The Canadian Investor - Is BCE’s Dividend at Risk of Being Cut?

Episode Date: April 22, 2024

In this episode, Simon and Braden explore Canada's job market post-Covid, examining how public, private, and self-employed sectors have diverged in their recovery trajectories. In the next segment, they discuss BCE's recent earnings and guidance. They look at BCE’s dividend and why it may not be sustainable for the long term. Simon and Braden finish the episode by discussing allocation and how it can be a great tool for diversification and minimizing risk across different asset classes. Stocks discussed in this episode: BCE.TO, ABNB, UBER, DASH, CVNA, NFLX,  Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.  See omnystudio.com/listener for privacy information.

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 Bélanger. The Canadian Investor Podcast. Welcome in to another show. My name is Brayden Dennis, as always joined by the majestic Simon Bélanger. Today, we're going to talk about Canada's concerning job growth in air quotes. You're going to talk about Bell,

ECE and telcos have been under fire. And then we've got two more amazing segments for you. Simone, before we kick it off, I have a question for you that I was asked recently. And I thought it was really great question because everyone has a hot take on this. Okay. Would you rather, okay, when you're, what do you prefer more? When you're really, really cold, warming up, like going into somewhere warm or when you're really, really hot,

when you're really, really hot going into something cold, what is your preferred? Cold to warm. Yeah. I hate being cold. Cold to warm. Yeah, yeah, yeah. Okay. All right.

And I tolerate heat pretty well. I've been known to go mountain biking when it's like 40 degrees outside, like when it feels like 40. So I have a pretty good tolerance for heat, yeah. I think you're in the minority of people i've asked this question uh i think most people the ideal of like jumping into a cold pool when you're hot but uh that's that's not here or there but for sleeping i would say i hate being hot so that is the one exception yeah sleeping hot is a deal breaker. I can't, I just.

I don't sleep well. Yeah, exactly. It just, it just won't happen. All right. First topic of the day, Canada's concerning job growth and air quotes on growth. I do worry. I've been, I have many data points and anecdotes to point to, but I do believe and do worry that Canada has been a post-COVID

loser on the world stage. But this shows the rules of Thanksgiving, no politics, no religion, just data points. And today's data points is the concerning gap between public, private, and self-employed job growth in Canada, particularly post-2020. You had public sector, private sector, and self-employed job growth in Canada trickling up on the same trajectory. Some had seen higher growth in certain years, but since 2014, all three of them grew to around 5% to 10% above the base of 2014. In 2020, you had, of course, a rapid drop in private sector jobs and public sector jobs and self-employed trickled down as well. I think that makes sense. A lot of self-employed people were very disrupted by this, what happened in 2020 and the way that Canada treated COVID. I'm not saying one thing is better than the other.

It's just, you know, you know how we did things around here. And it's just facts. Since then, there has been an alarming gap and i'm sharing the graph on it's okay i'm already sharing it join tci you're sharing the graph there public sector job growth has exploded so these are government employees has risen to nearly 30% growth, private sector to total of 15%, and self-employed Canadians is now down to below 2014 level. So you had all three of these lines in terms of percentage change since 2014. This source of the data is the Globe and Mail, Stats Canada, and my buddy JVAS on X. So trickling up very, very steadily together, huge widening post-2020.

All of the job growth in air quotes in this country is largely government employees and giving the disillusion that there's actual real job growth. And I think that that's a problem. These are types of facts and figures that you'll hear, like that there's job growth, but it's not real in my view. And it's wasteful and it's paid for by the taxpayers. So this is the widening gap between public, private, and self-employment right now in this country. Yeah. Self-employment is definitely the one that I was surprised. I thought it was actually a bit higher. But private, like you're saying, private actually increased decent amount, but it's kind of flattening out right now where public sector is still increasing.

And I mean, I think it's also good to just remind people that public sector is more than the federal government includes provincial includes municipal as well. And they probably include crown corporations in that. So I've worked in the municipal public sector and I work for crown corporation, like part time, I like to keep things separate with the podcast but you know from experience I mean municipalities what I've seen and that's probably similar to the federal government like kind of the what people think about like you know you know the federal government in terms of you know the public sector there's some and we were texting on this from what I've seen

you'll have like and these are just general things i've noticed but you have like 20 25 percent that are really really good worker that are pulling their weight and then some even like working extra hours i mean i see it with my wife i mean she like literally does not get paid the amount of hours she should be paid she's in management which is, but she works nights and weekends, I think oftentimes too much. But that's beside the point. And then you have people that, you know, do an okay work, that's probably 30 to 40%, maybe 50% that I don't know if they would make in the private sector, but that's beside the point. And then you probably have a

quarter that are you know they would not last like a month in the private sector because they're not doing anything or barely anything and i think that's where that's the part that i really hate because i've seen it and the reality is and without i don't want to get political here but just the unions are extremely strong and i've seen people from experience that did stuff that they should have been fired and the union protected them and they went on a leave a paid leave of absence for a few weeks while an investigation was being made and then came back to their job and I believe it's like a year once the year year or so, like there's, it depends on the union,

