The Canadian Investor - Episode 16 - Emergency episode - Bear Market Reality Check

Episode Date: March 14, 2020

On this special emergency episode, we talk about the biggest single day percentage drop since 1987. We also discuss what approach we are taking in this bear market and the importance of having a plan. Tickers of stocks mentioned : MA, MSFT, FLLA, FLIN, MKL, CNR.TO, SU.TO, IPL.TO--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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The National Hockey League, cancelled. The MLS Soccer League, cancelled. All across the world, all these stadiums cancelled Simon is Q1 2020 cancelled what's going on man yeah it's it's been just really crazy and today we're doing this emergency episode because I think everything's just unraveled um it seems like all this news is just coming in we're recording this on march 12th um yeah it's just been news after news of uh things being canceled like you said or should we say on pause i think that's what the nhl just said suspended is the word that they are using yeah no further notice yeah just it feels really surreal to be honest like i was

talking to my uh my girlfriend this morning i'm like this kind of feels like a weird like nightmarish dream like it doesn't really feel real i just don't really know what to compare it to and i talked to my dad on the phone yesterday and he says i've seen a lot of stuff. And this is something I've, nothing's quite like this in terms of this level of pandemic that we're at. And kind of the public freakouts that we've seen. And at first, I think a lot of the population is like, oh, it's fine. It's just a cold. And it's just really not the case. This thing is just so, so contagious and targets complications.

And I guess the world has just decided, okay, until further notice, most economic activities are just suspended, just like the NHL, man. Yeah, it's really unprecedented. And I mean, it's hard to really know how to react. I mean, for me, I was more concerned about my parents. My dad does have asthma. So I called him making sure everything was okay. And I mean, it's not an easy situation.

We've never really seen anything like this. I think probably the last time was the Spanish flu 1918 that was to that extent but obviously medicine wasn't what it was but yeah it's we it's hard like I'm kind of at a loss for words to be honest as what's going on and everything happening and I think Trudeau just today was announced that he's been placed in quarantine because his wife has flu-like symptoms. So she's getting tested for coronavirus. Same thing for him. So it's definitely a challenging time.

We're going to be talking a bit more about the stock market, the way we're approaching it. But we understand it's not easy, especially when you're also concerned for your health, your family members, and so on. So it's a lot of things going all at once, where for those of you who might remember the 2008-2009 market crash, at least a lot of people were in dire strait financially, but at least you could distract yourself, go see a hockey game, baseball game, things like that, and that's not the case anymore it's definitely unique in many many ways but this is the canadian investor and simon and i are adding to our portfolio at a unprecedented rate i'm speaking on your behalf right now simon and we're going to talk about some of the companies that we're looking at some of the things we're thinking about.

And I just want to preface it by saying this. I bought stocks yesterday and I'm down like 15% as of close today. I mean, you're recording this just after close. It's just a little after four right now. And it's like, whoa, things can always get worse. And I think that's the main takeaway is that things can always get worse. But if I was able to time some market, well, you know, I better quit my day job because I'm some absolute genius and I can make tons of money in financial markets. It's not that easy, guys. It's really not that easy. You just got to buy high quality companies for the long term. I looked at SPY, the main ETF in the US, and it's trading at December 2019, sorry, December 2018 levels, when there was that big kind of sell-off at the end there. That's just SPY. I mean, it falls really fast, but you really got to take that

mindset of thinking, okay, stocks had an incredible run up over 2019 and the beginning of 2020. Now we're entering this global pandemic. Economies are just stunted right now. I've been talking about supply chains just going to be completely shredded for most of 2020. So I mean, there's a reason for the stocks are falling and have the awareness, self-awareness of how you're going to react and the ability to recognize that it could get a lot worse before it gets better but that's just out of your control what are you doing in your portfolio right now simon uh yeah so i'm like you i definitely added to my portfolio uh definitely like i think this reinforces um what we've been saying all along to buy good companies but also a dollar cost average because i can't pinpoint when the bottom is going

