The Canadian Investor - A Recession Proof IPO and Apple Hits 3 Trillion

Episode Date: July 6, 2023

We start this episode with a big podcast announcement! We then break down the new capital requirements for Canada’s Big six banks, discuss Apple hitting 3 trillion in market cap, Savers Value Village IPO, S&P 500 returns by year and Costco cracking down on membership sharing. Symbols of stocks discussed: AAPL, SVV Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  TCI meetup registration Interested in becoming the next co-host of the Canadian Investor Podcast? Send us a 1 minute video at [e-mail] . Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome in to the show. My name is Brayden Dennis, as always joined by the now wiser Simon Belanger. Happy birthday, buddy. I know it was yesterday. Happy belated from me and the listeners. I am very excited to see you in the flesh in just a few days here.

Yeah, it'll be exciting to go to Toronto. Definitely a little stressful at the same time when you're traveling with a baby. I'm sure if we have tons of parents listening to the podcast, it's just like three times the stuff that you normally need if you're just traveling on your own. But it should be fun meeting. Yeah. Just meeting the listeners and meeting Dan and Nick in person for the first time, too. Oh, yeah.

I guess you haven't met them in person yet. Oh, okay. I've played golf with Nick a couple times and just quick run-ins with Dan. But, no, it'll be great, man. It'll be great, and I'm excited to see Dan. But no, it'll be great, man. It'll be great. And I'm excited to see you. All right, Simone, should we announce the big news? Yeah, go for it.

And then I'll add my two cents to it afterwards. Okay, sounds good. So as all of you know, we love doing the podcast. We've been doing it since... We have been doing it consistently without missing a single episode since the fall of 2019. And for anyone who creates content, that is truly a grind in terms of consistency and output. And I've been loving it.

I personally have been podcasting for seven years now in some capacity, on and off, and then very consistently after. This podcast has achieved roughly 5 million downloads since inception, if you include our previous platform you're using, Simone. And I'm loving it. And I'm not going anywhere, first of all. But it is time for me to step back to a once per week role. And the reality is that, one, I want to, but two, I want to for the listeners as well, because I love doing the Monday releases, the frameworks, the business breakdowns on specific stocks, specific businesses, specific things that I find very interesting and the growth of my other businesses. I feel like someone's got to come in and know the right skills and enjoy

it to do it here with Simone. And so I'm going to be taking a step back for one of the episodes per week. That is kind of the big news. Yeah. The Thursday episode. So it'll be- The Thursday episode. Yeah. Yeah. So basically- The news episode, I'm taking a step back. Yeah, exactly. So the news and earnings. So what we're announcing to is we'll be looking for a new co-host with me for that episode.

So we posted it on Twitter. I had a few people reach out. I know you had some as well. So if people are interested, send us an email with a short video. Hopefully not too much longer than a minute at CanadianInvestorPod at gmail.com. We'll have it in the show notes as well. Send it to us if you're hearing this episode in the next week or so. So, you know, don't have to stress out. You have a little bit of time. And there's a couple of different things. People are asking me what

we're looking for and just some big buckets here. Obviously, some good investing knowledge, some good macro understanding, because that's becoming more and more in the limelight in terms of news reliability. Stay on schedule. Do your research. Obviously, we're not going to babysit. So you have to be able to work independently and be able to stick to that recording schedule because we, you know, we don't want to miss an episode. Good knowledge of the Canadian market. Able to, you know, bring some good insights, but also being able to have some fun back and forth banter because we want it to be entertaining for people. And as a lesser thing, just because we do talk about it every now and then, it's usually me. But, you know, some knowledge of Bitcoin and crypto would be a plus, but not required. So that's just a plus if people have a decent understanding.

It's what I've been responding to people that had been reaching out interested in the role. I think that's a good breakdown. You can see, anyone who listens to this pod knows, I don't really factor in weekly news and macroeconomics into my investing strategy. So I feel like I'm letting you down on those episodes. And I know many of the listeners will be like, oh, we love the banter between two of you guys. Give this next person a shot for one of the episodes. I think they're going to crush it. I think that they're going to be able to bring some new insights as well. So I'm excited, man.

