The Canadian Investor - Can Zombie Companies Survive Higher Interest Rates?

Episode Date: December 26, 2022

In this episode, we discuss a recent piece from RBC showing that more and more Canadians are renting as home ownership affordability has dwindled over the last decade. We also talk about retirement decumulation and talk about Zombie companies Tickers of stocks discussed: CVNA Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Register for ShakepaySee omnystudio.com/listener for privacy information.

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

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I'm doing pretty good. I mean, if people are listening to this on the day it airs, well, Merry Christmas, I guess, to everyone because it's going to be Boxing Day. So, Merry belated Christmas. Merry Christmas, happy holidays to all. You know, when people talk about that recurring dream that just never goes away if you went to college university how you just like forgot you had an exam or something you know do you know the dream like people wake up and like they never graduated or something yeah i think i've had that maybe a couple times but it's been a while i would say but once in a while i get this

random dream of yeah either being university or high school. Yeah. Like he just, you show up to a test and didn't study or like something like that. Everyone gets this. I just got the new version of that, which is you text me and you're like, are we doing this thing? Are we doing the pod? And I'm like, oh yeah, we got to do the podcast. And I have done zero, zero prep work, but we are professionals now and we're able to just whip up some content out of a hat. And that content for me is starting with a piece from RBC, fairly new piece, and it's called A Nation of Renters. Here's what it says here. The ranks of Canadian renters is growing fast. Though two-thirds of Canadian households owned

their home in 2021, renters have increased at 3x the rate of home ownership in the past decade. So interesting, not surprising, but interesting. Here they say, there's never been so many renters in Canada. According to the 2021 census, almost 5 million households rented the home they lived in last year. Okay. Interesting. If you see the graphic here, I've put on the doximum. And for those listening, it shows age ranges and which percentage of them rent, but it

also has two bars. So it's 2011 and the 2021 number. So a 10-year difference. And you can see rentership is surely on the rise across every single age bracket. It doesn't matter if it's the 25 to 29 group or the 65 to 69 group. Home ownership is up in that 10-year period. Now, I found it interesting. Obviously, you have more rentership than homeownership from the ages of 25 to about 45, 50, which makes sense. And then it just flatlines. It just basically flatlines from 50 onwards, which is kind of like, you know, if you're a renter, you're probably going to stay renting. And if you're a homeowner, you're probably going to stay a homeowner. And millennials are renting longer than previous generations at an all-time high.

What do you make of this data? I mean, I'm sure you're not, you know, here is my shocked surprise face that doesn't exist. Yeah, I mean, it's not surprising, right? Canada's housing market has been on a heater, let's just say for what, for two decades, pretty much when the US had to pull back into, you know, from 2008, nine until the early 2010s. Canada's market just kept going up. I think I saw Dan tweet something about that showing kind of the two, three decades or more than that, actually, the different kind of cycles. And we've, you know, we've been almost in a super cycle when it comes to homes, right? The price. So clearly,

you know, the younger you are, typically you won't be making that much money when you're right out of university or college or trades, whatever it is, right? So it takes time to build that. So you might have some debt from school as well so from the time you can actually start saving that down payment with the home prices being as high as they were in the past decade it's really not surprising and I think for those who are younger or you know even millennials that are slightly older millennials like me I think it, you have to be creative if you want to be a homeowner, I think sometimes. And I know Robert Leonard that we've had on the podcast before he's big on house hacking. So that's something you can think of. You still have to get that down payment to get a condo or whatever it is. But even if you can just afford a condo, a one bedroom,

sometimes it makes sense to save a little longer get that two bedroom and then ran out that extra spare bedroom to be able to make those payments faster and build more equity in the house so there's things like that where if you really want a home or you know standalone semi-tab whatever it is right a condo you can get creative it's not easy i'm not saying it is but there's ways to do it if you really want to do it. Of course, you need discipline and at least a decent income to do it. My flaming hot take is that this is totally fine. This data, I mean, it's not as scary as it needs to be. Home ownership is not a requirement of building wealth. And that's the dream that's been sold

to so many people. And why is that? One, because it's tangible. And two, there's a good chance your parents made a lot of their net worth in the housing market here in Canada. That's just the reality. People are intimately connected with that. And so what can you do, right? Well, there's lots you can do. It's dollar cost averaging into high quality stocks or index funds. And that's what this podcast is primarily focused on. And it's not so bad not being a homeowner. That's the one thing I want people to really understand is there's so much pressure to do it. Yeah, exactly.