to be braden can't pinpoint you guys can watch cnbc all you want the talking heads on cnbc they might get lucky once in a while and pinpoint when the bottom will hit but the reality is we really don't know so for me um you know it's a good reality check I know a lot of people you know before this happened especially when you're in a bull market you're like oh you know no problem if there's a big downturn 10 20 30 40 percent no problem I'll hold on I'll keep buying but just make sure to keep track how you react and if you're having a hard time that it might be time to reevaluate your strategy, maybe just focus on dollar cost averaging all the time in index funds and never looking at it,

really, that might be the best for you. If you're like us, and you just see this as being even more an opportunity, then that's, you know, you're getting great discounts on great businesses. But for me, the main thing is I want to buy really the top companies that have solid balance sheets that I know will go through this. There might be some short, medium term swings, but that's really what I'm focusing on. So recently I bought, today I bought Microsoft. I bought MasterCard as well a couple of days ago which like Brayden I'm already down on about 10-15 percent I've also been dollar cost averaging in ETFs some smaller amounts because there's no trading fees when you buy them with the Questrade. So a few ETFs I've been buying. So the Franklin Temple India ETF,

I believe it's FLLA. The Franklin Latin America ETF. Sorry, I think this one is FLLA. The other one is FLIN. But regardless, I'll put it in the description for you guys in terms of the tickers and the other one i've been investing in terms of dollar cost average is a small cap etf information technology the psct in vesco i'll put the ticker in the description as well all very good ideas microsoft what an incredible business they have become, shifting all of their revenue to the cloud subscription revenue. They've really pivoted that business since in the last five years. I was looking at it last night, actually, and I was just shocked. I was like, Microsoft has really changed their business model, not in the products per se, but the actual business model over the last

decade has tremendously pivoted in a positive way to the SaaS model that investors can't really get enough of. And for good reason. I mean, subscription revenue on sticky, sticky enterprise software, that's just like such a good business like adobe fits in that category not not so much enterprise it's a lot of b2c as well with adobe but um i mean microsoft also b2c but we're talking about companies that are just really really powerful and what i took away from just listening to you is i'm thinking what are are you learning from this? Like as an investor, what's your takeaways? Because these are the things that are going to be really important in these pivotal moments in your investing career is what are you really learning about yourself

as an investor? And what are you really learning about how your style is working? learning about how your style is working. And for me, I'm thinking, I'm reinforcing quality, quality, quality. Because if this happens, and you're looking at some positions, you're like, yeah, like, they're, the business models, okay, I don't see real competitive advantage in any stretch. It's lots of competition, they could get knocked out in any way. How are you going to react to those holdings? You're like, ah, I may as well just ditch these ones, right? So having really high quality businesses, like you're talking about Microsoft, I don't think anyone's worried about Microsoft going bankrupt because of COVID-19. More people are going to be using these enterprise software communication systems more and more.

I think a company that I'm giving a freebie out here with my Stratosphere Premium subscribers, Enghous Systems, a company that I talk about all the time, it's communication software. It's a company that's going to do well no matter what in terms of what's happening with COVID here. So going on roundabout way of saying, what are you learning about yourself? This is a big self-awareness thing for me,

how you react and how you think about your portfolio. And for me personally, it is quality, quality, quality. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are

ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some

extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Yeah, I couldn't agree more with that so definitely stick with quality um one thing and you can mark my words in terms of what's going to happen is you'll find businesses that might have good products but they don't have a good balance sheet for example and they can't really weather this

type of storm so what's going to happen with these companies is you'll see really solid companies coming in and buying them on pennies pennies on the dollar because they just have no choice so those are companies that you want to avoid so definitely make sure you check those balance sheets make sure there is not too much debt that's really important and we keep you know talking about it all the time payout ratios when you look at dividend companies it's so important because you want that cushion that margin of safety in terms of the payout so if the cash flow is going down a bit on the short term the company can still pay that dividend and still thrive maybe you know maybe they reduce it a little bit but they can still go ahead and continue.