And we're not going to rush it. That's one thing that we're promising you is we're not going to rush it until we find the right person. But overall, I'm excited because I'm going to be listening to them and i'm gonna learn some stuff too so okay uh brother i'm pumped to see you i i feel like i really only see you i mean i see you see you through the screen a lot it's not the same but i don't see you see you in real life really only probably once a year. So this will be sweet. Yeah, I think it's going to be really awesome to see people. I think we have, what, over 100 people already registered for the meetup? Yeah, over 100 tickets were sold.

I did, you know, if you're listening to this, it comes out Thursday, July 6th. The meetup is on Friday, July 7th. I did release a few extra tickets. If you want to last minute, come on down. It'll be fun. Yeah, yeah, exactly. So now I know after all these announcement, we'll move on to the actual news and earnings part. I don't think there was really not too much in terms of earnings, but still a bit of a lull in terms of that, I think

at this time of year, but there's still some news. And one big part of the news, if people aren't paying attention, I think they should be paying attention to this. So happened a couple of weeks ago. I know Dan and Nick talked about it a little bit on their podcast, but I wanted to dig a little bit deeper just to explain what it means to people. So OSFI, which is the Office of the Superintendent of Financial Institution, announced that they were raising capital requirements for Canada's big banks. So they supervise and regulate federally registered banks and insurers, trusts and loans company, as well as private pension plans that are federally regulated. And it's important federally regulated because, for example, people know I'm well aware of how pensions work. There are a lot of pension plans

that are provincially regulated that would not fall under OSFI. So I think that's important to to know here. Effective November 1st, 2023, OSFI is raising the level of domestic stability buffer, also known as DSB, to 3.5% of the total risk-weighted asset. It was last increased in February of 2023 from 2.5% to 3%. So they stated the following reasons for them doing so. First, their systemic vulnerabilities remain elevated for our financial system, high household and corporate debt level, and persistent global uncertainty around fiscal and monetary policy. So it's kind of funny that you have a regulator saying, you know, there's a lot of uncertainty about, you know, fiscal and monetary policy when that's handled, obviously, part of it by the Canadian government and the other part by the central bank, so the Bank of Canada. But their role is to make sure that the banks are in good financial situation.

And essentially what they're saying is that they want to make sure that they have a bigger buffer if anything unexpected actually happens. And like I mentioned, this only applies to the big six banks, which are considered domestic systemically important banks or DCIBs. Some of them are actually globally systemic important banks like TD and Royal Bank. systemic important banks like TD and Royal Bank, but obviously there's also BMO, Bank of Nova Scotia, CIBC, and National Bank that fall in that bucket. And DSB is part of the Common Equity Tier One Capital Ratio Requirement, also known as CT1. So in short, this capital requirement is there to fund a financial institution business activities. And it's a buffer that allows them to absorb unexpected losses. And it essentially raises the overall CET1 requirement to 11.5% because there's several things that go into that. And if you go on the

OSFI website, you'll actually see they have like an interesting graphic. But essentially, there's one thing that comes from the Basel III agreement, which is an international regulatory framework for banks, which Canada adheres to. And this standard was established after 2007-2008 financial crisis. And it requires to have a CT1 ratio of at least 4.5% with higher requirement for DCIB and GSIB banks. So that's why it goes all the way up to 11.5% because there's other things that they incorporate to make sure depending on the bank that they're well capitalized. I like this little graphic. So it shows that domestic stability buffer effective November 1st, 2023, 3.5% to go up to 11.5%. But it makes it very clear the actual levels were 13.1 as of late April and now. Yeah, the average for the big banks. Yeah.

So they're definitely in good- They're well capitalized from that perspective. Yeah, exactly. So they're in good financial situation from that perspective, but I think it's worth noting that the regulator is saying, okay, there's definitely some potential turmoil coming ahead. Risk in the system, yeah. Exactly. There's definitely some potential turmoil coming ahead. Risk in the system, yeah.