but a year or two afterwards, if you're good, then it's wiped off from your, like your employee file. So that's the kind of stuff I've seen. Both you and I have experience in the public sector, the private sector and self-employment. You and I have experience in all three. You and I have experience in all three. I share your sentiment around that 25%, 50%, 25% of skew of effort being done in the public sector. I wholeheartedly agree. I think that's directionally correct if I look back at my days in the public sector. Everyone knows it's bureaucratic and people even who want to work hard, have a lot of ambitions, just get really frustrated and realize that it's too big, too lethargic, too bureaucratic for them to move the needle and they move on so that you end up losing a lot of

the good people too, unfortunately. Yeah, definitely. I mean, you did that. I kind of did that. I left my former employer, the municipality. I mean, it was the city of Ottawa. I can say that's fine. I don't mind saying it. There's tons of good people, good workers there. But I've seen that as well. Like, people just end up getting frustrated. And they see the person getting paid the same amount as them and doing like half of the amount of work or if not less and they just end up saying okay i can't change it i'll just go work somewhere else where i feel like you know i there's more value i'm providing more value to people in general you know my co-workers are also providing value i don't feel like i'm not treated fairly and that's what ends up happening, unfortunately. I did not fit in. You know my personality. No, no, I know. I got along with everyone, of course.

That's who I am too. But I didn't fit in career-wise. That might be the understatement of the year. The largest growing departments are Canada Revenue Agency. The CRA grew 34% in workforce since 2019. The Employment and Social Development Canada, ironically, grew 56% since 2019. So to boost their own numbers, they have hired. Wow. Brilliant move that is. The reality is Canada produces a lot of great entrepreneurs and tech talent,

but unfortunately, we're exporting a lot of that talent. The University of Toronto and Waterloo, and there's lots of great universities and institutions here in Canada. I went to the University of Guelph. But Toronto and Waterloo are two of the top 10 feeder schools in the world for US big tech and US unicorn startups with Stanford leading that list. It's hard to compete with big tech salaries in USD. It just is what it is. If I'm 22 years old, and by the way, I'm not just making these numbers up. I have friends. I am an engineer. I have friends that went off to go do this after they graduated software engineering, 22 years old, go make $300,000. Yes, that is correct. $300,000 US at a pretty safe blue chip tech company,

get paid some stock and yes, plus 50 to $70,000 signing bonuses in US. Yes, please check, please. Right? Like that's, That's going to be pretty hard for us to compete with. Now, I don't think that that's ruining our tech talent. There's still lots of great tech talent here, but there are forces at play that are just not ideal. Yeah. And I think we have to have a discussion as a society, right? Because we're looking and the federal budget comes out today when we're recording this. So it'll be interesting to see, you know, the level of spending. So it comes out, I think, at 4 p.m. tonight. But I think for me, the biggest issue

when I'm going to vote is just, you know, I'm thinking of my daughter and the sustainability of, you know, public finances and the toss it's going to have on those future generations. And at some point, we're going to have to make some tough decision as a society. I don't think we're there yet, because I don't think there's really a willingness for people to, you know, make those tough decisions. But it is something for me, it's the biggest issue. I think it's really important that we try and at the very least balance the budget. I mean, I remember you were too young for this, but in the late 1990s, I was like following this kind of stuff pretty often. And we were like, I think it was under Jean Chrétien, we were in a surplus position. Like that sounds like another world completely

surplus. Wow. Yeah. That is a completely different world. It certainly is. And this is the track, this is the path that Canada is on right now. I do think that it is concerning. It is Thanksgiving dinner here, so we're not going to comment on politics. That's just what the show is. That being said, I do believe Canada is a post COVID loser and that's not a track that you want to go on. There's been a clean, a clear line in the sand when it comes to statistics in this country post 2020 that are not the right trend. And we got to bucket fast while we still can. 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 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. All right, moving on. More Canada here with one of our darlings of companies. What's going on? Yeah, so BCE, so Bell Canada. I think it's Bell Canada Enterprise, the full name here.

And I don't think, I mean, obviously looking at the numbers, it's just not looking good for BC. And I got inspired by this. I won't name the name, but there's a lot of people in the dividend investing community that are just focusing on yield. And I think that's not the best. I mean, I think that's a terrible approach. I'll be honest here. You know, you also have like Mikey who we've had on the podcast before. I did an interview with him and Mike has, you know, he likes dividend investing,

but Mike, I'll give it to him. He does definitely deep dives into the companies. He really looks at, you know, dividend growers. He doesn't really care all that much about the yield. He looks at sustainability and that the business is growing. And that's definitely... He cares about total return. I mean, he owns Constellation Software. Exactly.

