The Canadian Investor - Looking at 2 Impressive Under the Radar Companies

Episode Date: March 27, 2023

In this episode we talk about irrational optimism and why it's a common characteristic of great founders and investors. We then look at a recent twitter post from Ben Felix who compared lump sum investing with dollar cost averaging (DCA). We finished the episode by talking about two companies on our radar that we’ve never discussed before on the podcast. Symbols of stocks discussed: MCO, SPGI, WISE.L, WST 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.

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Yeah, it should be a fun one. Just a little break over all of the financial sector as a whole. News cycle. News cycle, exactly. The news cycle. Yeah. So there's going to be a little bit about SVB, but not too much. We're just going to come back to concepts. So, a fun little break from it. That's why the Monday releases are such a breath of fresh air because we get to take the 10 million foot view on financial markets, portfolio management, and just good old

investing concept because it's really important, man. You can get caught up in the news cycle. And that's exactly why I wanted to start today's show with a topic I am calling irrational optimism. personality trait, a gene that is just in some of the world shakers and world builders of people who really do amazing things. And what is this? You say a rational optimism is a character trait that these innovators and thinkers and great investors have. It is when their world looks like it's falling apart. News is negative. News cycles only negative. Sentiment is at all time lows. And you face this extreme uphill battle, especially with the psychology of your own behaviors. And they're just enough, And they're just enough crazy, they're just crazy enough to do it. So something I find funny is my buddy Calvin, he started an automation shop and he literally builds robots that get deployed in manufacturing plants. He has like some huge contracts with large manufacturing, a lot in the auto sector. And he's been rapidly expanding, just a great entrepreneur. He's got this brand new facility last year. So shout out Ethos Automation.

They're in Brantford, Ontario. They're crushing it. And I was with them last summer, and we had a good laugh on this exact topic because to do amazing things, you have to be just smart enough to start and just ambitious enough to go for it and just dumb enough to think that it's going to work. Because if you knew all of the challenges that you'd face, you'd have to be dumb to want to do it or think it's going to work. And to me, that is what irrational optimism is

perfectly summarized. It's just enough, just dumb enough to think it's going to work when every sign of rationality is telling you it won't. It's like this podcast, Simone, okay? Most podcasts fail. You and I know the statistics. 90% of podcasters statistically never make it to episode 21. So only 10% of podcasts make it past episode 20. We had irrational optimism to push through and think that all this hard work was going to pay it off. And now we're staring at three and a half million listeners alone this year. And so that's an example of just like if you knew how hard this was going to be uh to keep consistent and now it feels good but there was a long time there right we were just irrationally optimistic that it was going to

work is that a fair characterization yeah i mean i think we were also just doing it more as a passion project and it was for fun. Exactly. I don't know if we had any expectations that were that high. We're just, you know, I think we just wanted to see some traction. And then, yeah, it's always good. The bar was set pretty low. Yeah, the bar was definitely set pretty low yeah maybe it's maybe it's kind of a bad example but you know you know what i mean like if someone is to tell you like how many hours are going to go into it uh you'd be like oh yeah like you'd have to be irrational to to join that venture and where i'm going with is great investors also have this, which is this great sense of incredible ability, wit, intelligence to pull off being a great investor. But part of their brain that has sense of pessimism turns an irrational blind eye. And what this means is it's very similar to being cautiously optimistic, but it's even more dramatically having the ability to say, yeah, sure, things might look bad right now, but if we zoom out how far we have come

and where we're going to go over the long term, I'm going to keep doing what I'm doing. And most sane people have the actual behavioral psychology, the bias where human intuition kicks in and goes into protection mode. It goes into cautious mode. And that's exactly when the great investors have irrational optimism and actually go against the grain to achieve alpha in their investment returns. And so I wanted to kind of contextualize this with a great investor. So let's look at Phil Fisher. He wrote the classic book, Common Stocks and Uncommon Profits, which I somehow only ended up reading in full last year. I think I'd read bits and pieces of it, but I read them full last year. And he was known as a great growth investor. the time there was the great Ben Graham, who was the great value investor. And Fisher was known as one of the great growth investors. And he believed that if you held great companies for a really long time and avoid selling them unless the fundamentals have dramatically deteriorated,

this is a strategy that requires supreme long-term views and optimism about the business existing and thriving decades down the line. Phil Fisher was born on September 8th, 1907. The late great Phil Fisher passed away in 2004. All right, Simone, here is the wall of worry, which is a topic that I'm going to stash for another time here, but the wall of worry for Phil Fisher. He's a young boy when World War I is happening. After the war, the Spanish flu circled the entire globe in four months, claiming the lives of more than 21 million people. 21 million people. The United States lost 675,000 people alone to the Spanish flu in the year of 1918. After the roaring 20s, the Great Depression is a ruthless recession. Stocks get pummeled, peak to trough down more than 50%. Things look terrible. Now he's 32, he's come out the other side and World War II starts. Oh, great. After the war, which raged on for many years, you have the era of stagflation, which was not a good time to own stocks. Boom, right into the Vietnamese War, the Vietnam War, Black Monday, the Cold War, all the way till the tech bubble implosion in his last years. Those are just some of the main events that had huge drawdowns in the market. There was more.