So that's really important, focusing on really good quality. You want companies that have moats. We've talked about them in the past. Some other companies that I have my eye on is Canadian National Rail, which I actually added to recently as well. Another one that we've never talked on the show is Markel, the company but it's like a baby Berkshire Hathaway so it's a company that has its main business is insurance but they also invest like Berkshire does so that's another one I have on my radar but can't stress it enough quality you'll sleep well at night with those goes with those good businesses if you don't want to pick specific companies braden has mentioned a lot of good index funds in the past some low cost

index funds that you can just dollar cost average and really get that that cause down and when you look back 5 10 15 20 30 years from, this correction or bear market will just look like a little blip on the radar. Very good point. Anytime these things happen, just head over to the S&P 500 or the TSX 60s performance over a long period, like back to the 80s. And you'll see that you need to be aware

of downturns in markets. It happens all the time. There's a ton of years that have large corrections and then still finish up in a big way. I don't know if that's going to happen here, but who's to say, right? If you look at the early 2000s, stocks sucked, basically sucked. If you bought, speaking of Microsoft, if you bought Microsoft at the height of the tech boom, like the dot-com bubble in the early 2000s, and you bought it at the peak, you didn't make a positive return until October of 2016, which is really, really powerful. That's one thing I always think about, and it's on brand here. We're talking about Microsoft. The height of the dot-com bubble to October 2016 didn't make a positive return.

And now you're looking at it, and you're like, wow, what a, what a incredible investment that was. So it's, it's very, it's very strange, you know, how these things, you know, take a long time to realize. So you got to look at your goal. What is your investment goal? If you need to retire and need this cash, well, you shouldn't be in a hundred percent stocks anyways. You know, I absolutely hate bonds and bond yields are absolute garbage. But you look at what's happening right now and you're like, well, yeah, you need that safety if you're going to be needing that cash to live on. This is your life, right? So think about the goals. You got to be goals oriented in your portfolio.

It says that is super key. That is super key. So, Simon, what do you think this being like we are just closing up shop for the year months absolutely impossible prediction on your behalf but I just want to pick your brain I mean flip a coin that's basically what you should do. Who knows? It'll all depend on the government reaction here in Canada, in the US, in Europe. The Chinese government, while they were slow to react initially, but then they really ramped things up. South Korea used a bit of a different approach, but they really ramped things up on that. We see what's happening in Italy.

So they were a bit slow for to the party and now they're doing basically a country-wide quarantine simon talk about talk about korea's uh south korea's drive-through system i think this is genius yeah yeah so you guys can look that up online so what they do is there's actually drive-throughs so people are um going through the testing station and they'll just be tested they'll be swabbed and then they'll be tested to see if they're positive for the coronavirus or not so they do actually like mass testing I don't have all the details you guys can look it up I've seen that videos of it so that's another approach that's been using. Feel free to read up on that. But what I'm saying here,

though, it's really hard to say the short, medium term what's going to happen. But I'm fairly confident in saying that long term, like I said, 5, 10, 15, 20 years from now, the good businesses will actually carry on. And I wanted to add something for those who might be a bit nervous right now. You guys can look this up. So it's an article that was written by Warren Buffett on October 16, 2008. So I'm sure Braden has heard this one, Buy American IM. So Warren Buffett wrote that basically saying that he was buying American stock in the middle of the financial crisis. And what's interesting is if you look at the date, October 16, 2008, that's actually about six months before the actual bottom of the S&P 500.