That's all you need to know. Yeah, that's it. And just to give props to Mike, and I don't want to place everyone who's investing in dividend companies in the same bucket, but I've seen this on Twitter where people, you literally ask them questions and I think they should know if they own the business and they have no idea. A lot of them don't even know what a payout ratio is. They just look at the yield, which to me is the first thing you should know if you want to know if the dividend is sustainable or not. But going back to BC here, so it's not been a good last few years, even if you go back to five-year periods. On a total return basis, in the last year, BC is down 25%. During that time-

Including dividends, by the way, folks. Exactly. So total returns includes dividends. During that same time, XIC, which tracked the TSX 60, so the 60 largest Canadian companies on the TSX, is up 8.77%. I didn't at the TSX-60, but I'm going to assume BC is in there. Just go on a limb. Yes, for sure. That one is up 8.77%. So you see a discrepancy here of like 34% in difference in return. Now the SPY, which tracked the S&P 500 is up 23% so almost a 50% difference in returns here and then the gap is even worse when you start looking at a five-year period with BC being flat on a total return basis XIC up 53% and SPY up 88% so it's been really a terrible investment obviously I know there's some dividend investors that just like focus

on the dividend income. And I guess that's their prerogative. But this is I mean, to me, that is a flawed way to look at things. That's my opinion, because my my primary focus is total returns. And I know yours is the same. So what's the issue with BC? Well, first, they haven't covered the dividend in the last three years. And when I say the dividend, I'm including here the common dividend, but also the preferred dividend. That's clearly not sustainable. They announced some cost cutting measures such as job cuts, which will result in savings of around $250 million a year with a bit of cost upfront front because of the severance, which will be impacted this year. They also are reducing capital expenditure investments by over a billion in the next two years.

Even despite that, they issued really weak guidance for 2024. Revenue grew between 0% and 4%. Free cash flow expected to drop between 3% and 11%. Now, this I find very alarming. Not just the drop, but the fact that the range is so wide. It just tells me that management is not sure exactly. That's why they're giving such a wide range. They know it's not going to be good.

They just don't know how bad it's going to be. Do you have the kind of same thing here? I'm looking at the numbers here. I mean, I think it's possible. Yeah, I think they don't know. I think they really don't. I think they know it's going to be bad. They just don't know how bad it's going to be. And they wanted to make sure that the markets weren't too surprised. But on top of that, the fourth item that is bad is they have to refinance over $3 billion in debt in the next year. And spoiler alert, despite what management said on the conference call, it's going to increase their interest costs. They were saying that, oh, you know, interest rates look like they're going to be coming down and so on. The way things are looking, I think that was wishful thinking.

And the more we go forward, it's even more so wishful thinking. That's definitely a big red flag for management is part of their strategy is hoping that interest rates will come down. That to me, I don't know. It's I, I have a big, I have a hard time, you know, with that kind of statements from management. And despite all of this, they announced that they will be increasing their dividend by 3.1%. Like, what the hell is management thinking here? That is has to be the dumbest thing that they said, because they're guiding for free cash flow to be down 3 to 11%. Yet they're increasing the dividend by 3.1%. And they're already not covering it. I just don't understand why they would even do that. I'd rather keep the dividend stable. To me-

Well, you know why. I mean- Yeah, I know why. People own the stock because it's a dividend grower and dividend yielder, and they're on some list of being a consecutive increaser. And that's who they are as an investment vehicle. That's what they are as an investment vehicle. And they know that that's who they're attached to. But I mean, we should just have a long list of companies that we add to the list of management teams

who do the wrong thing to appeal to their current investors. This is clearly that. And just look at how they're compensated. And I'm sure you'll see the answer there. Yeah, exactly. I have a feeling that management actually benefits from those dividends, obviously. So yeah, I'm not surprised to some extent, but it clearly shows that they're lacking long-term vision here because honestly, looking at this, the right move for a long-term shareholder would be a cut, probably a significant cut too. What's the yield on BCE today? 9%. Oh my God. Is it really?

Exactly. So it's not nothing. I honestly think they should probably cut the dividend by half. And then you use those proceeds to pay down debt pretty rapidly. You don't have to pay it all off. Obviously, it's a telco. You know, their cash flows will be relatively stable, but you give yourself more room to maneuver. If there's some good opportunities that come up, you have, you know, ammunition to pounce on those opportunity. And on top of that, you'll probably improve your credit rating and be able to refinance debt at a better rate because you're paying down

your debt. I'm seeing seven. Oh, no, it is nearly 9%. Holy smokes. 8.9% on the dividend tab on FinChat. Yeah. and I posted something on X and someone said like, oh, the price is down because of interest rate rising and a few other things. I mean, you compare it to peers and some are yielding more,

clearly affected by higher rates. But, you know, I'm looking here at TELUS. It's like below 7%. AT&T in the US, below 7%. Rogers is around 4%. Rogers is a tire fire in its own right. So I won't go there too much. But it just shows like when you start looking at peers and one is really jumping out as an outlier, that's usually the market trying to tell you something. So I don't think I'm the only one saying that, you know, there is a chance and