Exactly. There's risk in the system and they want to make sure that those banks have a good buffer. And the other thing which we've talked about for news and earnings when we talk about banks is the loan loss provisions or the provisions for credit losses. losses same thing where the banks will essentially deduct that from their earnings and put that aside on their balance sheet in case something happens and what this tells me is we're probably gonna see that continuing for banks because we've seen the big banks in Canada putting more and more money aside but I wouldn't be surprised if it actually picks up steam and increases even more because, you know, the OSFI, the regulator, now there's rumors that they may be coming down on some banks for their mortgage lending practices and specifically extending amortization for like 50, 60, 70 years, things like that. So people can still, you know, make their mortgage payments. But what's happening a lot of cases is the interest actually being added up to the capital so the mortgage is

increasing which is kind of a gray zone but what will happen is when these people renew their mortgages they'll have to go back to a 25 or 30 year amortization and then that could create some issues for the big banks and the financial system so i think they're kind of looking at all of these things as one and this you know the ratio that they're increasing i think is only one part of the puzzle for them so ten and a half percent is the g-sib requirement i believe i think so yeah i don't have it offhand but i think that sounded about right let me just google it yeah it looks like 10 and a half percent and that's what i thought it was but so this puts it at basically an extra full point higher than that yeah yeah

exactly okay very interesting yeah so i mean it's funny, right? Like the takeaway here is recognizing potential risk in the system they have been pretty good at having foresight of of making sure the Canadian banks are in a good position so when you know shit hit the fan south of the border in 08 they were largely like you know it's it's it's all good over here we're hanging out we're chilling and um I would say that they deserve some credit. So whatever they want to do here, I would say, you know, you guys earned the right, you know. I guess time will tell, right, what exactly happens. And I totally agree with you.

I think it's a prudent thing to do. But there's a lot of different forces. And without getting into that, because we have other things to talk about at play here, different than 2007 and 2008. But something to keep an eye on, especially if you have investment in Canadian banks, you should be aware of these kind of things. That's right. Yeah. And we've talked about it before. I've been very vocal about this. Canadian retail investors blindly own banks because they understand how their retail banking works. And that's basically the extent of it. These are very complicated, gigantic institutions that are not well understood.

That are not well understood. And if you're going to own equity, common equity in a business, you should understand it well. And these are businesses that take some time to understand it well. So if you do own them, that doesn't mean sell them. It means take some time to understand them. And that's my recommendation to you. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now.

Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want and they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend

this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right. Apple has done it. We're here at the market open two minutes ago. So

I don't know. I don't know if we're still holding that status. Let me see here. Yeah, we're still good. Three trillion in market cap for the world's largest business, Apple. So it became the first publicly traded U.S. business to hit $1 trillion in market cap on August 2nd, 2018. It has hit $2 trillion on August 19th, 2020. So basically just two years later. And now, roughly two and a half, no, almost three years later, Apple has hit $3 trillion in market cap. Spectacular. It makes you realize how dirt cheap the stock was when there was pessimism around the iPhones in the mid 2010s. And this thing just keeps chugging on.

It certainly does. Speaking of banks, at what point does this just become your digital bank, this business? They have so much optionality with you just glued to their ecosystem at this point. have so much optionality with you just glued to their to their ecosystem at this point yeah i mean you know apple just keeps chugging along um you know i've said it again i think for a lot of people it's just this apple and microsoft are these like ultimate like blue chip stocks now um which are not without you know like they're not perfect businesses. They're very good businesses, don't get me wrong. But I think people have this, you know, idea that it'll just continue indefinitely. And it very well might be.

But there's definitely some, you know, potential headwinds coming along. I think Apple, just one of them, for example, is just what's happening with their factories in China. Trying to move part of that production over in India, you know, and potential regulatory issues. But I mean, I own the stock. I can't complain. I mean, they they're doing really well. But you pay a premium, whether it's Microsoft or Apple, you pay a premium for the amount of potential growth that you're getting. But in exchange, you get these cash flow

generating machines. Absolutely. And you're right. For some reason, the geopolitical risk doesn't get baked into the valuation. We've talked about this extensively. And you know what it does? Is it makes me think TSMC is a really cheap stock. That's the way I look at it right now. That feels like an extremely cheap stock because they're tied at the hip right now, is the reality of it. And yeah, we'll see what happens here with Apple. Of course, the business is spectacular. Of course, people are locked into the ecosystem. Of course, the products are beautiful. And of course, they have tons of optionality. It has to, sitting at $3 trillion in market cap.