It's not that bad. You can rack up an insane amount of wealth renting and effectively, continuously dollar cost averaging into an asset class that has higher expected returns than housing, which is equities. There's always a positive to every story here. Yeah, and you can even invest in real estates with REITs, right? Without having, you know, while having a much smaller, you know, investment requirements, usually as long as it makes sense with your brokerage fees, you can do that. You can get exposure to that asset class and all different kinds of real estate, right? Whether it's commercial, industrial, could even be hospitality, real estate. You have apartment REITs. I have, you know, all different kinds. I know I'm skipping some apartment REITs I have you know all different kinds I know I'm skipping some medical REITs or some of them too so there's different ways and I love what you're saying I mean I was kind of approaching it like you know there's ways

to do it if that's really something that you want to do and a lot of people want that kind of stable home and just the advantages non-financial but the let's just say the more subjective advantages I don't know exactly how to say that with home ownership but again renting has a lot of advantages too if you don't want to be tied up to an area forever or you know for a long period of time because home selling a home is very it it's not liquid. We've talked about that before. And right now, we're seeing a downturn. And you just have to go on realtor.ca and you can see homes staying on there for several months. So if you're someone who wants the flexibility of working around the world, I know you like to do that, for example, renting is a no-brainer in that situation.

And I'm not even talking about the financial aspect yeah exactly yeah there's so many other pieces into this equation let's give an example right i am a renter i run my own company i invest in equities very regularly that's how i'm building my net worth and it's hit seven figures before the age of 27. So I think it's working. And this winter, I'm going to be in Costa Rica with my girlfriend the entire time. If I had my house, like if I bought a house when I very well could have, I just feel like I'd be so, I would be in a situation where I wouldn't be able to pull this off what I'm doing. And so there are pros of cons. You don't have to FOMO into big, huge financial decisions. And there are more reasons to be optimistic even when you see

data that seems kind of scary like this. 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.

Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building and people share their portfolios, their trades or investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends,

and there's other stuff like learning Duolingo-style education lessons that are completely free. You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up.

Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Let's move on. You have a segment on retirement accumulation here, which is something we get lots of questions on. I would say outsized amount of questions for how much we talk about it. So this is a good opportunity too. Yeah. And I mean, I think we're also culpable of that too, in terms of probably not talking

enough about the accumulation because we focus and most people in the investing page focus on the accumulation. Well, look how old we are. Yeah, exactly. And, you know, there's... You're in your 30s. I'm in my late 20s. Yeah, like, the accumulation's not particularly on our mind. No, exactly. But, you know, it's something that you should be at least have a general concept.

Even if you're, you know, in your 20s or 30s just have a general understanding you may not need to put it in practice right now of course unless you're one of those intense fire people who want to retire when they're third my age basically but even then I think it's just good to understand the general idea behind it and as you do get closer you can start slowly building a strategy towards the accumulation. So I started listening to a new audio book recently on the topic. The name of the book is Retirement Income for Life by Frederick Vettese. So I'm probably butchering his name. So the first thing that's great about this book, I actually did not know that when I started until

I started listening to it, is that it's for Canadians. So Frederick actually, well, whoever reads the book for him, because it's always someone else, right? It's never, never the author's voice. But they talk about he talks about CPP, old age security. So OS, RSPs, lifts locked in retirement, sorry, these lifts locked in retirement sorry life income funds riffs retirement uh my god registered i'm just pushing on the acronym there's way too many of them that's why no exactly and i know these one human supposed to stay on top of these things yeah i know these but i think i'm just a bit tired too i didn't sleep that well to fair, this is like kind of like your career. No, exactly. But I have been on parental leave. So, Riff. Oh, yeah, yeah. Dad brain. Yeah, dad brain. So, it's a retirement income fund. And obviously, TFSAs, I won't say the

acronym because everyone knows that. So, he does talk about all these different things in the book. There's quite a few concepts in this book that I find interesting. Some of the things I agree more than the others. But I think nonetheless, it's a great book for anyone nearing retirement. I would say anyone that's within like a decade of retiring, that's something, a book I would definitely recommend because there's some things you may think apply well for you, some others that don't. But the main message here is the accumulation.

So it implies that you're done accumulating and are drawing down on your assets. And for the most part, the goal that he states in the book is to not do some capital preservation here. So you can, you know, leave a large sum of money to your kids or something like that, but really use the assets that you have to draw a steady income as steady as possible until you pass away. So there's five key takeaways that I got from the book. So the first one for me is something I already knew but it's easy to forget. As you grow older you actually spend less. So someone in their early 70s or in their 60s that's retired will typically be spending more than someone in their 80s so there's varied reasons for that but you know in your 80s for example you could be at the

point that your spouse passed away and you both love traveling together and at that point you're not feeling like traveling solo you could also be more limited because of health reasons so there's been studies on that showing that yes, as people reach a certain age, they do spend less. So I think it's important because a lot of people will fix a certain income that they want to achieve. And then they tack on inflation to kind of project that in the future. But in reality, it might actually be a bit less than they're projecting. I'm balling out in my 80s. I don't know what you're talking about. It might actually be a bit less than they're projecting.

