The Canadian Investor - Are Family Owned Businesses Better Investments?

Episode Date: November 14, 2022

People often wonder how they can mitigate risk with riskier investments. We discuss a tool available to all investors that can help with this. We then talk about Big Tech Stocks and if we are bullish or bearish going forward. We explain what NAV is and why it matters when investing in funds. Tickers of stocks discussed: GBTC, WMT, TTM, JWM  Shakepay Bitcoin Survey Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Today is November 9th, 2022. Welcome into the show. My name is Brayden Dennis. And as always, joined by my co-host, the wonderful Simon Belanger. Welcome into the show, Simon. We are, I don't know why we've been so news focused. I think that's why, but it's been a while since we just went back to basics and talked high level, long term investing type stuff, which is so refreshing. As always, I'm pumped for this.

Yeah, same for me. I mean, it's always fun to talk about news happening, crazy news happening, actually, but we'll have more. Insane news. Yeah, we'll have more than enough to talk about for the next Thursday release next week or this week, I guess. Yeah. Yeah. I mean, running a financial podcast that 50% of the time we talk about the news, it's nice when the news is spicy hot fire coming off. So we'll talk about that on the Thursday release. All right. I'm going to kick us off here. We got lots of topics. I'm going to do a quick excerpt here. You're going to talk about net asset value, that NAV number we see all the time. I have two listener questions here. We haven't done listener questions in a while. And I think that these are two particularly good listener questions. So we'll get to that.

And then you're going to talk about asset allocation. First out of the gate here, I have an old excerpt from this book here that the bookmark just came flying out of the book. Nice. It's an old excerpt from Chris Middleman's shareholder letter, and it's taken out of the foreword from a hundred beggars by Chris Meyer, who's a great guy as well, by the way. Here's what it is. It's imagine if a friend had introduced you to Warren Buffett in 1972 and told you, I've made a fortune investing with this Buffett guy over the past 10 years. You must invest with him. So you check out Warren Buffett and you find his investment vehicle, Berkshire Hathaway, had indeed been an outstanding performer, rising from about $8 in 1962 to $80 at the end of 1972. Well, that's quite

the return. Impressed, you bought the stock at $80 on December 31st, 1972. Three years later, on December 31st, 1975, Berkshire Hathaway stock now traded at $38. So three years later, you had a 50-30% drop over a period in which the S&P 500 only lost 14%. You might have dumped it in disgust at that point and never spoken to your friend again. Yet over the next year, it rose from 38 to 94. By December 31st, 1982, it was 775 on its way to the whopping $223,000 a share, a compounded annual growth rate of 20.8% over the past 42 years. Dude, more than 20% compounded annual growth

on the share price of Berkshire Class A stock over 42 years. What does Berkshire Class A trade for today? Because this is an old excerpt. Yeah. It's just six digits still. Yeah. $436,000. So it's two X almost exactly since this excerpt, right? But it's an interesting thing. And Chris Mayer just basically says in the book, I have to print this out and frame it. And I agree. And I wanted to start today's show with this because there's a lot of dunking in the financial news world and in the investing world where you could have been amazing for 20 years. You have two years of underperformance and the market's like, oh, you lost it., you don't have your edge anymore. You don't know what you're doing.

The last 20 years was luck. When in reality, that two-year period is just a blip in the radar for long-term investors like Mr. Warren Buffett here. And so it's just a reminder to zoom out, one. And two, don't judge skill based on pretty much anything less than three to five, up to 10 years. At that point, you probably have a good sample size to know if you actually know what you're doing. But don't get frustrated and think you don't know what you're doing, or professional investors or your friend don't know what they're doing based on a year or two

of performance. It's just not enough substance to make any real conclusion of skill. And I think that this is an awesome little excerpt and with real data from Warren Buffett's Berkshire Hathaway. Yeah. And if you only have a year or two in front of you, then you probably should not be in the stock market. Right. Exactly. Because even this company, which was executing the whole time, Berkshire Hathaway, in three years period, it saw 52% drawdown. Were the fundamentals impaired? No. And so there is a huge disconnect in the short term between business fundamentals and share price. And so you can't expect the market to be rational in a short term. And so react accordingly. If you need money in the next 12 months, it shouldn't be fully invested in the stock market, right? Like, that's just the reality.