But it is difficult to get there on any spreadsheet to underwrite some decent returns. I can get there a little easier with Microsoft, just with the ridiculous growth on the cloud business. But that aside, you're right. I think it's been this flight to safety that's bid up these two names in particular. And I would say like the golden seven at the top of the NASDAQ right now that have just gone bonkers this year. It's a long list of stocks that you don't really want to sell. You just want to keep owning them. Don't sell things that the businesses are executing really well, but I wouldn't hate the idea of taking some profits. And that's against my investing religion. But this game has nuances and sometimes you have to make decisions on your own. And that's personally how I'd feel.

I look at something like TSMC in large cap space that's got a tremendous future, is not without its geopolitical risk, but all of tech is under the exact same thing that TSMC is sitting at what, like 16 times trailing 12-month earnings? So roughly half the multiple. It really does make you think. Yeah, yeah. I mean, I think too. Yeah. And just a just double click on the flight to safety like we were talking about. And, you know, especially if you think about investors that maybe retired or close to retirement, a bit older that may not have grown up with technology as much as some of us, but, you know, they probably have an iPhone, they know Microsoft products and things like that. Like Apple and Microsoft, it's a very easy company for, you know, older generations to invest in, even if they don't have, you know, the most knowledge and

technology and those type of companies, like I think you can feel pretty comfortable owning an Apple or Microsoft because you know these names pretty well in your everyday life. And, you know, it's hard to find anyone, regardless of their age, that doesn't interact with those two companies to some extent, right? That's right. Yeah, I mean're they're they're fairly easy to understand when you for now multiple decades have probably been a customer of one of these two companies and and that's not to say like people are just investing anecdotally these businesses are incredible like you know they're they're incredible, like the best consumer facing product ever, uh, in the iPhone and what has

become a utility in terms of stability of cash flows in Microsoft. It's, it's a utility with extremely high operating margins. Like what that grows and that has global distribution like what is there to not like there right like and it owns the the consumer side the business side and the infrastructure computing side what's not to like? So I fully get it. And I'm a Microsoft shareholder myself, and you have been now too for a long time. It's easy to get there on understanding how incredible some of these large cap technology companies are.

It's easy to get there. And you've seen how much they've risen in in price this year but off a pretty terrible 2022 maybe not for apple but uh 2022 is rough for a lot of these tech names so let's not have too short of a memory no exactly now we'll move on to a company as far as possible from tech as I can think of. And that's the Savers Value Village IPO. So for those who are not familiar with this company, you probably have seen, obviously, Value Village. Their stores, they're all across Canada and the US.

So they're for-profit thrift stores, which may come to surprise to some people. So they're for profit thrift stores, which may come to surprise to some people. And they IPO last week and on their first day listed, the share popped 27 percent. They have 317 stores in the US and Canada with 153 of those in Canada. So they almost get half of their revenues coming from Canada, just shy of that, which is not something I expected, to be honest. And they did $1.4 billion in sales last year, and they are profitable on both an earnings basis and free cash flow basis. And personally, it's not hard to like a company like this because they essentially get donations

so they don't have to pay for their merchandise and then they sell it at a profit. However, I was reading that apparently they do give a portion of the money to non-profits or a portion of the donation, but I need to do more research on that part. The other reason I'm intrigued by this company is just because of the current economic environment. So we've seen how well and you've been hammering the drums on that, how well Dollarama has fared in the last couple of years. And to me, this is a very similar type of business in terms of how resilient it can be in different economic environments.

So right now, obviously, people know we had high inflation the last couple of years. Looks like it's coming down a little bit. But for the most part, you know, people have higher housing costs, higher food costs, their salaries. You know, the data we've seen is salaries have not really kept up with rising costs as well. So a company like Value Village or Savers Value Village, I think, could really benefit from that where people have to shift their spending habit and, you know, save money once the essentials are paid, like food and lodging, for example. So after that, you know, you still have to spend money on certain things, whether you want to buy clothes, whether you want to buy kids toys, whatever it is. And I think Value Village would be a really big benefactor from that. And it's a company as there's a couple quarters coming out

of them being publicly listed. I'll definitely want to have a closer look and talk about it on the podcast because it's I don't know, it's like it looks like a good business model. I I have a hard time not liking just on the surface. Maybe I'll feel different. Is it a franchise model? I don't know. Yeah, that's a good question. I think they're company operated, but that's just a guess.