I'm balling out in my 80s. I don't know what you're talking about. I'm got yachts, whatever you want. Whatever I want, I guess is what I should say. Yeah. And I mean, so the second takeaway here, I think it's one that you'll have. He hammers on the fact of people reducing their fees. So he talks a lot about robo advisors, which, you know, are fine, I guess, for someone that really doesn't want to do much and just kind of set and forget it. You do pay a bit more fees than if

you're doing it yourself with ETFs, for example. But definitely, you know, I'll say this. I think robo-advisors personally, I think they're better than paying like, you know, in excess of 2% for mutual funds. Oh, 1 million percent. That's right. We've talked about this so many times, right? I'll get back to the retirement accumulation in a second. But we've talked about this a handful of times, which is robo-advisors serve a great purpose in helping people go from mutual funds to a much less fee product of managing a collection of ETFs.

And then any person with an internet connection can take that one step further and just DIY buying those ETFs and not pay the like, what, 70 basis points a robo usually charges. Is that kind of in the neck of the woods of most? Yeah, I think it could be anywhere from like 50 to 70. Usually, you know, you'll have the fees from the etfs that they'll choose for you and then there's like a tack on for the robo advisor of i think it's anywhere from like 25 basis point to like 40 45 that day tack on on top of the etf so 40 is

like the lowest i think i've seen yeah yeah it's still i mean it's still way lower than mutual funds and i think that's the main takeaways. But if you can't reduce your fees, we've talked about that a lot, do it. Yeah, just in general, like across the board. Exactly. So this third takeaway here is, you know, consider postponing on when you start drawing on CPP. So you can actually start drawing on CPP, so Canadian pension plan, as soon as 60. The normal age in kind of air quotes is 65, but you actually get an increased benefit if you delay

it past age 65. So a lot of people don't know that they actually increase their payment by 0.7% for each month that they delay CPP after the age of 65 to a maximum of 42% increase. So one of the things he preaches in the book is trying to delay that as long as you can, ideally in most cases, because he does mention that it's a case by case, but let's say in most cases you delay until 70 and you bridge that gap because clearly, you know, you're retired at that point with some registered retirement. Well, for the most part, it would be RSPs or locked in RSPs or LIRAs or things like that. So you kind of bridge that gap in between. So you draw more on those early on to then start getting higher CPP payments.

You take less from your savings at that point. And what that does, it actually gives you an index pension that's bigger until you pass away. I'm on board for this framework. I think it makes most sense. There's lots of ways you can do it. I think the most important piece is to actually just kind of sketch it out on a spreadsheet, right? Exactly. You don't have to be like an Excel genius to do it. Yeah. And that's what he does. He does like, he gives a bunch of different scenarios with people with different income to just kind of show. And that's exactly what he does, right? He graphs it

out with, you know, different assumptions, different retirement age, and so on. So I think that was really interesting from that perspective, because one of the biggest concerns of people is running out of money while they're at retirement. But a lot of people don't want to defer CPP because they are afraid that they will die too early, and then they won't maximize their CPP. And therefore, they want to start it earlier to make sure they get those payments from the government. But he does have a good point. If you do die, you know, it's not your problem anymore. Yeah, exactly. I don't care about a couple of bucks when I'm in the ground. Exactly. No, and of course, people, you know, care about the succession planning. Yeah. Which is fair enough. Exactly. The next one was kind of curious at first, but I think, you know, I've never been a fan of this one, but he does make

a good point. So he said to for some people considering an annuity, if you're looking for income guarantee. So an annuity is for those who are not really aware of what an annuity is, is you take a lump sum amount, you give it to an insurance company, and in exchange, the insurance company will give you a guaranteed amount paid, let's say monthly, for until you pass away. You can also have some annuities that if you pass away,

your spouse gets two thirds of the payments even when you pass away. So there is some income guarantee there. Usually if you want it indexed, it's pretty rare to find those and also they're super expensive to get them indexed. But nonetheless, you know, a lot of people like this idea of having a guaranteed income. So what he does preach in that book is it can make sense to not use all your savings for an annuity, but part of it so you get an additional part of your income that's guaranteed on top of CPP and old age security if you qualify for old age security without too much callbacks. And the last one here, so one thing we've talked

about a lot before, have an emergency fund in retirement. You can do this by already having a set amount set for emergencies or what he suggests for those who don't have one, you basically just set a percentage aside each month in retirement. I think he preaches around 5% of your income, put it away in a savings account, and you have that for emergencies. Because one of the things, one of the big issues that people encounter in retirement that kind of puts a wrench in their plans is they get an emergency that they have to deal with. So something completely unexpected, and then it really puts a big dent in their future retirement income. So this is Retirement Income for Life by Frederick Vitesi.