Yeah. And if you do that, just be prepared to not have the desired outcome. I mean, I would not recommend it, but I've heard a lot of people doing that in the past couple of years because they wanted to put a down payment on a house and investing was the only way to do it because getting something that yielding 1%, 2%, 3%, even 5% now with interest rates being up, down payments require the down payment you'll need to buy a house in certain cities will be tens of thousands of dollars. So that's the only way for them in their mind to achieve that. So as long as you're aware of it, that you may have a drawdown on that capital, but for sure,

like if you need capital preservation, stock market short term is not a place to be. Yeah, well put, right? Like the stock market is a wonderful wealth generation machine. But people got all out of sorts with expectations that the market just doubles every year. That's not the reality. It's never been the reality in the short term. Sure. There are definitely bull runs that make it seem like printing money via trading stocks is a reality. And then you realize it's not really quick. The market, you know, like bitch slaps you. You're like, that's not reality. And you learn pretty quick. And so I think that this is an interesting excerpt. And I might take a page out of Chris Meyer's book here, No Pun Intended,

and print this on the wall as well, because it speaks a lot to not only how ridiculously good Warren Buffett has been, but also that even that stock has had huge drawdowns. And look at where it trades today. And that he's still alive. Props to him. Yeah, whatever. I was going to say, I need to do what he's doing, but I know what he's doing. And it's eating poorly and drinking Coca-Cola.

So I don't know if I'm going to be on the Warren Buffett diet, but good for him. Him and Munger, still crushing it. Is Mr. Munger turning 100 this year? I don't know. Because I said that he was last year, but he was actually turning 99, which was my mistake. No, he's 98. He's turning 99 next year. He's going to make it to 100.

I'm very confident. He might fall asleep during the annual shareholder meeting again, but we'll give him a break at the young age of 99. 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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor.

And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and

more information. And now we'll go and talk about net asset value, like you alluded to that. So it's something we haven't really talked about. We've had some questions over the time. So I'll just explain what it is and how you can see it varies sometimes as well compared to what you'll be paying. So first, you'll hear about it quite a bit. So it's just NAV. That's usually what we'll hear when you're talking about funds in general. So NAV is just a way to show what the value of a fund is per share. So you take all the assets that the fund has and subtract its liabilities.

So if you want to have it per share, obviously, you just divide it by the amount of shares that are available for that fund specifically. So for an ETF that holds equities, its NAV will be all the value of its equities and any cash that the fund holds minus any liabilities that the fund will have because obviously funds do have some expenses and oftentimes if you have an ETF if it's an index ETF it'll be a bit different but if you have an ETF that's not indexed they may have a couple percentage in cash that's not unusual so to have it per, then you divide it by the amount of shares outstanding. For an ETF traded in the US, the NAV will be calculated once the market closes. And I'm

pretty sure it's like that in Canada too. For the most part, the ETF will trade pretty closely to its NAV since that is the goal, since it's an open-ended fund. However, there are some funky things that can happen for funds that are listed, say, on another exchange or tracking businesses listed on another exchange, especially if you have these ETFs that track, let's say, an ETF listed in the US, but it's an ex-US ETF, meaning that it tracks stocks worldwide, but not the ones in the US. So that's because the foreign stock market may not be trading while the US ETF is and vice versa. So you can have some discrepancies versus the NAV and the actual market value.

There might be some discrepancies there. Anything you want to add before I continue? Nope, this is good. It's a term that, especially if you're investing in ETFs, is one that you have to have at least a base level of what it is. Because what are the terms you should probably know of? ETF investing is so easy. That's the point of it, right? The whole point of it is that it's very passive. Net asset value, MER, which is the fee, and what the holdings are, the three things that I'm absolutely going to be looking at every time. Yeah, no, exactly. And the once a day calculation is really important to

remember because since the price of an ETF is based on offer and demand, it's normal that the fund may trade slightly below or above its NAV because it's calculated at the end of the trading day. So because of that, it's normal because at any point in time during the trading day, the NAV is going to be slightly outdated. Now, some funds can trade at significant premiums or discount to the NAV. Typically, those will be close ended funds. And I can do another segment on close ended versus open-ended funds ETFs are generally open and ended funds but I'll take a closed-ended fund here just to show how the NAV and the actual price