Yeah, I'd have to look because it definitely reminds me of, what's the owner of Plato's Closet? Winmark. Oh, yeah, Win win mark i remember when you talked yeah i remember when i did a dive on win mark it's basically they own plato's closet uh the baby store was it what's once upon a baby what's it called oh i don't i don't remember we we've gone to quite a few baby baby stores so it's probably one of them yeah your windmark franchises yeah so it's uh play it again sports uh play-doh's closet and the babe the baby one whatever that

whatever that one is someone will let us know yeah here we go our Our brands. Play It Again Sports, Music Go Round, Once Upon a Child, that's what it's called. Play-O-Dos Closet and Style Encore. So the big ones are Once Upon a Child, Play-Dos Closet and Play It Again Sports. Those are the big three. And I'm very curious if this is as well. But they crush it. They crush it. The margins from the franchise model, obviously amazing, but also on an operational model for the franchisee. People give you free stuff or almost free. And you sell it for a pretty nice margin. And it's a, they also do really well in seasonal type situations. Value Village does like Halloween, Christmas, like a lot of those events are huge revenue drivers for the business as well. Cause people need that kind of stuff like seasonally. It's an interesting name. I'll have to dive into the filing for that last one where they went public, because these models work really, really well. And there's no denying that. I think Winmark is a perfect example of how well it has worked.

Yeah. Yeah. And especially, it just seems to me like a model that would be resilient in any kind of economic environment, too, because even when things are going well, you know, the reality is like some people still need to shop at discounted stores, which that would fall into. And, you know, maybe they do better when economic times are tough. But yeah, it seems like, you know, depending how it looks and after reviewing the business, it seems like a business like you could probably own, whether it's Winmark or this one,

you know, for a very long time and not have to worry about it. Winmark has been a 32 bagger before the dividend since 08. Pretty good. It's pretty good. You've done all right. Very interesting. I'm going to look at this S1. What's the market cap for the IPO now?

I think it's pretty small. I think it's one point something when I checked. Yeah. I'll have to find it. Okay, very interesting. I'm going to check this out. Pretty sweet. It looks like the market cap is almost

$4 billion. Oh, never mind. Okay. A bit bigger. Yeah. But that's peanuts compared to Apple. Value Village is a pretty big brand that reaches a lot of you know, reaches pretty rural markets too. I don't know. I know we have a few in Ottawa and in the region.

So, you know, that's where, that's one of the places I used to go to buy cheap Celine Dion records and then sell them on eBay for a profit. Did you do that? You hushler. Yeah, I used to do that when i was like 14 15 yeah dude i love those stories this is the stuff that fires me up like when kids do real entrepreneurial stuff uh you could see me fleecing kids with their pokemon cards you know i'm like this one's not really worth a lot and then i i knew it was worth a lot and I'd trade them some shit card. You got to be hustling from day one. 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 questtrade.com. Here on the show, we talk about companies with

strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host.

All right. Let's do this S&P return bucket since 1928. So I've been fascinated with the market performance this year compared to last year. And I believe it's been an interesting experience for those who are new to markets. You know, we've been doing this for a while now, but look at the numbers, how many brokerage accounts were opened in 2020, 2021. And the market doesn't just go up. I think we've learned that. It is usually up big and down big in a major way. It rarely does what you'd expect. And I touch on this a lot because it's important to understand the historical returns and set expectations. Statistically, more self-directed investors are in the market now and realizing, hey, this is probably a wonderful long-term wealth generation machine and a very bad gambling

machine. You can't just day trade options to a couple billion. It doesn't work like that. Now, there's a couple of really important takeaways from this graphic that you can see here on the screen. If you're a listener or if you're a subscriber of join TCI.com, you get to see our beautiful faces, but also these graphs as we put them up on the screen. So that is at join TCI.com. So there is annual return buckets broken down by tens of percent. So zero to 10, 10 to 20%, 20 to 30%. And then also on the downside. So down single digits, down between 10% and down 20% from negative 20 to negative 30.