over the next few years that BC cuts the dividend. I'm not saying it's going to happen for sure, but it's definitely a possibility. I think you'd be completely biased if you can't acknowledge that it's at least a possibility that a dividend cut will happen in the next few years. I just – I mean, for sure. No arguments here for me. It's just so questionable that the capital allocation is what it is. I mean, the stock is yielding currently 9, yeah, 8.9% here on FinChat on the trailing 12 months of div. It's like over 10 if they keep this you know yield growth or the the payout growth up which is all fine you know you want to you want to own those companies that are

if they're paying it if they're growing it but not like this like not not like this i think most people who have owned the name traditionally were been receiving about a 5% to 6% yield. That's what this name's been known for. So I don't think if they had a third of the cut and went to go servicing the business correctly, that that would be the end of the world for these people. But you know that's not going to happen with the management team. It's just not going to happen. They'll do it when they have no choice. It'll happen when they have to. Yes, correct.

When they have no choice, which will put them even in a worse position because then they'll have their back against the wall. They'll have to do it. The business, you know, now's the time to do it. This is like Intel 2.0 right here. Like wait till you really don't have a choice and then you do it.

And usually when these kind of things happen, hindsight is 20-20. But if you did it much before, you know, you would be in a much better place. You just kind of bite the bullet. You do it now. You cut it. You have a strong plan in place and shareholders will be happy down the line because they will see better returns. I mean, would you be happy as a shareholder? You're like trailing, you're flat over the last five years. No, exactly. Of course not. Yeah, that's it. So I think shareholders will, would be fine if they see, you know, they see results from it. And to me, it's just a no brainer. I mean,

they would reduce their interest costs by so much just by reducing the debt. They would reduce their interest costs by so much just by reducing the debt. Yeah, but Canadians are dividend blind. They're blinded by the yield, and you lose a bunch of money in the process. Reminder, folks, if you are a customer of one of these telcos here in this country, which you probably are, give them a call. I was doing my weekend Costco run, threw on the AirPods, called my telco provider and said, I'm paying way too much for internet.

I ended up getting a better package for half of the price without any long-term commitments. Half, exactly half the price. Oh,-term commitments half exactly half the price very nice yeah and that was one phone call and it's not even like i had to go you know be that manager yeah i didn't even have to be that guy i didn't even have to do that it was just whoever answered the phone switched up my package and next month i'm paying half as much so go ahead and do that i think that's been it's been tough pressure on the telcos as of late yeah the pricing changes yeah there's definitely a bit more competition too right with video buying uh public not public mobile but um freedom mobile oh yeah there's mint there's mint there's public mobile that piggybacks on telus network that's one i've been looking at because

i have a two-year contract with one of the big telecos that's ending soon and they're sending me texts. Literally, the frequency is getting, you know, more and more frequent as I'm getting closer. It's ending in June. So I think they really want me to renew with them because they are, you know, telling me, you know, upgrade to the iPhone 15 because I have the 13 right now. I mean, me you know upgrade to the iphone 15 because i have the 13 right now i mean why would i upgrade to the 15 i mean the 13 works just fine and i don't care if i get a slightly better camera but i'll do just that when it finishes i'll be like i'll switch to a competitor if you don't lower my price that's that's what i'll do that reminds me of do you

remember onion i think they're still around remember onion news it's like the the fake uh oh yeah satire i remember satirical news they had a movie way back in the i don't even know maybe early mid 2000s and uh they have a segment in the movie where they're pretending to be it's a satirical take on like microsoft back in the day that is like the new version it's like xp 95 oh yeah seven eight nine like every year there's a new one and uh they're like you know oh you're still using the baits 2000 throw it out that's a piece of shit uh it's like with the iphones now it's like i think apple the reason you're seeing apple's struggles uh and and lack of growth the the phones they filter just too damn good man they they've they've kind of innovated themselves into an issue there i i i used to think that they would like have your battery just eventually

like yeah useless it's just be absolutely useless and then i think like since 11 onwards the phones have just been so durable as long as you take care of it i mean yeah i think for me you're not dying to upgrade to 15 no no like for me honestly like i'll probably upgrade every four or five years when it really comes like starts to get slow and the experience is bad, but I love my 13. It works great. Why would I like pay, you know, 30 bucks a month for financing to get an iPhone 15? I don't need it. So that's how I see things. I don't care. I, as long as it works, I don't need the new fancy thing. Throw your baits 4,000. It's a piece of shit. 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.

All right, my last segment of the day. You have one more after this if we have the time. Question for you. What do these questions have in common? Let's play a game. Let's play a game, Seabog. Airbnb, Uber, TikTok, DoorDash, Instacart, Carvana, Turo, Public Storage, The REIT, and Netflix all have in common. Wow.

You thought you had me there for a second and I switched it up. Yeah, until you got Public Storage. I mean, I don't know. They all did well in the pandemic. I don't know. Okay. All right. You know, maybe that has something to do with it.