Am I saying that right? Probably not. I spelled that out for people because I'm not sure if I'm... Do you listen to this audio book? Yeah. Just for the... Wow. Look at the commitment to the pod.

Yeah. Mostly while I was walking with the dog because my dog is a small dog and he's very particular in the winter. He does not like to walk on the sidewalks. Does he wear a coat? Yeah, not always. He's tough for a little guy. And so we go in the woods.

He loves it. I put the AirPods on and that's where I've been listening to this book. Wow, that's so wholesome. That is so wholesome. I love it. Let's talk about my next segment on the pod, which is Nat Friedman's framework. Most of this is a framework for business and life, but some of it is a framework for investing. And almost all of them, the reason I found it worth for the pod is almost all of them

can be related back to investing or just operations as an investor. So, Nat Friedman is an entrepreneur, investor, and he served as the CEO of GitHub for three or four years. And during the time it was acquired by Microsoft. So, obviously a very intelligent person, very successful in machine learning and artificial intelligence. And that's what's made GitHub such a powerhouse as well. If you've ever seen GitHub co-pilot in action, by the way. No, I haven't. It would make you very happy as a Microsoft shareholder. Because you are a Microsoft shareholder, correct? Yeah, yeah, I am.

It would make you very happy. It's like watching magic in real time. All right. So these are the framework. And I've shortened it in some places that are not as relevant, but I've kept most of it intact here. Number one, as humans, it is our right and maybe moral duty to reshape the universe to our preferences. You should probably work on raising the ceiling, not the floor. Okay. Interesting. Number two, enthusiasm matters. It's so much easier to get work done on things that are exciting to you. I think that that makes sense and I wholeheartedly agree career-wise. Number three,

it's important to get things done fast. Number four, here's an investing one. The efficient market hypothesis is a lie. At best, it's a very lossy heuristic. The best things in life occur when efficient market hypothesis is wrong. Let's double click on that in a second. In many cases, it's more accurate to model the world as 500 people than 8 billion. Okay. And most people are other people. Okay. So here's a way with words, I'll say that. But let's double click on this point here. Well, two things. The efficient market hypothesis is a lie. What are your thoughts on that? I would say I probably agree with that because the efficient market also presupposes

that we're in a free market. And I think we are in a free market to some extent. But the reality is, I mean, you know, we saw it this year and talked about it, or I can't remember when this will be released. I think it'll be before, but in our 2022 year in review, and a good example is the central banks, right? If we were truly in a free market, there would not be that much intervention. So I think, you know, I would probably agree with that. I think for the most part, it is efficient, but in some areas, because of government intervention, including obviously central banks, it's just not possible to have an efficient market. Yeah, I agree. And the way that he's putting it here, in many cases, it's more accurate to model

the world as 500 people than 8 billion, which is extremely interesting, right? Because efficient market hypothesis is basically saying there's so many market participants that not everyone can be dumb and there must be truth to the way that the market is pricing securities and just generally think like he's doing lots of venture investing as well too. So there's some frameworks you can build that into there as well. So I mostly agree with efficient market hypothesis being wrong. Typically, there are cases where it makes a lot of sense. Like I always assume greater fool theory that if I see something that seems too good to be true available in the market, whether it's like

price or something like a huge price discrepancy from the fundamentals, I'm at least going to assume that I must be missing something. That's an important mental framework for me to just make sure I'm doing the proper research. I could very well see something that the market's not seeing, but when it's too good to be true, it probably is. And so I need to kind of model that in greater fool theory that not everyone can be dumb, right? There's got to be something wrong with the business. Can we double click on this? The best things in life occur when efficient market hypothesis is wrong. I think I agree with that. That's the whole idea of a fat pitch in investing. The best ideas are the best things in life occur when the general consensus is very off. I think that that's mostly correct. Let's move on to the fourth, or I guess fifth idea here.

We know less than we think. We are not often asking the right questions. I think that's mostly true. Or seven, the cultural prohibition on micromanagement is harmful. Great individuals should be fully empowered to exercise their judgment. The goal is not to avoid mistakes. The goal is to achieve uncorrelated levels of excellence in some dimension. I don't really know what that means. That's a lot of big words.