negative 20 to negative 30. The most common bucket is the market is up in the teens of 10 to 20%. That is the most common bucket. Next, 20 to 30%. So like where we're sitting at this year, that's another common one. 2021, for instance, 2017, 2009, after the great financial crisis, those years are very helpful. And then we have lots of returns, even in the 30 to 40% a year bucket. Zero to 10 and minus 10 to 0% are also very common return buckets. So those are, you know, as a normal distribution curve, it looks exactly like what you would see. Now, here's what's really interesting. It's almost never been, it's been once since I think 78. One time since 78 the market has returned between 8 and 10 percent now that's phenomenal like in the way like statistics are insane because someone when someone says what does the market typically do like what does the s&p 500 typically do what do you say

yeah around 10 i think yeah people say between eight and ten percent yeah that's like but the market almost never does where you have over 50% gains on the S&P 500. And then you have years like 2008, 1937, 1931, 2002, 74, 1930, where the market's down between 30 and 40%. Those are stinger years. And so the takeaway here is that there's two really important takeaways I want to touch on here. One, the market has very little, if any, maybe zero statistical correlation between this year's return and the previous year's return. The stock market doesn't care about arbitrary timeframes set out by the calendar. This is important to think about, right? We structure our lives and our calendar by a year, January through December. The stock market doesn't care. It really doesn't care.

It's an arbitrary timeframe. Number two, which I just touched on, common wisdom says the markets goes up between eight and 10% per year, eight to 10% per year on average. Maybe financial advisors would say conservatively somewhere between maybe six and eight, five and eight, but it almost never does. It's usually up big or down big. You get these really long bull runs to the upside, balanced out by many years of double digit returns, many years of double digit returns, single digit negative returns, and sometimes down bigly when the stock market faces sharp drawdowns like we saw in 2022, or the economy slips into a recession. So this is just an important reminder. I love pulling this kind of data. I typically do it every month or two on what you can expect,

set expectations, because the only thing that is normal in the stock market is volatility. A smooth line doesn't exist. Only when you zoom out 150 years and you log adjust it, you know, 150 years and you log adjust it, does the market actually look very smooth? In the short term, it is anything but that. Yeah. And I think I'll add to, you know, when you look at different time periods, yes, you can pick arbitrarily, you know, different periods to fit your narrative. But I think for people, it's also important to remind that, remind yourself that when you get closer to retirement or needing the funds, I would say at least, you know, five to 10 years within that kind of target retirement date,

you should start thinking about that and potentially allocating your portfolio slightly differently so you're able to weather these kind of more volatile markets in the shorter term. Because we're probably going to see a five-year period at some point in the future where the stock market returns either flat or negatively. And that's not great if you're in a decumulation phase. So being able to have kind of a backup plan, whether it's having some extra cash that's yielding 5% or something like that right now, I think that's something that's really important, because if not, you're at the mercy of the market, and no one wants to be forced to take

money out when their investments are in a 10, 20, 30 percent drawdown. So your retirement date or whenever you need the money by itself, it's a bit of an arbitrary kind of time frame, right? When you think about it. So I think it's really important to, you know, start thinking about, you know, making some adjustments to your portfolio because you know you can be 100% allocated to equities if you want and that's fine and you can have kind of safer stocks but you have to be aware that you may end up not necessarily getting the outcome that you want if you're you know you're in retirement and you're facing a big market drawdown yeah well said i mean you gotta you gotta know yourself too right like exactly yeah like i don't you look at my portfolio and it's like you know roughly half is in one

position if you include the spinoffs of constellation is that for everyone absolutely hell to the no like that's like some people call me nuts um no it's done tremendously well but it's still nuts for a lot of people but for me it's not uh for me i know that business very well and i know that it's made up of around 900 individual different companies uh you know similar to like a berkshire where it's not really just one company. It's many, many companies. It's a basket of companies inside of one. But if it was to face a large drawdown and you didn't know that, you didn't understand it, that kind of conviction is not, it's not created in a week, a month, a quarter, even a year. That conviction doesn't just come about and it cannot be borrowed from me or anyone else.