can be really different and the one that I think is really fascinating and you'll see I have a graph that I took here is the grayscale Bitcoin trust. So ticker GBTC and GBTC is a close ended fund. It was basically the only option before the ETF. So a lot of the Canadians ETF tracking Bitcoin started trading. So whether you're into Bitcoin or not, it's really irrelevant here. Just I thought this one was just a really good example to show the discrepancy between the price of the fund and its actual NAV. Now, prior to 2021, the fund was trading at a premium to its NAV because like I said, it was one of the only options, if not the only for a while, sometimes as high as 50%, 5-0, above the net asset value. That was because there's no other option for a lot of people who didn't want to hold Bitcoin, the actual Bitcoin. That was the only option they could have. Now, in early 2021, when a bunch of ETFs in Canada and other countries

launched tracking BTC, it really put a damper on that NAV premium. And since then, it's been trending downwards. And right now it's around 36% as a discount to its NAV. So if you pull a chart, it's really crazy. You pull a five-year chart of GBTC premium or discount to its net asset value. It's insane. It actually starts and it starts slowing down and there's a kind of middle axis and then it crosses the zero point and then goes into the negative. So that's a really good example. There are other funds, usually the close-handed funds are the ones that will have either a premium or discount associated with them. a premium or discount associated with them. Now, explain like I'm five here. Why? Because I'm looking at this chart here and there's a huge discrepancy and it eventually crosses the zero

point on the axis that you talked about where it goes from a huge premium to the NAV to a huge discount to the NAV. What are the forces at play here for the left side of the chart versus the right side of the chart here? Why would it trade at a huge premium and why would it trade at a huge discount? Just like very high level for the people. Offer and demand. It's that simple. Exactly. Right. It's offer and demand. So what happens in the case of GBTC is like I said, there was no other option. A lot of institutional investors specifically were looking at ways to get Bitcoin exposure. And then prior to 2021, GBTC was one of the only options. As a retail investor, you could also buy some individual shares. And then what also was happening here is

the investor, the institutional investor could buy it at the NAV. So actually, they could buy it at the net asset value. And they could, I think there was a locking period for six months or something. And then when it would be over, they could sell it as a profit, assuming that it was still trading at a premium. Individual investors, they could only buy it at the market price. But at the end of the day, it's really an offer in demand. The case of GBTC is just because once ETFs came into play, they were lower fees on the one hand, and they were much easier for investors and friendly to certain type of accounts, specifically registered account compared to, I don't believe GBTC is

eligible for those account, if I remember correctly, because I had done some research on that. Okay. So you're seeing here the dynamics of the demand for the ETF change quite drastically. This is an example where it trades at a quite severe discount to the NAV, as you can see there. Yeah. And even if people say well you know it's all about the bull and bear market actually it's not true so if you look at the price of bitcoin where it was trading at a significant nav even when there was the market crash in 2020 cryptocurrency and bitcoin actually crashed and in 2018 and you had the big crash of late 2017, early 2018, it was trading

at like a 50 plus premium. So it doesn't really have anything to do with the bear market that we're in right now. It's really an offer in demand. And there was just not many other options for this type of product. Gotcha. Yeah. There's like legit competitive forces at play for the product of the ETF product being out there as one of the options for investors. Let's move on to a listener question from our buddy Joe. Here it goes. Hey guys, love the show. Either you are great or I'm getting old because the podcast has replaced Pantera for deadlift day. I'd like to say we're great, but Joe, you're just getting old, my man. That's just how it goes. I was wondering what your take is on family owned slash controlled public companies. It's a great question. I like this.

He says here, a few examples that popped to mind are Estee Lauder, Power Corporation, or the Westins with George Weston. I can reason both for and against owning these types of companies. Thanks, Joe. All right. Well, Joe, thanks for the question. And I love this question because it touches on a couple of important things and family owned slash controlled businesses. Many of them are very interesting and the structures of them are very interesting. And they, as you alluded to, have pros and cons, like you just said in the last part of your question, you can see the reason for, for, and against it. And so I'm interested to hear your take on this, but I'll lead this, which is there are wonderful examples of lifelong family owner

operated public companies. And so when we're talking about family businesses here, we're not talking about mom and pop shops for this question. We're talking about global multinational billion dollar public companies. So I looked this up and I found a cool thing from Harvard Business, which is the Harvard Business Review came up with this study and said 30% of all companies with sales in excess of 1 billion, examples like Walmart, Samsung, Porsche, come from family-owned public companies, which I thought was really interesting. That seems like pulling more than its weight in terms of how many public companies are family-owned. Here we go. Here's a quote. It says, when we looked across business cycles from 1997 to 2009, we found that the average long-term financial performance was higher for family