Yeah, I kind of get confused with this. Yeah, well, no, just I feel like it contradicts the point there. Like the cultural prohibition on micromanagement is harmful. But then he goes on to say that basically you should not be micromanaging. I don't know. It feels like it contradicts himself. Am I reading that? I don't know. It feels like it contradicts himself. Am I reading that? I don't know. I really don't know. He used a bunch of words that are way above my pay grade. Next one, smaller teams are better. Fast decisions,

fewer meetings, more fun. Many tech companies are 2 to 10x overstaffed. Oh man, this is interesting coming from someone who ran a very large and important technology company that has kind of become the rails for so many technology companies, which is GitHub. So he's seeing this firsthand more than probably anyone else maybe. More tech companies are two to 10 times overstaffed. We've talked about this a lot. That's why there's been so many job cuts in tech is, yeah, the good times are maybe slowing down, but not only is there a slowdown, y'all are just overstaffed for 1 million percent most of the time. For him to say even 10 times overstaffed. I'm not surprised. Yeah, no, not. I mean, I've always kind of been in smaller teams, aside from kind of my early on jobs. And I always found it pretty efficient. And I've had managers who kind of empowered us and

then not micromanage. So we always had pretty efficient teams. So I can agree with that. Yeah. Next one. Where do you get your dopamine question? Drugs. Heavy, harmful drugs. Just kidding. For those I offended, of course. Hey, I mean, stand by it. Better to get your dopamine from improving your ideas than having them validated. Okay. I actually disagree with that, but that's okay. And it's okay to get your dopamine from making things happen. That one I wholeheartedly agree with.

That's what gives me dopamine is making things happen and seeing it actually work. But getting your dopamine from improving your ideas rather than having them validated. I see so many founders constantly improving on their ideas without ever getting validation. And then what does that equal? A dead business because you have no customers validating it. So this one I'm not so sure about. Yeah, you may be coming just from an angle that, you know, like maybe not the same angle as you more, you know, if you're in a team maybe and you're improving your ideas, you don't always need the validation of colleagues and stuff like that.

If it's a good idea, you know, you don't. Yeah, I think he's looking at it from I think people that are self-confident don't necessarily need the validation from others. But I agree with what you said as well. So I can see both sides here. Yeah, fair enough. Last one on the docket here. You can do more than you think. The laws of physics are the only limit. This is very like Steve Jobs-y, right? So many of his early Steve Jobs interviews where he was just like, yeah, everything changed for me when I realized there are no limits into me being able to change the world. I push on this input, I push on that output, and I see actual change meaningfully in the world if I want to. There

are basically no bounds beyond the physical limits of gravity keeps me grounded to this earth and I can only live so long. Those are like the laws of physics. But it feels very Steve Jobs here where it's like, you can accomplish way more than you think in terms of business, whatever it is. I think that that's true. I know my next companies that I'll work on, one thing I've learned is there's no point of working on a small idea because it's going to take you as much time and as much effort to execute on a small idea too. That's my takeaway from there. That last one just reminds me of the Scotiabank slogan, you're richer than you think. Did they can that? Are they still doing that?

I don't know. I feel like they were encouraging people to take on that. That does not look good. I mean, that's pretty much what it was, right? Like, I mean, you don't have any money in your bank account, but we will get some interest out of you. Anyways, no, but. Oh, look at this. I just typed it in because I wanted to see if they're still doing that tagline because I know some people thought it was stupid. Oh, yeah.

CBC has a comedy section on cbc i didn't know that okay scotia bank's new slogan you're richer than you think except you jeff you owe a 60 grand pretty much yeah yeah but i mean seriously the last point though i would think you know i'm just thinking about semiconductors reading that and you know what people were in the industry were doing the 70s for example compared to today how small these transistors have become over time and how powerful the technology has become you know I'm sure a lot of people just could not imagine that at the time so I think that to me that's where I kind of go when i read that it's a good old moore's law it's like exponential equations and exponential type

yeah yeah yeah every year it i think doubles that's pretty much yeah every year the computing power and the chip can double that's moore's law right i'm i think i'm paraphrasing it yeah i think more has come out and say that we've kind of hit a peak at what that can really do. I mean, you can only achieve exponential growth in any function for X amount of time. Like it can't persist forever. But where I'm going with this is that exponential functions tend to outperform on the upside in almost, or sorry, they tend to surprise and surprise again, because you couldn't imagine where you get when you have a doubling of computing power every year for multiple decades. You end up with a result that people couldn't have even imagined was possible the few decades prior.