And so that's important to think about. Yeah, and that's also important to, you know, have a buffer so you're not forced, whether you have conviction or not right like it's it's one thing we talked about conviction which is really important but you know you might have the most conviction but if you're stuck in a bind and you need money and that's your only kind of out is to sell a company that you have a lot of conviction and it's not a great spot either so I think it's just, you know, making sure that people do look at their portfolio as a whole and, you know, they don't find themselves

in a situation where they have to sell a business on the cheap that they really love. So I'll stop sharing this. And now the last thing I wanted to talk about, and this one's pretty, I want to hear what you're talking about uh sorry what you think about in terms of what costco is doing with their membership crackdown and they announced last week that essentially they were pulling a netflix i'm kidding a little bit but um it's kind of you know what they're doing so what they will be doing is they'll be requiring members to show their membership cards,

even at self checkout. So apparently that was a well-known hack that people would take a friend's card, go in, I guess, show it quickly as they go into the Costco warehouse. And I've never done such a thing. I've never done such a thing.

I would never do that. That's, that's, that's dishonest. I've only done it a couple of times. Yeah. And, well i've i've had a costco membership since i think i've moved out from my parents so um you know i go enough i think you know it may make sense if you just go once or twice a year to ask a friend for their card but we go on a monthly basis so for us you know we get the executive one where we essentially get the membership paid for just with the cash back that you get.

So for us, we go enough that it's worthwhile. But for people wondering why they're doing that, it's just because the business model of Costco is pretty simple. They essentially get most of their profits from those membership fees. That's because their margins are razor thin and they don't have much room here. So I think what we're seeing, and if you look at their financial statements, you'll actually notice that like every other retailer, their profit margins have definitely shrunk over the last couple of years. They were consistently around this, I'm talking here, gross profit around 13%, but have dipped around 12% last year.

So definitely- Is that net profit? I know those are gross margins. Yeah, I was going to say, because I think that's usually where their gross margins are. Yeah, okay. Yeah, yeah, exactly. I forgot to add it, but I'm like 99% sure it's gross margin. And the operating margins are also down, but they've held up a bit better. And really, you know, membership fees, when you think about it, there's a little bit of overhead costs, you know, for printing the card. And I'm sure like, you know, membership services and stuff like that. But for the most part, I mean, it's almost straight to the bottom line. So it makes sense that they would want to crack down on that, especially if they're a bit reluctant

still to increase those membership fees. So that's a way for them to not necessarily increase the fees or maybe increase them, but less by making sure that anyone that goes to Costco actually has a paid membership. It's kind of confusing too, right? Because to the best of my knowledge, they don't break out. That's just an aggregate. The margins are like 2% net profit. But that's because you have this huge base of revenue of selling goods. And then this like really, really small revenue in comparison of membership fees, but the margins on that are like, you know, operating margins on that are like, you know, basically 100%. Like there's no real like, it's 100% operating leverage. So I would love to see the breakdown further if they broke it out.

Yeah, no, I'd love to see that too. And you almost have to think of Costco as a subscription business. And what they offer in terms of subscription is some really good prices. Like it's essentially how you have to see Costco where, you know, the money they make on selling those goods, it's just an afterthought. And really the bread and butter is that good old membership. That's right. Like for context, people here, it's like we're talking about gross margins of retailers. Like 12.5%, 13% is what you typically see from Costco on like a gross margin perspective.