businesses than non-family businesses in almost every country we examined. The simple conclusion we reached is that family businesses focus on resilience more than performance. They forego excess returns available during good times in order to increase their odds of survival during bad times. Really interesting. What's your take on that? Because I think that that's ultimately what makes these such good long-term compounders because there's alternative incentives and motivations at play here to make sure the family business lives on generationally. It's almost like human instinctual for these forces to be at play. Do you have a take on that? Yeah. I mean, I don't know. I'd have to really dig into data to really know,

but what you read was interesting. I know one that comes to mind is Nordstrom. Okay. Yeah. Yeah. I think the family owns- Like the Canadian retailer. No, the American. Nordstrom's American. The retailer. Okay. Yeah. Yeah. I think the Canadian retailer. No, the American. Nordstrom's American. The retailer. Sorry. Yeah. Yeah. I just see them in Canadian malls. I'm like, they actually, yeah, they were in the US a while back. I remember when they said, yeah, you're thinking of the bay. But yeah, Nordstrom, they haven't fared all that well,

but I guess that's more of a byproduct of the retail space yeah i guess i i mean i guess i can see their point i can also see situations where the children take over and do a pretty poor job right the parents were actually managing that quite well or yeah so i i don't know it's kind of hard to say you just have to make sure that you're grooming your heirs well for the business. Yeah, exactly. Yeah. I think it's more that. Yeah.

And that's what I mean by long-term focused. And so the studies are quite staggering in favor of family-owned companies. But I'm going to counteract that with a couple of bad things as well. But Harvard Business Review came out with five main learnings, which is funny because my list has literally seven things here. So let's remove that typo. There's seven main learnings here. Five-ish learnings, some of them more important than others. Number one, they are more frugal in spending. This is kind of like related, but number two is they typically have a higher bar for CapEx spending. So higher hurdle rates for a turn on invested capital. So just better at spending

money, a little bit less reckless. I mean, I guess that makes sense. You're spending your own money. You're going to be a little more careful with it. Carry less debt overall. Again, this goes back to don't blow up. Make sure this asset's around for a long time. They typically do less acquisitions. They're typically more diversified. They're typically more international, which I find interesting and slightly counterintuitive. And number seven, they're better at retaining talent. So this is what Harvard Business Review came back with after looking at every single family-run company that exceeds $1 billion in sales. So very interesting. All right. So now this is going into my opinion and no longer Harvard's opinion, but my opinion is

you do have a good mix of things that I typically like to see. One, owner operators, meaning they have lots of skin in the game. They have lots of stock ownership. And that means that they're highly incentivized to think long-term. Number two, a lot of them are founder-led still. If the main founder or CEO of the business, when they started, a lot of them are times are still running the company unless it's been passed on to the next generation yet. And so this can sometimes be a bad thing because as you alluded to that handoff into the next generation, is that going to be a bumpy handoff? We've seen a cough, cough Rogers that be not so pleasant, right? There's legacy incentive, right? Your name might be on the door. Your name might be on the headquarters door. And so there's a legacy

incentive there. And lastly here, they have long-term orientation because it feels like human instinctual to make your family name try to endure for a long time. Now, the bad things. to make your family name try to endure for a long time. Now, the bad things. I hinted at before, poor generational handoffs seem risky to me, extremely risky to me. Number two is if family members ain't getting along, that ain't good. Look, most family situations I've ever come across that are extremely messy are usually because of money. And this is one of the risks,

right? It's like, don't mix business and family and friends. And then you get these gigantic billion dollar public companies that are doing them. So as you alluded to, Joe, this is really on a company by company basis. Overall, my take on them is positive. And the data to back that up is positive. But there are hesitations to this as well. And it's really on a company by company basis. Some of them have been able to do this for a long time. And some of them passed it off to the third, fourth, fifth generation and still crushing it. Those ones, I'm a little bit more convinced that the company culture is intact, no matter who's running it at the helm. Yeah. And bad things, I'm just going to go exhibit A, Rogers. Rogers. Yeah. Oh, and you remember when they were going at it, like him and