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. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom

Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the App Store and I'll see you there. Okay, so now we'll move on to our next segment. I'll talk

about zombie companies. So this is a term that people may have heard before, but I'm sure some people have not really heard of it. Of course, it's very different from if you have you watched Walking Dead, the TV show, the TV show. Speaking of zombies, I did. And then I think I was a couple seasons in and I was like, nothing's happening. Like, it's the same thing over and over again. They're running from zombies. But I think I watched a couple of seasons. Yeah. Okay. Okay. So, yeah. So, I digress. But if you haven't heard of zombie companies, I'll go over what it is and also provide a pretty current example of a company. And you don't have to look very far. There are quite a few zombie companies, whether it's on

the TSX or the US exchanges. So a zombie company is a company that earns just enough money to operate and service its debt. Servicing debt just means to pay the interest. The company has almost no excess capitals if anything happens market disruption event for example or even a bad quarter in some cases could lead to insolvency so that's a company that just has enough cash to keep operating and does not have much cash on hand either even if like if something bad happens a company becomes insolvent when it can no longer meet its financial obligations to lenders as debt becomes due. Because we had years of loose monetary policies, there are quite a few companies out there. Typically, the most frequent numbers that

I've seen in terms of estimates, it's around 10%. Goldman Sachs recently stated that they estimated that 13% of US listed companies are zombie companies. So these companies are essentially staying alive because they could get very cheap debt in the past couple years, but I'll go as far to say since the Great Recession, I think 2009, 2010, because interest rates have been so, so low. So it meant that they could get relatively cheap debt and they are becoming increasingly risky right now because of rising rates and tightening monetary policies globally. Now, because zombie companies tend to have poor business model and unsustainable businesses, rising rates will most likely be fatal for a lot of them here. Now, an easy example is the example of Carvana.

So it's been in the news quite a bit. Ticker CVNA. For those not aware, Carvana is an online platform for buying and selling used cars in the US. Looking at their most recent quarterly report, all the signs are there. For the first nine months of the year, and spoiler alert, it gets worse if you just look at the most recent quarter, they could not cover their interest expense with their operations. Of course, Carvana got hit hard in the second half of this year with a decline in used car sales. But even last year, if you looked at the quarter ending in September, you could see

that they couldn't cover their interest expense. Then they were short $25 million to be able to cover it with their operations. And that was when the used car market was actually red hot like i don't recall the used car market being that good last year at that time and their interest expense was 48 million last year for context so that that was clearly a warning sign that you know things were not that great and the market for used car was exceptional did Did you want to add anything before I go on? I'm just thinking out like, this is a perfect example, when I think out loud of catching a falling knife and the math of losses. Because you can think to yourself, this stock, any stock, let's throw out Carvana for a second. This stock is down 90%. It's surely

going to rebound. And then you do some math and it's down 90% from the 90%. That's how this math works. If you bought Carvana stock in August of 2021 and it fell 90% exactly one year later, August 13th to August 13th, 2021 to 2022, you lost 90% of your money. All right. Went from $300 a share to roughly 50, went from 360 to 50 bucks. Okay. Since August of this year, you are then down 92% from here. And this is investing losses really visualized in a real example and to watch out for trying to catch falling knives. I know that's not what this segment is about. Well, it kind of is buying potentially very distressed assets, but the math on losses can surprise you. Yeah. And the warning signs were there last year when the stock was trading around $280 a share.

And right now it's at $4 and change per share. So the warning signs were there. And it kind of goes with what we saw in 2021, right? There was all these kind of hot stock, I guess growth, if you're just looking at revenues here, that were just bid up really in a crazy way. And I guess Carvana was a pandemic winner, but now it's literally struggling to stay alive. I would not be surprised if we see it go bankrupt in the next couple months, to be honest, because what I'm going to talk about now is their current interest expense. So I had mentioned that last year for the quarter ending in September, their interest expense was $48 million. Well, their latest quarter, also ending in September, $153 million, the interest expense. So looking at the financial statement, it's pretty easy to spot why. Because Carvana has

a large portion of its debt in revolving debt facilities. So if ever you see revolving debt facilities, the vast majority of times, these are like line of credits, so they are variable rates. So this is clear, you know, with the two numbers I just said, it's clear that the higher rates are definitely impacting Carvana here. I mean, it wasn't really sustainable at lower rates either, let's be honest. And if you're looking at the first nine months of this year, they've burnt $1 billion in free cash flow. So clearly, even from a free cash flow basis, it's not looking good. not looking good and now they only have 471 million of cash on the balance sheet with a used car market that is showing no signs of turning around i mean that's the one thing in the cpi

prints that we're seeing in the u.s for example that keeps declining constantly is the used car market because there's more and more new cars available. People were turning to used cars because they could not get those new cars. So they need a car, you'll buy a used one. And of course, people are being impacted by inflation. So maybe that used car purchase, you're just making the current car you have go a little further. And the stunning thing here

is they have 6.3 billion in debt. It's crazy. Oh my God. Oh, yeah. I mean, they're like, I don't think I'm making a bold prediction here by saying they will be bankrupt. Like, it's, I don't see how they can issue shares. Like, no one would want to buy that. It would dilute.

