Disney. You nailed it, you nailed it. This is Disney and this page makes me want to throw up. There is, see this little I? That means the segment's been discontinued. So how many one in two metrics

have been discontinued on this page? It looks like the data is just missing. No, the data is right. You just have to play Jenga to match it all up. You have to work to match up all the segments, all the geography, all the EBIT segments, all the KPIs. Oh, let's just randomly actually discontinue tracking monthly revenue per paid subscriber on Disney+. That's not a useful metric anymore. Let's stop tracking information about the hotels. Let's scrap our entire reporting segment and switch to this other one.

Let's move over from parks and stuff to experiences and bundle in a lot of stuff. So if you notice here, they used to have like six segments and now they only have four or three. That is actually a leading red flag because that means you're taking a bunch of stuff that used to be broken out and bundling it in and hiding it under segments that are doing well. Yeah. This page is just red flag after red flag. Yeah. And did you notice that must be part of their strategy. But on Netflix now, there's Home Alone, the movies, where it used to be only on Disney Plus because they own the content. And I'm saying Home Alone, but I think they're trying to get more revenue

by not making it just exclusive on their platform. I think they- To license it to the other players. Exactly. I think they tried make it exclusive thinking that would bring in some subscribers. And I feel like the subscriber count is not what they would want it to be.

So they're trying to get some more sources of revenue. I'm assuming they're making the calculation that the extra licensing revenue that they'll get outweighs the potential loss in subscriber if they had that content exclusively for their platform. Yeah, look at the global paid Disney Plus subscribers. It's actually been pretty resilient the last couple of quarters. They had lots of churn coming out of 2022, as to be expected.

But overall, surprising business. This might be one of the most hated large caps on the market these days. Yeah. But I have no opinion on the stock because I don't like owning companies like this, where I have to literally play Jenga with their financials. Or not their financials, but their KPIs and their revenue segments. It's hard to really put it all together. Yeah, exactly. Completely agreed. 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 winningwinning 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. 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. Now the next one here, number seven. So an extremely complex business to understand. So this is more, I guess, personal for me, but if I can't fully understand the business, that's a red flag. It might be because I just don't have the technical knowledge, for example, pharmaceuticals. Right. Like I I just I mean, I guess I could learn it. But I also know that it would take me hours on end to learn it. And it's probably going to be still a very difficult industry to invest in. So I'm just not willing to put the time in. So in that case, I'd probably just pick an ETF if I want more exposure to that sector. And it could also be because I'm an extremely complex organizational structure and one big, let's say, strike against Brookfield because I do own it, it's the complexity of their structure.

That's always been a bit of an issue. I mean, I still own Brookfield, but I'm not really adding and I'm not planning to add anytime soon to Brookfield. I think I'm just fine with the position being as it is and most likely going down as my portfolio grows and I inject some new funds. Because to me, that's still a risk for Brookfield is unfortunately, I have to put a decent amount of trust into that management team, which is fine. I think they have a good management team. But again, I think it's just a structure is just so complex, unfortunately, for Brookfield. It's not. It's more so that, yes, the structure is complex. I mean, the subsidiaries, you got to tie it all together

and the ownership stakes back to the mothership. But it's really around like the governance and black box around it that makes it difficult for investors. And investors that just say, eh, you know, not for me. I totally get it. Yeah, me too.

Totally, totally understand. It's like when like, what the hell does Datadog do? Bro, I got someone who works there to explain to me what Datadog does. And I left more confused. I literally was like, thanks, man. I know less about Datadog now. Your explanation was fine. It's just that, what?

You know that meme? It's like, one, what? That was me after the explanation of what Datadog does. And it's a $44 billion in market cap software company. This is a large, large business that apparently is solving a large, large problem for customers. They went from $100 million in revenue to $ 2 billion in revenue in the last four years. They're doing something right. It's just that I don't know what they're doing right. And I don't know if I'm ever going to know what they do right. It's just so confusing to me. I guess at the high level, they analyze data for businesses, but that's the extent of what... Because I'm reading the whole thing, like what is Datadog just on Google? And I mean, I'll read it for people to kind of make their own mind.