Okay. Let me take a Public Storage from the list okay yeah airbnb uber tiktok doordash and ticart carvana tarot netflix what do they all have in common i mean i think they're all web-based that would be my first thing yeah yep they're all they are all based yeah yeah and they all have a lot of scale. They all have what I would call the ZERP moat. Oh, yeah. The Venture Capital ZERP moat. You want to explain what ZERP is? Yeah.

All of these companies have different effects on this, but ZERP is a acronym for zero interest rate phenomenon. It's what people call everything basically growthy post-08, I guess is that a fair characteristic? Post-great financial crisis. Yeah, that's pretty much when it went into overdrive. Yeah, so post-08, maybe you can call it dot-com era, had some of this, but for me, I characterize it as post-GFC in 2008 to rates being zero for a long time. Cheap money. Cheap, cheap money, right? And risk on. And the result of this was venture capital, especially in areas of the US, like

the Bay Area, Silicon Valley, different parts of the world for sure, but those come to mind, where venture capital investors were willing to throw money at business ideas that had in a perfect world, infinite scale. And the more money they're losing, the better because it is grow, grow, grow, grow, grow, grow. Don't ask me, don't tell me about profits because the problem with profits is they're going to ask how much, and it's never going to be enough. So more money. We'll get there actually. More money. When? Eventually. Eventually. And it doesn't matter because if you've raised Series C, guess what? We got Series D and we got Series E and it's always going to be more and more money. As long as me as a venture capitalist, I can mark up my investment from we bought at a

50 million. Now we're joining the round with our ability to join the next round at a 500 million. Oh, but now it's a 5 billion. We're going to more and more money as long as we're able to mark up our investment. Now, many of these companies didn't care to be profitable at all. And what you saw in 2022 was many of them had now gone public. They had been around a long, long time. They're out of their VC incubated stage and into the public markets, they're out of their VC incubated stage and into the public markets, like an Airbnb, like an Uber.

And that doesn't work the same way as VC private markups. And so they had to figure out how to start making money. And these are all companies that I wanted to never touch because like you said, when's the profit? Eventually, because they're going to ask how much and it's never going to be enough. But now you have a scenario where these companies have actually reached massive scale, like Airbnb, like Uber. They've reached massive, massive scale and recreating them is nearly impossible. There's no appetite for that anymore. The interest rates are one, they're not zero anymore. They're materially higher. They're more to a normal type of state. And investors now care about making money because there's competition for capital. And you can't just be risk on with that Zerp era anymore. So these companies, I think, are actually incredibly hard to disrupt. Incredibly hard to disrupt because there is no appetite from smart capital allocators

in VC world that are ready to fund and seed the next idea that requires this much capital that requires series F before going public and potentially hundreds and hundreds of millions of dollars of capital with no path to profits. Though the appetite for that just simply doesn't exist anymore. And unless they magically go to zero again, who knows if there will be an appetite like that again. So I do think these companies have been absolute dumpster fires in terms of actual operating businesses until recently. And now I'm looking at them and going, this moat is incredible. This clown world that we lived in has created these very hard to disrupt businesses. So what do you think about the Zerp moat? Yeah, I mean, I think you're right. Like at the end of the day, a lot of these companies have,

you know, there's either a graveyard of companies that have tried to compete with them or, you know, maybe on the way to the graveyard. I'm just thinking right about Netflix. I mean, Disney Plus is struggling. You had NBC with their Peacock service. I think that's struggling as well. Like they're all pretty much struggling except for Netflix. So either they're money losing or they're breaking even at best for the various parent companies. So I think that's a good example. Obviously,

you think about, you know, you have Uber and you have what's the other one? Lyft. Yeah, that's a good example as well. So no, I think you're right. The Carvana one. I don't know. I don't know enough. I know it was a dumpster fire late last year they were on the verge of going bankrupt but i guess they haven't looked at their financial recently but i guess they are you know turning things around i'm not sure that one in particular but it's just one that i know that exists because of zerp yeah and so you know what not all of these are alike in terms of quality and moat.

But I do think that there's something here, especially with Airbnb and Uber, these kind of marketplaces with two-sided network effects. These marketplaces with two-sided network effects that require, in Uber's case, the drivers and the cars, And then at Airbnb's case, the listings. That supply side of the user-generated content, in this case, user-generated assets, and then also acquiring customers to stay in those user-generated marketplace content is very expensive. It costs an unbelievable amount of money to get the snowball rolling.