These are just memorable ones. And he ended up going on through all of that, managing money and writing books about holding great companies. This is irrational optimism at its finest. Here in 2023, the negative news cycle is heightened by bad incentive structures, clicks and catastrophes. I certainly have my worries as any sane human does, but I remain irrationally optimistic for the markets and creating things that people find value in both in my career, but also as an investor. And I wanted to highlight this segment because it is so hard to find good news in financial markets. Even when we were on that gigantic bull run, from like basically oh nine ten to to end of 2021 it still felt like you know the news cycle is always negative because that's what generates clicks and incentives are

built like that and so uh zoom out and take a take a dose of irrational optimism you'll uh you'll feel better about your life yeah exactly and i mean even with all the pessimism, like we haven't, you know, we've made some small sales here and there of our stock portfolio. But for the most part, we remain pretty close to fully invested. I mean, at least for me, I think for you as well, right? And for me, I think the main thing for me, the change has just been definitely hedge a little bit the type of stocks that I own. Just to, you know, be able to, depending on what outcomes will happen with the economy, I've kind of, I'm starting to hedge a little bit my portfolio just so it's better position in different kind of outcomes. But again, I've been sold or anything like that for the most part.

All my big positions are still the same. So that's how I approach it from an investment perspective. Right. You might be positioning yourself up for success like all investors should, which shouldn't be mistaken as like, yeah, like you said, you're still fully invested. You're still taking the 10,000 foot view and you're still extremely optimistic about the future. Um, when all signs and human intuition goes against you, especially when you're being

thrown the news cycle, the 24 hour bad news cycle, it's news cycle. It's not healthy, man. When people are like, oh, have you heard about this or about that? Or have you seen what's happening with this stock today? I'm like, nope. I'm like, don't you own it? I'm like, yep. You're right. It's irrelevant to me.

These daily moves, weekly, monthly, even annual moves are relevant on the stock price. I am focusing on the business fundamentals. Yeah, no, exactly. I think that's the right thing to do. 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. Now we'll move on to some more investing concept, a thread that got flagged to me by Joseph D, who was at the baseball, the Blue Jays meetup. Yeah, Joe.

Shout out, Joseph. I think it's probably Joe. I don't remember. But anyways, Joe or Joseph. Oh, yeah. He's a great lad. Yeah, he came to the baseball game with us. And he flagged a thread by Ben Felix,

who does some videos on YouTube as well. And I thought it was a really interesting thread because he did a look about DCA versus lump sum investing and which one actually has the better outcomes. And, you know, I think it's for the most part, I'll talk about the findings and then you can give me your thoughts about it. But sitting on cash, obviously, you have to sit on some amount of cash if you're considering the strategy, one or the other, because you need to have a decent chunk of cash if you consider lump sum

investing. If not, if you're investing every single pay, for example, then you're automatically dollar cost averaging, which is not what they looked at here. They really looked at someone, let's say someone got an inheritance for $100,000. So what's the difference? Is it better to invest it as a lump sum or do as they tested and doing a 12-month DCA again versus a lump sum investment? Now, they use stock indices from Australia, Canada, Germany, Japan, the UK and the US. While being deployed cash would be earning the one month US Treasury bill return. So that that's essentially for the DCA, right? Because at the end of the day,

if your dollar cost averaging over 12 months, let's say you're investing you know a chunk every month for 12 months i mean that cash that's sitting you want it to at least earn some returns and they evaluated the data in several different scenarios so here are the findings in all countries lump sum outcomes were better 65 percent of the time and it was a pretty good advantage too. So DCA provided on average 38 basis points, so 0.38% lesser annualized returns than lump sum investment. So that's a pretty big difference when you look at it annualized. When they took the 10% worse outcomes of lump sum investing and compare that with DCA, it was essentially a 50-50 outcome, but clearly they isolated the 10% worse outcome. When looking at periods of volatility, lump sum became ahead once more, 54% of the time,