I mean, they'd get almost no proceeds or no, you know, no one would take them up on that. And who would want to loan them money when they're already owing $6.3 billion? So the story of Carvana is definitely one where the business could not even cover its interest payments when the used car business was on fire. And that's a big red flag. If you're looking at a business and the industry as a whole is doing awesome. Yet there's already things that you can see in the financial statements where you just needed to look at the financial statements, like I said last year, where you can look at it and say, OK, will the used car market realistically stay this hot for years to come? Probably not.

It may stay this hot for another year or two, maybe. But if they can't be profitable and they can't even cover their interest expense when interest rates are low and the market is hot, then, you know, what's going to happen when it turns around and it's not a good market? And this is exactly what happened. And, you know, I would say, just make sure you be very careful. There's a lot of these types of companies out there. And I think we'll be seeing quite a few companies that will be going bankrupt unless there is some kind of bailout and maybe some have too many jobs relying on them. So the government will intervene. But that's not a good investment thesis because I don't think you'll do well if they're bailed out either.

Look at these two beautiful screenshots I just put in there on the doc that you can look at. What Simone and I are looking at right now are screenshots from Carvana on stratosphere.io. I went on the balance sheet. I clicked on short-term debt, cash, and inventories. Look at the explosion of inventories. Looks like selling cars got a lot harder. My gosh. And the cash, I mean, what do they got? A couple hundred mil and short-term debt is at 788 million and they have 316 million of cash

on the balance sheet. They're not making it, let's be honest. I would be surprised if they make it past June of next year. And I think I'm being pretty generous there. They're burning money. It makes no sense. It doesn't make much sense. And you're right, the writing was on the wall. How did this thing get so expensive? How did this thing... Low interest rates, easy money. I mean, revenues, I don't know if you have revenues there but i think revenues were just were increasing and that's the only thing people were looking at i i think revenues are increasing i don't have the statements in front of me let me throw up uh just like people had blind folders on and they just look at that top line and nothing else revs increased very nicely quarter over quarter from 18 through about 21 yeah so

people were not looking at anything else there's just looking at the top line and not well you saw what the used car market was like right you couldn't get any new car so yeah but it's it does like you could have looked at their financial statements last year if you were saying like, oh, you know what? Maybe that's a good business. I'll go and have a look maybe. And, you know, if you have a decent understanding of financial statements, you could have. I think it took me less than half an hour to spot all of these things. It was not very long.

And just to say, OK, yeah, if anything happens here, it's not going to be just to say okay yeah if anything happens here it's not gonna be good and nothing crazy happened it's just kind of back to the norm a little bit right right yeah this is wild i didn't realize how bad it was yeah i've seen whispers of how bad it is but like it's not a name i care about or attract no me neither yeah and I was just looking for a zombie company and I wanted to look, you know, it's easy to be looking at it hindsight 2020 and look at the financial statements now, like clearly it's not looking good. But what I wanted to say was pretty easy to spot, even if you were looking at it a year or two ago. They came out with a used car model that was different, which was putting them in a giant vending machine.

It was cool. I mean, that's pretty cool engineering. Is it something people care about? Like, no, people just want the car. All right. Let's talk about our last segment because you were talking about audio books and I had a major pain point slash rant about audiobooks on the Twitter sphere. And I was asking people like, how do we fix this? How do we improve this? There's got to be a better way. And you and I love audiobooks. I like podcasts more, but it's still a good way to just kind of keep leveling up your knowledge. You mentioned your wholesome walk in the park with your dog. Perfect time to just throw in an audio book. I do see people walk down the street reading a book. And I think that's actually so badass. You have the don't give an F level that you just walk down the street reading a book. I envy your don't give an F level, but I throw on the AirPods and I'll listen to audiobooks or

podcasts. And I was thinking, audiobooks for investing content sucks hard. And the reason for that is how often are they like, please refer to figure 7.4B in the supplementary PDF. What do you do at that point?'m curious do you just you're like okay i'm just gonna not know what that graph is yeah i mean i do agree with you for the most part i'm pretty good at visualizing without looking at something but sometimes they won't even tell you what it's about yeah yeah no that book i'm just kind of going on the one the retirement income for life because it's the freshest one. But it was, there was a lot of charts in it.