his sister and like, oh my God. Oh man, that was what a disaster. I know. Seems so disastrous. And this predates my time at Magna International. But when Frank Stronach stepped down, he had his daughter, Belinda Stronach, run the company. And she was running the company and the CEO for like a year or something. Don't quote me on that exact number, but it wasn't long. It was very short. And then I don't think that was working. So, they had to quickly pivot and her husband became the CEO who did a damn good job. Don Walker did a damn good job for a long time and recently retired. But it's so company by company specific. I remember when I think she went for the leadership back in the day of the conservative party when i was really young yeah she's doing some great

things she did more of a philanthropic role and i mean it makes sense right you have your family's worth billions of dollars and you got to figure out how you can make a difference in in the community so good for her i don't know her, but good for her. Yeah, exactly. Yeah, no, that's good. 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. So not so long ago, self-directed investors caught wind of the power of low-cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians, and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust

suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world, while folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please

check out the link in the description of today's episode for full disclaimers and more information. Let's do another listener question from Thiessen. Hey guys, I'm from Winnipeg and I've been a listener of your show for over a year now. Hey, thanks Thiessen. We appreciate that. You recently talked somewhat bullishly about Google and Microsoft. And I'm going to paraphrase the next part of the question, but it's basically saying, you guys were talking bullishly about Google and Microsoft and then brought a bunch of links to my attention about counter opinions about how these big tech companies are left for dead, growth is

dead, growth is stalling. These companies had horrible earnings reports, kind of like very bearish. And so, Thiessen was just like, what do you think about this? There's multiple conflicting opinions here. And I think that that's healthy. There always should be, and that's the market, right? And I went ahead and looked at those sources that you sent me, and I have two main responses. And the reason that I'm using this question is because it brings up an interesting discussion, which was almost every negative connotation towards these big tech companies was largely short term. Now, they were talking about growth issues with Google and the ads business in a recession, talking about difficulties with that. 90% of the concerns were on a short to medium term.

Look, it should be shocking to no one that ads is a cyclical business, right? If you're just learning that, like ding, ding, ding. I mean, we did talk about that too, right? Yeah, yeah, yeah. Google was kind of bucking the trend until the recent quarter and still performing quite well. bucking the trend until the recent quarter and still performing quite well. But we've seen the whole industry with a few exceptions here and there. Pinterest did pretty well overall, but they were also nowhere near the monetization of companies like Google's or Meta or companies like that. But as a whole, I mean, we've seen a reduction in ad spent and we talked about it, I think, on the last episode too, where companies are seeing higher expenses, revenues kind of going down.

So one of the things they will probably be reducing is marketing. And when you're reducing your marketing budget, ads will take a hit. So it's going to affect a company like Google at the very least, I think short and medium term, depending how long this recession is going to last. I think we can pretty much say that it's going to happen at this point. It's kind of consensus, not to be too bearish. Yeah. And I think that this lays out two important things here around setting expectations. And before I say that, it just brought to mind that this morning, Meta Facebook announced that they are laying off 11,000 employees.

Did they lay off their CEO too? No, he's still there. Kuckerberg? No, no, he's still spending money ridiculously on reality labs. You got me there for a second. I had to triple check until I looked at your face and I'm like, oh, that's the sarcasm Simone face. Oh, yeah. But we've been hinting at this, right? Tech layoffs are here. They're definitely coming.

And so a major one of 11,000 workers being laid off from Facebook this morning. And hey, look, if that's affected to you, my condolences. What I'll say is that chances are you're a very skilled tech worker and people are still clawing at the bit to get your talent. So stay positive. All right. So where I'm going with this and why I picked this question is not to be around Microsoft and Google because whatever, sure. There are two main things that are really important here. One, this is your advantage. When the market is very bearish on problems that are relatively like 12 to 18 months issues, that's what the market looks at. I always say like 18 months, that's what the market looks out. There's no science to that. It's just, that's what I think. And generally, if you have a longer horizon than that,

that's your advantage. That's one advantage that a lot of us can have is that we're willing to look out more than 12 to 18 months. So that's number two. And number two around setting expectations, I guess this is relevant to Microsoft and Google is, look, these are trillion dollar companies. We shouldn't be expecting them to grow like they did over the last 10 years, in the forward 10 years. They're not the growth stocks of this decade. They were the growth stocks of the last 20 years. They're mature, highly profitable and gush cash and probably the best businesses ever invented. And that's why they're still so valuable is that they gush cash and probably the best businesses ever invented. And that's why they're still so valuable is that they gush cash and they're utilities for the world today,