see from Costco on like a gross margin perspective. So, you know, cost of goods sold compared to what they sell those English muffins for that you get 45 of them and I just need six. Classic Costco. 13% you can compare to around 25% from Walmart, for instance, on gross margins. So it gives you an idea of it roughly being half. And so that's basically where they are adding value to their customers is they take a much, much lower markup on the actual, you know, what they're charging versus cost of goods sold for the items in the store. That's the value proposition, just to give people some idea on them versus Walmart. Retail is a hard business. I haven't looked at those recently, but I know net profit margins are very low for retail in general. It's a reason why you have these massive companies is because they do, yes, they do well, they make quite a bit of money but they do so because they have scale

um that's it it's a it's a game of scale and that's essentially that's what becomes their moat yeah yeah and i forget what his name is on twitter i'd love to give him a shout out but he wrote this awesome thread about why it's basically called like why margins are overrated. And part of me, part of me agrees, part of me thinks, okay, there's more to this story. But basically, the general concept here is what you're talking about, where it's super high volume, super low margin, right? And Buffett always talks about this, right? You have to have a business that sells a few items for really high margin or a ton of items for really low margin. And the idea that both businesses can both achieve really high returns on invested capital shows that they both can work exceptionally well just depending on the business model like there's no real there's no real correlation between those margins and a return on invested capital uh is basically the the thought of this thread and i thought it was pretty interesting

um because you're right i think i'm biased towards high margins but maybe that's just the software guy in me. Probably. Yeah, probably. I mean, they're just different types of businesses. And, you know, I'll ask anyone, try to open a retailer that competes with Walmart. Let me know how that works out for you. Yeah, exactly.

First, you're going to need like probably tens of billions of dollars, if not hundreds of billions to be able to build that like infrastructure and then obviously you have to assume that walmart will almost lay down and not do anything about you which clearly they won't do um so when you think about all these things all at once uh yeah good luck for any business wanting to do that right like it's like have we got it all wrong it's actually the low margin high capex intensive businesses that have super durable competitive advantages and incredible incremental return on invested capital it's uh it's kind of frame breaking from you know the

beautiful business of software as a service, but probably more durable, right? Like, I guess it's all about what you know and what you can understand. That should be the theme of today's show. What you know and what you can understand is what you should own. Because if you don't, you get one of those years I'm talking about. You get, you get 0274 talking about. You get 0-2-74-19-30-37-08. The world collapses in terms of the market performance. And Simone, I'm like, I don't know what I own.

It's like me if I own a bank, one of the Canadian banks, and shit went south. I don't know them well enough. And I think people lie to themselves that they do. That's what I think, but I could be wrong. I think I know them decently. And even I feel like I don't know them well enough to own them. That's just the way I view banks. And I see enough kind of red flags right now where it's not making me want to own them, but I could be completely wrong. And that's just, you know, it just shows that, you know, I have my limits. I know you have yours too. And there's

just things I understand better than others. I understand the macro decently well, I think as well. But banks, I mean, they, it's just the issue with banks is they're not all the same. That's a problem too. There's all different kinds kind of things and then if you want to understand the plumbing which is uh something else to even start understanding i'm gonna share my screen with you so this guy i know from toronto he shared this so the nassim taleb black swan thanksgiving turkey image is basically the life of a turkey. 1,001 days in the life of a Thanksgiving turkey. You have the turkey's well-being and growth on the y-axis and days on the x-axis. It's a beautiful up and to the right until Thanksgiving day, day 1,001. Surprise! day, day 1001, surprise, you're going to be someone's Thanksgiving dinner tonight.

And this is the way I think about banks, is it's great until it's not. This image, I think of owning banks, and that has not been the case for Canadian banks. No, they've performed really well. Yeah. But it's been the case for what? Hundreds and thousands of regional banks in the U S. I don't, I'm not sure thousands,

but definitely, you know, a lot of, yeah, a lot of, I'm talking about like, since the beginning of civilization. Okay.

Okay. Yeah. Like in terms of like. Oh, okay, okay. Yeah. In terms of banks have taken many different forms. That would make sense, yeah. In civilization. It's like fiat currency and banks have the life of a Thanksgiving turkey. I just thought it was a funny correlation. All right, Simeon so let's wrap it up that

was the episode thanks for listening to the show we really appreciate you uh last last capital call here for the meetup if you want to come tomorrow night link in the show notes and um join tci.com which is the patreon page just a quick reminder send a one minute video. If you think you're the guy or gal to take my seat on today's episode, this style of episode, I think we're going to find some A players that add a lot of value to the show. Send a little video to canadianinvestorpod at gmail.com. That is canadianinvestorpod at gmail.com. We'll see 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

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