Datadog is a monitoring and analytics tool for information technology and DevOps team that can be used to determine performance metrics as well as event monitoring for infrastructure and cloud services. The software can monitor services as serve such as servers the database and tools like i have a general idea but if you ask me to like explain like you know to people what they do in a simple fashion while understanding the business like forget it i don't think i'd be able to do that. ServiceNow is a tech company that has just absolutely dominated at the enterprise level. It is ticker now. ARR has exploded. One of the best profitable software companies in public markets today. I kind of know what they do. They automate tasks for large enterprises. Yeah. I think they do a case

management tracking too for clients and stuff like that. Yeah. They do a lot according to the website. Go to the website. It's like, I know less about the company and IT teams love it. Clearly they're solving a big problem. And if you work in this space, maybe you work with ServiceNow at your company, you might get it. But my goodness, again, another name of this massive, massive company. The metrics are fantastic, but like, why do they do it better than anyone else? If the stock goes down and I can't answer that, better than anyone else? If the stock goes down and I can't answer that, I'm not in a position to own it. No, that's good. And then I guess the last one here before, because we definitely spent more time than I thought on this segment, but it's a fun one. The last one here. So again,

with management teams, so management says they are unsure that the company will continue on a going concern basis. And I think this one should actually be number one. If you ever, ever see this in a earnings release. So if you're new, essentially a going concern basis means that the company can keep operating. If there's some doubt regarding the going concern, it's essentially that management is saying there's a real possibility that company may not be able to continue its operation. So this to me, if ever I see that this is like three strikes and you're out. Like this is something where there's a real risk that the company will be insolvent, may go into bankruptcy. And when these, especially when these earnings are out and they've been verified by

auditors and they agree with the management team it's not a good sign like it's a struggling business maybe they'll turn it around but to me i will not consider a business that has that because they're literally telling you that they could stop operating very soon yeah i, I mean, I don't even want to be even close to this going concern. This is a drop everything red flag. No, this is, yeah. You see this a lot and people are

searching around and junky stuff on the TSX Venture. You see it kind of all the time. If you stay in quality, this won't be an issue. And maybe some people like to take bets and they analyze a company and they think it's going to turn things around. Just personally, if I see that, if management literally is telling me that, I'm not even wasting more time. I'm moving on.

If they turn it around, good for them. I don't want to be part of it. Let's move on, Simone. I have a man crush that I'd like to tell you about. I don't want to be part of it. Let's move on, Simone. I have a man crush that I'd like to tell you about. I'd like to tell everyone on the podcast, I have a man crush. This investor, his name is Dev, I'm going to mess firm, a fund called Valley Forge Capital. Valley Forge Capital manages just under $3 billion. He is the portfolio manager of it, and he's been running this fund for a couple decades now. I'm going to go through the portfolio, but I'm also going to

go through a couple stats of what Valley Forge Capital Management has and what Dev Cantiseria has done during that time. I sent him a LinkedIn request, which has gone unnoticed so far. So Dev, if this makes it to you, just accept me a little LinkedIn, pal. give me a little linkedin follow you need more followers on linkedin or friends or whatever colleagues whatever they're called i don't have enough clout on linkedin for him to uh to see it so the just under three billion uh of asset management looks like from the stats here on the 13f the position size is eight companies. It's mostly concentrated into just six names, which I'm going to go through. The average holding period of a stock in the portfolio,

drum roll please, is 21 years. Is that badass or is that badass? Yeah, that is amazing. amazing turnover over the last years it just says zero so there's been no portfolio turnover like this guy just absolute beast okay so you guys know i'm into these wide moat financials not to be confused with banks. I'm talking Visa, S&P Global, FICO, BlackRock, these wide moat financials that have extremely competitive positions. Think of like a FICO. They just have like a monopoly on their scores business in the US around like the FICO score. His portfolio is one quarter FICO, one quarter S&P Global, roughly another quarter MasterCard, and then the rest is Moody's, Intuit, Visa, some small tech company that I've never heard of, and ASML. This is a badass portfolio. It is very high quality.

You're seeing what he likes, monopolies. He likes, in this case, sometimes I might fare often to say duopolies. And this portfolio is what I strive to be dev of Valley Forge Capital Management. You can look it up on FinChat and get their 13F. You can see all the history of all the companies they've owned. Here's a spoiler alert. It doesn't change very much, but this is an awesome portfolio and what I strive to accomplish. Yeah, that's pretty impressive, honestly. I'm kind of waiting for you to buy a railway.