Once the snowball is rolling, it's very difficult to stop it. But getting it going costs hundreds of millions of dollars, if not in the billions. Yeah. And it's a cautionary tale too for venture investors, right? I think you need to know that space better than I do. But even looking, I'm thinking of a stripe and I don't know exactly the latest valuations. But the last I heard about it is that if they were to go public, it would be a haircut to the previous funding round. So I think there's probably a lot of venture investors that are a bit cautious as to put too much money in. I'm sure they're willing to put some money in the right projects, but they're much more selective and they probably need to have

a better idea of when the company will expect to be profitable, not just growth at all costs. Want to know the two dirtiest words in venture capital? You sure? Go for it. Downround. Oh, yeah. Yeah. Okay. Yeah. words in venture capital you sure go for it down round oh yeah yeah okay yeah that just what that means is like in this example is raising money again at a valuation that was lower than the previous round that's a that's a down round and it's the dirtiest two words in venture yeah yeah definitely um i guess we'll have time for my segment that I've been keeping, you know, pushing back for a few and on the back burner for a while. Yeah, exactly. I think it's a fun one. Feel free to interject as I'm going through this. So I wanted to look back at allocation because I think it's really important for people. So especially like for investors, especially if you start investing not too long ago. So allocation is

definitely a really powerful tool to help you kind of mitigate risk in your portfolio or increase it, right, depending on what your risk level is. With all other things being equal, the more concentrated you are, the more risk you take on and vice versa. So say you only invest like a good example to wrap your head around it. You only invest in stocks and you have four companies that are 25% each. No matter how good the companies are, blue chips, you know, maybe their best companies in the world, right? Think about four companies that you think are, you know, solid for years to come. Well, you know, they still have some risk. And we talked about that in some recent episode.

And even if each holding has a very small probability of going down half in value, for example, the probability of it having a significant impact on your portfolio is magnified because of their large allocation. valuation whereas if you have 25 companies at four percent each if one of your holding goes down significantly let's say by half or even to zero it's going to impact your overall returns but it's going to have much less of an impact than if you had just four companies at 25 percent each i mean a lot of people i think the allocation is just not discussed enough. And clearly, the more concentrated you are, the more polarized your potential outcomes become. Because let's take it to the extreme. Say you own one company and some of the richest people in the world, that was their case, right? They only had stake in one company. If it doubles, your portfolio doubles. If it tumbles 50%, your portfolio goes down 50%. You have nothing else to offset it. So it's a great way to get rich or to go broke.

Anything you want to add to that? The last few words you said there is exactly what I was saying. It is concentration in terms of portfolio concentration, position concentration is the easiest way to create and destroy wealth. What I like to do is I obviously run a very concentrated portfolio. I have a few names that make up well over half the portfolio. The top 10 names make up, I think over 85% of the portfolio. So that's, that is the game I play. I let my positions become that big by not selling them. I don't ever add to a position that it becomes that big. I look at it as a way it has deserved that type of conviction from myself and my capital over time by being a winner in my portfolio that I understand extremely well. that I understand extremely well. That's how I let positions become massive is because I don't sell and trim rather than, okay, Simon, I really like this name.

I'm gonna put 80% in tomorrow. That's not the way I invest personally, but I am very concentrated. Yeah, exactly. And I think it's just important for people to understand that, right? And the allocation, you know, you can have a different strategy. So I've talked about this before, but say you have, you know, 90% of your

portfolio in index, you know, index fund, let's say the S&P 500. And then you have 10% of your portfolio where you tell yourself, okay, I'm gonna take, you know, 10 bets, 1% each into these high growth, high risk companies. Well, that's not that risky of like, I mean, obviously it's still equity. So there is a certain amount of risk, but that's not extremely risky when you think about it, because that 1% per company, I mean, it's not going to impact your portfolio all that much. And that's where you can also have asymmetrical returns, which just means that, I mean, it's not going to impact your portfolio all that much. And that's where you can also have asymmetrical returns, which just means that, you know, there's the potential outcome of, let's say, I'll just take a 1% allocation, and that might be a bit low. I'm

just using it as an example. Well, you know, let's say there's just two potential outcomes. Usually there's more than that, but let's say there's just two. Either it goes to zero, so you lose 1%, it goes to zero, or it 10x. So then it becomes a pretty meaningful part of your portfolio. So that's how you look at when people say asymmetrical outcomes is there is, you know, the upside really outweighs the downside risk but that's because you allocated appropriately because if you had 50 of your portfolio clearly then the asymmetrical outcome is different there because you're gonna get wrecked if it goes to zero yes you'll probably get rich if it you know 10x is that point but that's where it comes in terms of asymmetrical outcomes where you can allocate a very small portion, but the upside is so great compared to the downside.

It's like the Kelly criterion for sizing bets in gambling. It's like a really good framework for sizing bets in your portfolio, sizing positions. The way I look at it is match my conviction. So, you know, it's just like what you're saying there around asymmetric size, a little bit smaller. The same, the way I think about it is Simone, like if I, if I tell you, you can double your money. If the sun comes up tomorrow, what do you do with your portfolio? So what do you do with that bet so i say simone you can give me as much money as you possibly want i possibly can if you if you are able you get a you double it if the sun comes up tomorrow if the sun doesn't come up tomorrow i take all of it what do you do in that situation 99 in case an alien blows up an alien spaceship blows up this well and i don't think