And after the fact, after I got back home, I would look at the charts. But even during, I thought it was, they did a pretty good job at explaining so I could visualize it. And it was also pretty cold, so I didn't want to have my hands out of my midst the whole time. Just pull up a PDF in the park. Like, how lame is that yeah no they were explaining it were they like saying what the figure is yeah yeah exactly obviously referencing the figure but also explaining the actual kind of flow of the numbers because the false part he was explaining how you know the income looks like for like giving an example of a couple what you know savings they have and blah blah blah

and then you would reference the chart in terms of what the incomes looks like and then say you know around age 80 they have a bit of a dip in income so there's a there's missing you know five thousand dollars a year in terms of the projected income towards what they wanted to have versus you know they had 75 instead of 80 and stuff like that. So it was pretty – I would say they did a relatively good job where I didn't feel too lost without having to look at the charts. Okay. So that publisher is explaining the figures. I like that. Clearly, that publisher is doing something right and And they've heard my rant and

they've answered my call. But it's like on a podcast, imagine these graphs we talk about. Because if you look at our document, that's probably like three or four graphs per episode, at least. And when we incorporate video, we'll have those up. But we try to at least, for the people listening, explain what it is. The audio book I was listening to last night, I was on the subway home in Toronto. And yeah, it's like refer to figure 7.4 in the supplementary PDF, but no explanation. And so it's like, if I wanted to or could pull up a PDF right now, like I would, but I can't or don't want to. I'm in the car, right? I'm on the subway. I'm walking. It's so ridiculous. So how do we solve this? It sounds

like better narrations is a solution. Are we on to a big startup idea, Simon? Because an AI version of Morgan Freeman reading the book and describing the figures is currently in the realm of possibilities with technology that I'm seeing. So this is an open call to the people listening to the podcast. If you have an idea and want to use machine learning to improve audio books so that I don't have to hear some boring nerd tell me to refer to figure 7.4b and have like Morgan Freeman read me a book. Hit me up. I'm very interested in working on the idea.

Or you can pick between Morgan Freeman and Liam Neeson. Liam Neeson, yeah. He's got a pretty good voice if you want a British twist a little bit. Totally. I'm sure there's also like some good women. David Attenborough, man. David Attenborough should read every single book. Oh, yeah.

Like the Planet Earth guy. Yeah. I'm sure there's women too that do some really good voices. I'm just not – So much more soothing than a man's voice. That would be good. Yeah, exactly. Yeah, because David Attenborough, it's funny.

We watched a recent one and he actually like was in the docu-series a little bit. And I was like, it kind of annoyed me a little bit. I'm like, dude, I don't want to see you. I just want to hear your voice. Isn't he like 90? He's 96. I just looked it up. Yeah. He's not the youngest. Yeah. What a legend. Oh, yeah. 96 years old. But he was doing, he was first person, like, this guy's like Christopher Columbus. If you look at the documentaries he was doing at the beginning, he was like the first person in humanity, like, regularly flying around the earth, like, collecting data and filming nature.

No one in the world was regularly flying around like that. Like, this was like right after aviation was commercialized. No, I didn't know that. But I mean, he has a pretty good voice too. But yeah, I think if I had to pick for me, Morgan Freeman is still the number one. Yeah. The reason I bring this up is because I've seen people like what they'll do is they'll take text and the machine learning has just learned so well what

Morgan Freeman sounds like. And people have recreated this with podcasts as well. Like if you, I forget the link now, but you can listen to a Steve Jobs, Joe Rogan podcast interview that is completely made by AI. And obviously that interview just never happened, never occurred. That's funny. Yeah. It sounds like it did. You can tell in certain places that it's a little off. Like Steve Jobs sounds like he's like giving a keynote because that's all the machine learning had. So it sounds like he's up there with his little turtleneck and giving the whole thing. No, hit me up if you want to work on this. I think it's a good idea or at least

something I want. I don't know if other people find it's a good idea, but I want it. That does it for today's show. We appreciate each and every one of y'all. Merry Christmas, happy holidays for everyone who's celebrating and taking some time off. Or cheers to the people that are grinding through this and working on their new project, their new idea, their new hustle for the new year, getting a head start. Whether you're relaxing or grinding it out, we salute you and we appreciate you listening to the podcast. If you want financial data like Simone and I were pulling up

while doing the research and on the fly for the podcast here, stratosphere.io. Man, it's just a joy to use the platform. And I see that as not only the founder of the company, but as researching businesses and researching stocks. It's so visual. It's so easy to use. It's nice, easy on the eyes. And you can go and check that out at stratosphere.io. We ship a new, better feature every single day, literally seven days a week, because I got a team

of freaks. You got to let your freak flag fly on stratosphere.io if you work on the team. So we're shipping something every single day. Go ahead and check that out. It's completely free to get started. We'll see you in a few days. We'll see you in the new year. We got lots of good content still coming out through the rest of 2022. Thank you for listening. We'll see you soon. 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.