So even Warren Buffett, as good and as smart as he is, you can tell right there that he was in his own way dollar cost averaging and he saw opportunities to buy even though that the bottom didn't hit for another six months looking back now we can see that wow he was actually really smart to be buying at that time and just keep that in mind that you know don't try to pinpoint the bottom just keep investing and in the long run it's going to turn out well at least compared to like historical norms so um that's definitely my main message to everyone listening simon my dude that was a great answer i put you on a impossible question to answer but i just wanted to do that because you recognizing that you don't know is what's key and that is a really good example here with the warren buffett thing six

months before the actual bottom he's buying us stocks and he's just telling everyone that this is what he's doing how in the world is war Warren Buffett supposed to be able to time the financial crisis bottom? You can't. So what can you do? You can buy good quality companies. This is something I really remembered that I wanted to talk about. So with what's happening in energy, Canadian oil and gas, these companies, my hot take is I wrote on LinkedIn that they need to start acting like private co's, do not care about what analysts say, and slash those dividends.

This is my hot take of the day. Oil and gas needs to seriously swallow their pride and slash those dividends. The payout ratios are completely unsustainable at the price of oil well south of $40 a barrel. It's going to be rocky for them for a variety of reasons beyond just the coronavirus with what's happening with Russia and Saudi Arabia, creating a whole bunch of supply in the market. These companies, I mean, I wish I could get in front of a boardroom and go, you children, get it together. Cut those dividends. I'm not a CFO, and I know that the kind of backlash that they'll get from the stock market, who cares?

Everything is getting absolutely pummeled right now. This is the time for them to seriously get their payout ratios intact for the long term. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help

if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details.

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

since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Yeah, definitely. And I mean, that's kind of why we stay a little bit away from those energy companies like specifically oil. I totally agree with that. If I were to just, I mean, I think I would stay away from pretty much all of them, except maybe some of the pipelines because they have a bit more guaranteed cash flow and long-term contracts. But the only one I would consider is Suncor Energy, mainly because they're a producer, but also they refine, and they also have gas stations, obviously, through Petro Canada, and I think they have a few other brands under their umbrella.

But what's great for them is if the oil prices go down, the input cost for the refineries actually goes down, so their profit margin increases there. So it compensates for the lower margins on the production side. So that's probably the only company I would consider. It'll be interesting in the following quarters exactly what their financials look like, but I think they should be able to weather the storm. And what's probably going to happen is you'll see solid companies in the oil sector like suncor energy that will buy really good assets from

distressed companies because they were poorly managed and just like braden said they might have refused to cut their dividend and at some point they won't have a choice it's either going to be bankruptcy or being bought out for pennies on the dollar by a company like Suncor. Absolutely. Those CFOs, man, cut the pride slash the dividend, man. Just do it. Okay. So let's look at an example. I just thought of this one. Interpipeline in the last five days is down 50% and the dividend yield is 18% right now. I think ExxonMobil is in a similar category and a lot of US investors are going, well, I got to lock in this like 20% dividend yield. It's like, just cut it.

You know, seriously, you guys got to get it together here. That is my hot take of the day. Simon, do you have any last thoughts on what is happening right now this is just fun to talk about in my opinion because this fires me up in a way that you know everyone panics i'm just like man i gotta i'll start you know mowing lawns if i have to if i can get a couple extra bucks in my pocket that would be sweet yeah i mean i think we went over everything if i can give one last tip to people if they want a really good book to help them get through this it's available on audiobook and also on a regular book so i find

mastering the market cycle by howard marks Really good to be listening to right now. It'll put things in perspective for you. He's really, he's a wealth of knowledge when it comes to investing. And these swings and these cycle, you'll kind of understand them a little bit better and put things into context a bit more. That's probably my last tip for people. I've actually never read that book,

but if I can get it on audio, why work remotely for the next little while, that'll be, that'll be good. All right, guys. Thank you everyone who's been giving the positive feedback so far. The response has been actually quite, quite amazing to see. Appreciate the emails, applies on my Instagram DM. The Instagram is stratosphereinvesting. We should make one for the Canadian investor.

I just know that we wouldn't post enough. And I know I really appreciate it, guys. As always, getstockmarket.com. I updated it yesterday because prices have come down so much. All those companies have updated the valuations and everything. So seriously, check them out. A lot of good companies right now trading for some serious discounts. That's it, guys.

We will see you next week. That does it for this emergency episode. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. Thanks for listening to this episode of The Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.