I mean, all these monopolies doesn't get i know it's i like has said evy compared to other like a visa or mastercard but still i i'm a big fan of railways just because of their track record i mean they're slightly outperforming i think the snp 500 at least the can Canadian ones over long periods of time. And good luck building a new railway. It's just, yeah. I think that you're totally right. I mean, the results are there. And I think you're probably going to beat the index with those names moving forward. It's just that you can think of Visa and MasterCard as like the rails of transactions with a lot of room globally to grow. Like where are the rails building new rails outside of North America, right? Like they're just kind of constrained just by physics and geography. So they're fantastic. But I look

at some of these other names and it's like asset light you get all the same kind of upside in terms of quality and moat with uh less constraints i don't know how else to put it yeah yeah i guess for me it's more like i guess the pricing power because there's just few little options you can increase the efficiency as well but i get what you mean i still i love the railways. I have Canadian National Rail. I'm definitely debating just doing equal weighted with CP and just have both going forward and enjoy the natural and regulatory modes that they benefit from. You should go on FinChat and type in Chris Hone or TCI Fund Management.

you should go on FinChat and type in Chris Hone or TCI Fund Management. That is a roughly 30 billion AUM company, a TCI Fund Management managed by Chris Hone for a long time. You'd like this name. It's General Electric riding the turnaround and then CN Rail, Visa, S&P Global, Moody's, Google, and Thermo Fisher. It's the whole company it's pretty good yeah pretty impressive yeah so concentrated and he's been uh he was big in the uh the cn rail drama there remember when he wrote that memo we went over that was like oh yeah that was him huh yeah back getting back on the rail what was it he had a clever name for it was like to cn rail to get back on the track or something was that before get back on track rail. What was it? He had a clever name for it. It was like to CN Rail to get back on the track or something. Was that before? Get back on track, which is just hilarious because they're a rail.

Was that before? I guess before the new CEO came in, right? He was just- That's right. Yeah. He was an activist. Yeah. He was telling them to get rid of the-

Which they did. Yeah. Well, he owns $4.5 billion in CN Rail stock. So, I mean- So- good so yeah well he owns four and a half billion dollars in cn rail stock so i mean so cn rail is a large company but anytime you have at least like single digit percentage of ownership in any company the company will listen to you i think a lot of people 6.18 percent of cn rail yeah so that's that's a lot i think for a lot of people may not sound like a lot but for one uh shareholder to own like i'm literally saying like if they own one percent or more it's massive and the board and the company will usually listen to him and if not i mean

oftentimes these investors will be pushing to have at least a seat on the board as well. They sold out of Microsoft. Interesting. Yeah, I saw that too. Last segment of the day is called thinking in percentages, not dollars. So quote, the first 100K is a bitch, but you got to do it. I don't care what you have to do, if it means walking everywhere, if it means not eating anything that wasn't purchased with a coupon, find a way to get your hand on $100,000. After that, you can ease of the game a little bit. I don't really know what that means, but that is end quote Charlie Munger, talking about how do whatever you got to do to get to the first 100K and then you can lay off the gas a little bit. Yeah. Then you can put in your bank account, CDIC insured, boom, you're all set.

Yeah, boom. The quote is from the 90s and inflation adjusted. It's more like the first 250K pitch and you got to do it. But I actually think that that's a really nice number, 250K for my young kings out there without large sums of money, no inheritance and no large portfolios today. I do think that that's a really nice kind of North Star to drive towards in your portfolio. One thing that I learned through the years around saving, spending decisions, investing, portfolio allocation, everything financials in my life is to think in percentages, not dollars. And the reason why is because big outcomes are decided in percentages. Percentages rule our world. Percentages rule the math around our world. And they give context that a nominal

number does not. Simone, if I ask you, I say to you, hey, this company makes $100 million in profit per year. Is that a fair, undervalued or overvalued company? That alone, I can't say. Correct. You can't say. You're missing information, right? You don't have the context. you don't have the ability to

turn that into an earnings yield because you're missing a very key part of the calculation that is a large number 100 million it sounds pretty pretty large right simone but if the market cap is 1 billion or the market cap is 50 billion, that's going to change. Those are very different conversations, right? Like one's an AI chip company and one's like a cyclical thing that no one really cares about. So this is why thinking in percentage matters. I'm going to rattle off one, two, three, four, five, six examples here. And then I'm sure you'll have some comments. Your portfolio IRR, your compound annual growth rate. If you do manage to compound at 8% or more per year for decades, even if you started with a small base of dollars, you end up with a great outcome.

Regardless of what you started with, if you're dollars, you end up with a great outcome. Regardless of what you started with, if you're able to do that for multiple decades, you're going to end up with a great outcome. What happens if you just increase that percentage to a few points of outperformance, say 11.5% compendial growth rate? You end up with wealth generation beyond your furthest expectations. Let's look at interest rates on your home, on your car, these large purchase decisions. Financing rates really matter. These percentages really matter. They rule the outcomes in your financial life. One of the most important of all, your savings rate. This is a percentage. Sure, making more money helps, but if you make of all, Simone, your savings rate. Okay. This is a percentage.