these technology products. But that said, they're still growing. The cloud business is still growing 30% to 45% year over year consistently, depending on if you're looking at GCP, Azure, or AWS. And who's to say that's not going to persist for quite some time in the future. So to say that growth is dead, I just don't agree with that. And so it's a roundabout way of saying set expectations. These are not going to be the growth stocks of the next 20 years like they were for the last 20 years. They're mature, highly profitable businesses that are very important and probably going to have a lot of staying power. And so that's their position in a portfolio, not trying to make

another a hundred bagger on a trillion dollar business. So set expectations and recognize that the market and the sources you sent me are looking 12 to 18 months largely. And so when you hear an opinion one way or another, think about the timeframe. And same with us. When we say things that we think are great or bad, is that a short term opinion? Is that a long term opinion? And recognize what game you're playing because not everyone's playing the same game. And that's what makes the space so noisy and hard to navigate. Yeah. And keep in mind too, for those companies and big tech in general, right? They're producing so much cashflow. So even if growth does,

yeah, even if growth does reduce by quite a bit and say they only grow by long-term, they only grow 5% a year at the top line, but they're still generating as much, if not more cashflow. Well, I'm going to tell you now, surprise, surprise, they're going to be buying back shares or paying a dividend. That's exactly what I said to you. I was like, oh, Simone, oh no. Shareholders, they'll only buy back $100 billion worth of stock in the next 12 months. What a tragedy that is for shareholders. This is the reality of a maturation curve of a company, right? And that's where they are today.

Yeah, exactly. Now, I guess a little bit on a similar-ish topic, allocation. We have talked about allocating your positions in your portfolio and the relationship between diversification, because clearly, yeah, it doesn't mean that you have 50 stocks that you're diversified if, you know, your allocation is all out of whack. So I wanted to talk about that because there's really tons of different strategies you can take with investing. And one of the most common ones when it comes to equities are index investing, growth investing, or dividend investing, I think, or dividend investing. I think,

or dividend, I would say value investing. They're kind of the main buckets, I think, that people will typically fall in. And I know some people like to stick to one strategy. I love dividends too. And I know some people are very hardcore on just basically having only dividends, which is fine, but you can still have a kind of primary strategy while mixing in another strategy. And that's where allocation comes in. So let's take someone who wants to focus again on dividend paying stocks, which is fine, but you might be missing out on companies that could be multibaggers in the decade to come. If you're just focusing on dividend stocks, you're kind of going steady as she goes,

getting a dividend, which is totally fine, but you're not going to get probably that multibagger, that 10, 15, 20X company in 10, 15 years. It's probably not going to be that dividend stock that you own. But that's where you can- It's just about setting realistic expectations for what each horse in your portfolio can reasonably do. I think that this is so under discussed, even from us. I think we should probably talk about it even more. Yeah, exactly.

And that's really where allocation comes in because you can still keep that overarching strategy that's primarily focused on dividend stocks like I was just talking about, but still having a small allocation to growth stock. For example, you could dedicate 90% of your portfolio to blue chip dividend paying stocks and 10% to growth stock. There's a bunch of different ways you can structure this example. Just, you know, you could even do 80, 20 5 doesn't really matter you can have them equally weighted or have some names that are higher allocation than others just based on your conviction

and knowledge of the company now for example here you could if you have that 90 of dividend stock you can choose five growth stocks at two percent allocation each so you have 10 in growth stocks at 2% allocation each. So you have 10% in growth stocks and 90% in blue chips dividend stocks. And obviously here, not all growth stocks are created equals. Some will be profitable. Some are not. Some are growing faster than others, the top lines and so on. But even as a whole, let's say you pick the riskiest five growth stocks. Let's just assume you did that, you pick the riskiest five growth stocks. Let's just assume you did that, right? Even if they go down by half, it's still not a major hit to your portfolio, assuming that your dividend stocks are remaining pretty stable. And that's usually why you'd want to pick dividend stocks because they will be less susceptible to drawdowns. Can I jump in here for a second? It's not that they have to

be dividend stocks. And I know you don't mean this. You just mean like- Well, this is an example. The blue chippers. You just mean like, yeah, the blue chippers, they don't have to be dividenders. But yeah, okay. I just wanted to jump in because I know that's what you mean. Yeah.