your money's gonna mean much you you take you go you know you push in all the chips in the table right so that's kind of the way to think about sizing bets around conviction and around probabilities that's something you'd probably want to have in size it's like i i will double your money if you if the sun comes up tomorrow but if it's some long shot i'm not gonna i'm not gonna be having all the chips pulled pushed in yeah exactly an allocation too i think it's you know if you listen to any portfolio manager especially those who manage like you know money from wealthier clients i'm not saying necessarily the people that get, you know, paraded on being and, you know, sometimes I, I do find that I wonder sometimes if they know what they're doing some of the portfolio managers

there, but I digress. But if you look at, you know, people that will manage money from wealthier clients is they'll oftentimes, you know, allocate to different type of assets. So I'll just go over them quickly. Just a quick overview, just because I think it's important. We do focus a lot on like stocks and, you know, all interchange stocks and equities here because they're synonyms, obviously. But, you know, I own personally a lot of equities. It to be 100% but now it's a lower percentage it's still a big part of my portfolio it's about half and historically US equity has been one of the best performing asset classes I mean Canadian equities haven't performed as well but they've performed pretty well at least over the last 20 years, they're pretty close to U.S. in terms of total returns.

If you go back further in time, then the U.S. definitely are doing better. Or if you go more like the last five years, clearly U.S. equities are doing better. But there's also fixed income. To be fair, personally, I don't own long duration bonds, but I do own short duration treasury bills, which are backed by U.S. government or Canadian government, depending on which one I want to own. To me, it acts as an edge against equity not performing well. And I'm currently getting 5% plus to hold these without interest rate risk because it's on the short end of the curve. So if interest rates go up or down, it's not going to affect the value of the underlying capital. Obviously, I'm going to be yielding less on it or more, but there's less risk there than longer duration bonds. Another option would be GICs. You know, EQ Banks is a sponsor. They offer some great GICs products if you're looking to get

locking some rates and get some fixed income and locking those rates. The only downside is you can't cash out until maturity. Real estate is another asset class that you could allocate. This to me, I kind of put REITs here, although they could be lumped into equities, but they do perform differently than equities as a whole. I think it's also important to remember that not all real estate is the same. Some will perform better in certain environment than others. And then the next two categories, I think to me, the way I see it as Bitcoin and gold slash precious metals, the way I view these as just a hedge against government excess or even an insurance policy, especially when it comes to spending, which we've seen, you know, Canada, the US, I mean,

the US, I think, is increasing their debt by like one trillion every quarter, something like something wild like that. It's just it's just crazy. And both are scarce resources. You know, whether you agree or not with Bitcoin, I mean, I think the protocol, the way it's set up, I do think it's scarce. There's going to be a maximum and it's very difficult to change the protocol. They may not hold their value short term, but can provide a valuable hedge against other asset classes as well. And, you know, if we do come in a situation where there are some problem with sovereign debt, there could be some asymmetrical results with these type of assets, meaning that they could perform extremely well against other asset classes and I would also

place companies that produce precious metals here as a general rule I know this is debatable but a company a mining producer so a mining company that produces like gold or other precious metal it's typically seen as a leverage play on those precious metals so it's gonna move more as the price goes up but will also go downwards as the price goes up, but will also go downwards as the price goes down more because they are leveraged. And then the last part here that, you know, I don't really own myself, but it's been more and more popular, at least with Wall Street is alternative investments. So in there you have private equity, private debt, hedge funds, collectibles, slash arts, commodities,

basically tons of non-traditional investments. I know there are some other ones. That last part, I don't really dabble into that. I know I don't think you do unless you have some collectibles I'm not aware of, but that's kind of the- I gambled the whole portfolio into some NFTs last week. Yeah. Okay. Okay. It could be hockey cards or something uh you never know right i pulled out my hockey card collection last year as a kid thinking that i was gonna have some amazing cards because i remember my collection being top notch like pretty solid for hockey cards yeah yeah i still have it is not good I didn't have anything valuable at all, dude. I thought there was going to be something in there that I'm like,

oh, this is worth something. Or like, this is, oh, look, so glad I held on to this. Like, I didn't have one good one. My brother-in-law is showing me his, and it was so good. And so many valuable cards. I whip out mine, and i literally had zero rare cards as a kid i thought they were like it was an electric collection it was not good so early 2000s so that that would probably be like early mid 2000s that you built up that that uh a collection yeah probably from around 2000 to 2005 ish okay okay so maybe thousands yeah 878 maybe i don't

know okay so you're i'm just trying to think in terms of like players if you had a rookie card like a of note or not so so let's just say yeah mary i have the i had the the coolest one was i was a jerome again i was a really big jerome aginla fan he was okay hockey player okay and i have his rookie card okay so it's not quite worth as much as the wayne gretzky rookie card huh it's really that's like the only cool one i don't know what it's worth but that that one to me is sentimental because i i think jerome mcginless is the man for me it was um the one player because like we were kids and we all had one favorite player for me it was uh paul correa i have his rookie card too yeah i don't think it's worth all that much, but still, I have the rookie card. That's badass, though. Yeah.