Sure. Making more money helps, but if you make a 250K a year, your savings rate is negligible. You end up with a bad outcome. I know people that make 250K a year and save less nominally than people who make a hundred K a year and have a good savings rate. This happens all the time. Even on a lower doll amount, if you have a sustained 20 plus percent savings rate, compounding that by putting another respectable return, again, another percent, you end up with life-changing wealth. Your effective tax rate, Simone, this is a giant percentage. And this one's harder, right? Because this is a kind of giant life decision on where you want to live. But your effective tax rate makes a big difference. If I live in Texas

versus California in the US, those are gigantically different. They vary by province here in Canada as well, not as substantially as the States, but these things matter. Yeah. The one thing I wanted to add there, just for people that may not be familiar with these terms. So there's two kinds of things when people talk about tax rate, it's the effective tax rate, which is basically the average tax rate that you'll pay over a given year on all of your income. And then the marginal tax rate is whatever tax rate you pay on whatever additional income you're making. That's right. And that compacts into a calculation, which you can call your effective tax rate. A credit card, APY, might not seem like a bad amount. If you have 20% plus, that's on the low end, maybe a high 20%, you get eaten alive into

a debt spiral if that lingers. Your portfolio allocation, usually this is a pie chart with percentages. We just talked about a portfolio. It's 20% S&P, 15% Visa, MasterCard. This is very important in terms of your concentration and both the upside and the downside you'll face in your portfolio. For instance, 100K to have in one stock might seem like a lot. But if you have a $5 million portfolio, that is a 2% weighting. Is that a big position?

No, not really. No, 2%, I mean, it would be like probably for, you know, depending on the people, but 2% is a pretty reasonable weighting without too much exposure, I would say. That's right. And so if your portfolio is 120K and 100K is in one stock, that's a big allocation. You got to think in percentages and not dollars. Of course, dollars matter. But if you think in percentages,

you start optimizing things correctly. That's what happened for me anyways, is when you move from thinking about, okay, something is X amount of dollars versus that's X percent. Percentages rule the math of our world and our universe. And so that really helped me focus on the thousand foot view and really focus on what matters in percentages, not dollars. Yeah, exactly. And I mean, it applies to so many different things, right? When I played poker, it was always about percentages. You try to just think about percentages and units and not actual dollars. If you're buying a house and you're trying to get approved for a mortgage, don't look at different ratios that are all percentage based. But investing as well, it just puts more context like a dollar value. Just I know sometimes it's

easy to focus on that dollar value. But at the end of the day, it just doesn't place a lot of context. And I think it's important, especially for new investors that may focus on penny stocks, for example, because the brain will look at it and say, OK, it's a dollar per share. If it doubles, I'll double my money. It goes to $2. I double my money. But it's 100% increase. The double is 100% increase. Doesn't matter whether it's Apple stock doubling or that $1 stock.

It's still a double, right? So I think it's just people tend to look and see smaller numbers. And I guess they assume that the likelihood of something happening is greater. Like, I'm not sure. I think that's probably the reasoning behind it. Yeah, because they're like, yeah, what's another dollar in the share price? Exactly, yeah.

Well, it is a 100% increase. That's what it is. And when you think about these percentages, you actually think rationally. It helps save you from your behavioral biases around finances. And smart people, wealthy people are almost always thinking in percentages. If you see them spend super lavishly, buy some fancy car or go for some fine dining that costs like ten thousand dollars that might be a percentage for them that is negligible that doesn't even register

for a lot of people for most of the population that is going to be a significant percentage it's going to be their food budget for the year that's what it's going to be a significant percentage. It's going to be their food budget for the year. That's what it's going to be. Budgeting's in percentages. Everything's in percentage. So that's the segment. No, I think it's great. I mean, that's, I don't know, maybe we're just too used to it

and that's how our brains work. But for me, it's always, I kind of feel lost if I don't have a percentage. That's the feeling it is. There's no context. No, exactly. Yeah, that's it. You're missing a piece of the calculation.

And so always be thinking in percentages. That's the pod. Thanks for listening, folks. We really appreciate you. We are here Mondays and Thursdays. Myself and Simone are on Mondays. Dan Kent and Simone are on Thursdays. You guys do news, roundups, talking markets. We talk big picture stuff on Mondays. And we're so happy that you are here. If you want to support the show, you can go on join TCI.com. You can

see our portfolio updates for all three of the amigos, as well as this podcast on video. We share lots of charts and stuff as we go through the podcast. That is at joinTCI.com. You can go also on FinChat.io. 100% of the data we pulled up on today's show was from FinChat.io. You can use code TCI for 15% off. We'll see you in a few days. Take care. Bye-bye.