But yeah, anyways, go ahead. Yeah, I was talking blue chip dividend stocks. I'm focusing more on dividends in this example. But coming back here, your maximum downside if you have 10% to strictly growth stocks here is that they all go to zero. That's your maximum downside. So you wipe out that 10%. But again, assuming the rest of your portfolio remains relatively stable, obviously this year, you can see where these blue chip dividend stocks would have performed better, but still have negative returns, but better than the rest of the market. But even in that scenario,

as long as that portion of your portfolio is performing well, then you can take a bit more risk by doing good allocation strategy that you can live with. So you have to think about the worst case scenario. And of course, it doesn't have to be 1090. You could do 8020, 7030. Again, it also varies what kind of dividend stocks versus growth stocks are you picking. It's just with allocation, you can really mitigate the risk. And I think that's really important because other extreme example here that I'll talk about is say you have 19 stocks. 10 are dividend, blue chip stocks, and 9 are growth stocks. It may sound pretty even, but not necessarily because I haven't told you what the allocation is. If I tell you that the allocation for your growth stocks are 10% each, and then 90% of your portfolio is in those growth stocks, and then the 10 dividend stock represent 1% each for a 10%,

then it's a completely different story. That's the other extreme example of showing you that allocation is so important. Because if I just give you 10 blue chip dividend paying stocks and nine growth stocks, I think people just assume that you're kind of 50-50 in both. And that's not necessarily the case if your allocation is all out of whack. I think that this is so under discussed. this is so under-discussed. You and I, we hit on it a lot in these deeper dives into how our mental frameworks for investing like these episodes. And it's so under-discussed because there's no context really when we talk about portfolio management or a growth stock that we like that has performed quite poorly. And the context is that it's like one and a half percent position. And that's because the weighting is obviously so important, but the weighting should be tied to your conviction.

Right? Like that's how I do it. I weight conviction and weighting in your portfolio because if you have a wide range of outcomes for a business or the performance can be truly asymmetrical where you're not going to need a huge position to make if your thesis plays out for it to come back with a mega huge return, then you don't need to size it at such a position that doesn't make much sense. And this is just so important. And this is why you and I talk about sizing your conviction accordingly to your ability to predict its outcome in the future. And if the outcomes are wide ranging, then you can't size it at 100% or 50% or 80% of your portfolio. It's just a quick way to go broke.

or 50% or 80% of your portfolio. It's just a quick way to go broke. Yeah, yeah, exactly. You have to, like, I always like to think in probability. So, I like to think what are the probable outcomes? What's the most likely outcome? Is it positive, negative, vice versa? Try to assign a percentage range. That's how my brain works. But yeah, you don't have to look very far. If you go on Reddit, especially Wall Street bets, that's how people get wrecked, right? I always find it funny is that they'll be like, it's crazy some of these posts is they'll be down like they invested 150k. Now they're down like 100,000 from that investment. And they'll show and they'll have 10 positions. One of them's like Microsoft. And the other nine are all these like crazy bets

that they're taking and then surprise surprise they had allocated way too much to these crazy option bets or really risky companies and then they're down 75 60 whatever it is but massive amounts so that's always i think just a reminder to me, just when I see that, I just obviously I can't believe it. And the reason I wanted to talk about allocation is, I don't know if this is the general idea, but I have a feeling when people think of someone else's portfolio, what they invest in, they automatically will hear like, oh, okay, this person has 20 oldings, 50 old old things i think they automatically think that they're all equal weighted i think that brain kind of goes by default and

that's just not the case right when people because if you have no context you have nothing to base it on so the brain's just gonna naturally equal weight those yeah yeah but i think that's uh an assumption that a lot of people do i mean i could be wrong but yeah i think that's an assumption that a lot of people do. I mean, I could be wrong, but yeah, I think that's just a good thing to remind yourself that if someone has 20, 30, 40 stocks, if you don't have the allocation, I mean, okay, it's fine to have this amount of holdings, but allocation plays a big part. And if you don't believe me, just go take a look at the S&P 500. You'll see that certain companies have a much bigger allocation than others. Yeah, like Apple and Microsoft.