That's a good one. The rookie card, what a concept. It's just like, you know, scarcity is everything, right? It's printed once, and then... Do you think hockey cards are still... Like, is a McDavid rookie card worth a lot of money? Are hockey cards even really worth a lot of money? I think it depends.

I think you can have different rookie cards based on the different like publishers or whatever they're called right on like tops or whatever like upper deck because there's a rating system yeah so i think you can have different but one of my buddies is dad who's in his late 70s now but i was like you know we were neighbors when we're a kid and i remember he sold his hockey card collection and he was collecting cards in the 50s and 60s. Oh, wow. So he had like Marius Richa, like rookie card, a Gordie Howe, like stuff like that. And he made a decent like penny at the time. I think it was late, like mid 1990s when he sold.

the time i think it was late night like mid 1990s when he sold but i mean his collection would probably be worth like in the six digits easily now yeah this ebay a perfect 10 gem rated rookie card of connor mcdavid uh psa graded 10 officially is 5200 can Canadian dollars. So just a little over 5,000 Canadian dollars. That looks like to be one of the more expensive ones. There's a few for the 3,000-ish range that are not as rated a perfect 10. That's a little bit more than I would have expected. I mean, at the end of the day, it's like everything, right? It's scarcity. So if there's not much and it can't be produced anymore, you're going to have a market. The market might not be super liquid. And we talk about that with stocks all the time, right? You know, it might not be very liquid, but if you can get the price,

you can get that one person interested in it. You'll probably be able to get the decent price for whatever you have if it's scarce enough yeah no no doubt dude now i'm gonna go i know a guy who he runs a software company i know a guy that knows a guy i'm actually pretty close to them because i'm in like a mastermind group with him okay like a bunch of other software founders and he runs card grading software. Oh, nice. Yeah.

And so he has deals with like some of the gambling sites and some of these like sites that are specifically for, um, buying and selling sports cards and they use his, his grading system and technology as like an API. It's pretty damn cool. I should ask him more. I mean, I talked to him a lot and I know nothing about his business

in terms of the actual scoring. Yeah. I know all the financials. That's okay. I can tell you his financials inside out, but not the grading system. But this is fascinating. I'm like on uh rookie card uh ebay people listening are probably like oh i should have stopped listening five minutes ago

hell no that's what they think they stay for this stuff they stay for this stuff yeah and the probably last thing if you're not very well versed and i'm not that well versed on trading cards or a sports card but definitely the pA level will impact the value a whole lot. It's super important if you want. If you have something that even is not the rarest, but rare enough, if you don't have a high rating, it just shatters the value. Right. It's like selling something on Marketplace that's not mint condition versus new versus yeah something crappy dude i sell a lot of stuff on marketplace with some pretty good success and by a lot of stuff

i mean like randomly i'll sell something uh and i'll i'll occasionally buy stuff on marketplace but i'm mostly just a seller i put on so much stuff that I think would never sell. The more I think that no one will buy it, it flies off the shelf. I get like 30 messages being like, hey, I'll come right now. If I have something that is a slam dunk, I'm like, this is such a good price. I'm basically just listing this so someone will take it off my hands. It'll sit on the site for months and months until I just take it off. Yeah, I need to go on Facebook Marketplace. I have used it a little bit, but not that much recently. We have some stuff to sell.

So you've inspired me. I think I'll start doing that this weekend. Put on the things that you don't think will sell and you'll be surprised. It's going to be the first stuff that'll sell the the stuff that i think will never sell is immediately gone and then you know the contrary so put put some of your uh your stuff on there and you'll be surprised you can you can charge actually pretty good price whatever i can get rid of that I'm not using. That's how I see it, get a little extra money at the same time. Thanks for listening to the podcast, folks. We appreciate you very much. Thanks for tuning in. We are here Mondays and Thursdays. You can

support the show at joinTCI.com. That's our Patreon. You get our monthly portfolio updates coming out on the first of every month. Myself, Dan Kent, Simon, and you also get this podcast on video. Key for things like that graph at the beginning, showing the widening gap between public, private, and self-employment jobs in Canada. It's one thing for me to describe the graph. It's another thing to actually see it and see the data, textualize it, see the gap.

So that's at joint TCI.com as well as use code TCI for 15% off at FinChat.io. FinChat is the best research platform on the internet. When this podcast comes out, Simon, we are launching FinChat V3. FinChat V3. FinChat V3 is five to 10 times better at reasoning and on the AI engine. It's able to summarize earnings calls, summarize businesses, summarize the last quarter with amazing results. I think 10X better on those queries and it even formats it in a certain way that makes it super easy to understand so those prompts i don't think are super impressive right now but vinshot v3 is good looking forward to ask it if bc should cut its dividend i'm gonna go query that in the testing and the. I wonder if it'll have a hot take on that. Yeah, I do wonder. I was just joking.

I do wonder. I mean, I think you'll be surprised at the reasoning that it has because it has so much like, I don't know if it understands deep capital allocation yet, but we'll see. Eventually. Let's work towards that. Thanks for listening, folks. See you in a few days. Bye. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.