Yeah, Apple and Microsoft. Like just so much weight into those names because market cap weighted. The index is market cap weighted, which I think seems like forgotten by a lot of folks who haven't looked at the index in a while. No, exactly. The constituents in a while. No, this is perfect. And I think a great way to round out today's show, which is that context, it matters a lot, especially with weighting the probability of you being wrong. Because the probability of you being wrong on a name, that's in the range of outcomes. You and I have been wrong on many stuff. We've

been right about lots of stuff, but we weight our conviction in potentially being right more. Let's look at something that's a really small position for me, the trade desk. The trade desk is a 1% position for me. It's done quite well. Maybe it's a 2%, I got to check. It's a name that is specifically serving a gigantic growing market of ads, the ad business. It's an ad technology business. And it could become even much bigger than it is today. But if there is gigantic changes to privacy, and've seen what Apple can do, like just destroy ad tech businesses overnight based on the permissions that they're able to give, that's something that's completely out of my control and really hard to assign probabilities

to if that's going to happen. So sizing it anything more than that makes little sense for me. And since it could be such a gigantic business in the future, still led by Jeff Green, the founder, who's just a wizard, I don't need to size it at 10% if I'm right on the upside. And that's why people put Berkshire Hathaway and these boring conglomerates at such a heavy weighting compared to some of these more asymmetric bets for this exact reason. Because you have to hedge the fact that you're going to be wrong a lot as an investor. You're going to be wrong sometimes. And knowing that and having the humility matters. And this is a perfect

segue to that context matters and we disclose our portfolio to the exact position size in a percentage you and I do on join tci.com. Join tci.com if you have not joined yet is where Simone and I show our portfolio updates every single month. And you see in a spreadsheet, in a table, this is worth this much, and then we have this. And that's useful context. Because if I say I own 10 stocks, that doesn't tell you enough. It really doesn't tell you enough, especially about the style of how the portfolio is being run. And so, this is good stuff. Yeah. Because you don't know, right? If you don't know the allocation, you can own 10 stocks and one of them is 90% and the rest is the 10%

remaining. It doesn't tell you any info. Obviously, we think that's pretty rare that someone would do it that way. But clearly, some people on Reddit do it. So it does happen. The one thing that I'll say is I have conflicting opinions on this, which is I have let positions become gigantic and own so much of the portfolio because I let winners run almost no matter what. I have a very strong bias towards letting them run and not trimming winners. That's just how I think about the world. But whether that's right or wrong- I've trimmed.

You've trimmed, but you've trimmed very smartly. I haven't had anything go up 10x in a couple months like you had with Teladoc and you're like I'm this is ridiculous I'm out at least in terms of a trim yeah so maybe if I was in that position I would have but I have a very strong bias towards letting winners run yeah I think for the most part I do it's pretty rare that I will trim but I think I've mentioned that a long time ago if you're losing sleep over a position that's too big that's probably a sign that you should trim that position right there like i don't think it's sleep test yeah exactly like i don't think an investment should impact your quality of life that's just my opinion and

teledoc was was starting to be so big that i was getting nervous in terms of the position that it wasn't my portfolio and then you look at the multiple and you're like it's 50 times ev to was starting to be so big that I was getting nervous in terms of the position. That wasn't my portfolio. And then you look at the multiple and you're like, it's 50 times EV to sales. You're like, ugh. Yeah. Just the sizing it was versus my conviction versus the valuation. I still had conviction, but the valuation was making me nervous. So, yeah.

So, that's why I trimmed it. I didn't sell the whole thing. I probably wish I did at the peak, but you know, I still hold on because I still keep a close eye on it. I think there's still some good opportunities ahead. They've had some headwinds. I won't hide that. I haven't hidden that.

But yeah, that's the sleep test for me, I think is the best thing. Those are wise words from Mr. Bélanger today, which is no position should negatively affect your quality of life. And I wholeheartedly agree with that. And those are wise words. Thank you so much for listening to the podcast. We appreciate y'all. I just hinted at jointtci.com as our Patreon to support the show. You can hit us up with listener questions there as well and probably just answer them right there on the spot on the jointtci.com Patreon page.

And if you have not checked out stratosphere.io, time is tick tock, tick tock, until we launch the new platform on November 28th. I just messed up the date again. It's the 29th, November 29th. How many times have I done that now? I think three or four times. November 29th, time's ticking, prices are going up. So use code TCI to get 15% off today's price and then it'll be locked in on a good deal. 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 or financial decisions.