54% of the time. So almost 50-50 here. And then lump sum also came in 64% ahead of the time when the market was considered expensive. However, they only looked at US data because it was due to lack of data for the other countries that I mentioned earlier. So overall, I mean, using the data they found here in the backtesting, clearly, you know, lump sum investing was the better option in terms of return. I'm going to give my thoughts here. Great thread, by the way, from Ben Felix. Any comments before I give my thoughts here? I'm just trying to understand this experiment. So, oh, there's backt back testing whatever you want to call it so yeah

the the lump sum is that just taken like in a bunch of different periods like hey if i lump something here what would the next 10 years look if i lump something here what the next 10 years look like because of course that timing really matter so they just like a bunch of sample sizes to do the comparison against like how did they do yeah i believe so yeah exactly so i think they used uh like i think they use over a century if i remember correctly i don't have the thread in front of me and then they average out the different outcomes okay okay and so 0.38 percent was the difference between the like better for those 10 years for each 10-year period. My first thought is, yes, of course. Money invested at an implied total expected return versus cash should yield better results. But there are a long list of drawbacks associated with that as well, including that sometimes you massively mess that up.

And, you know, tell that to people who've lump summed in November of 2022 or sorry, in November of 2021, how they feel about their lump sum. So there are a couple other factors here to think about, which I assume you're going to get to here now. Yeah, exactly. And to be fair, Ben Felix does mention a bunch of these as well. So he does mention that there can be a psychological advantage to choosing DCA method, even if it might not yield the most optimal results. results. He also has said that DC is necessary to deploy money into, if it's necessary to deploy money into an asset, then asset allocation may be inappropriate if you're unable to sustain the volatility of a lump sum, right? So he's kind of going back to, you know, maybe there's bigger issues with your investment strategy. From a psychological perspective, I think it can be a

big advantage, like you just mentioned with people. And I can understand his point on asset allocation. But especially if someone that would be new in investing and puts the money in an index fund just to see it go down significantly during a market drawdown afterwards, like that, I can see for some people, they would panic sell and then basically end up having the worst possible outcome here. So I think DCA… Or just completely losing trust in the market long term because of one bad month or quarter of market performance. That is what's the costly mistake is having that happen, right? Yeah, and that's been my argument for is having that happen, right? Yeah. And that's been my argument for those dividend portfolios, right? We had the discussion before where even if you have a dividend portfolio that, you know, is an average yielding, maybe not super high, maybe not low, but you love just having all

dividend stocks. And my argument, I mean, I don don't it's not my position on my portfolio you know that but the argument behind it is i've always said look if it prevents you from panicking in big periods of drawdowns like there can be a benefit even if your total returns won't be as good should you be holding you know more growth stocks or mixed in with dividend growers, whatever it is, well, just the fact that you're not panic selling could actually be a really good thing. And that's where I come in from that perspective. But they also use the DCA strategy over 12 months.

So that's a pretty long period for DCAing. So you could use a hybrid strategy where you say you dc over three or six months so instead of doing that long term maybe you split it into that lump sum that i mentioned that example that hundred thousand maybe you split it into 25k installments and you do it over four months so then i'm sure the results would differ from their back test that they did. And one other idea that he also floated in his thread is maybe you do a hybrid approach where you put a lump, part of it as a lump sum, and then the rest you DC over six or 12 months. So there's different ways to do it. I think that's important to kind of wrap around here is that they only did it under one kind of set of circumstances in terms of the installments and if you change that variable obviously you'll come to different results as well

so it's not i wouldn't say it's a knock against or for dca per se i think it's just it shows that you know the test that they did with the variables that they did yielded the results that they did here. I'll give you an anecdotal experience that I've had very recently. No, I don't think it's uh-oh. Okay. Here's some anecdotal evidence of how you should live your life. No, I have a very close friend of mine and they're like, Hey, I'm going to start, I'm going to, I'm going to get my, my shit together here and start DCA-ing into index funds.

Okay. So into low cost, broad-based ETFs. And I said, Oh, that is, that is wonderful. That is music to my ears. You should definitely do so and then like oh yeah like should i just throw you know what i have ready to invest in in these these etfs and i'm like one i don't provide financial advice but uh here's the etfs that i think are are really low cost and yes you can just do it kind of with one etf or these two three etfs whatever and the number the the the, like basically it was like, yeah, just go lump sum it, like whatever. And then I learned how much it was. And it was a lot. It was a lot of money compared to what they make every year. So I know this is a lot of money

for them. And I was like, whoa, that's like nice. Good work. That's like you've been saving. Good stuff. And so when I found that number, I'm like, okay, let's tone it down a bit, like lump sum, sum of it, and then DCA it over even like it's enough where I know that it's so much for you that you could even think about DCAing this over like the next 18 months. Because you can get, you know, pretty decent return on your cash and like a, you know, really basic fixed income instrument or even just a HISA. And so these things matter. That's why it's nuanced like if it's you know if if it's like 95 of your wealth you just walked into with this you know lump sum then you can't just think

about it the same way even if the math says one thing i the the psychology matters here like it's it's it's nuanced enough that it definitely matters yeah exactly and i think that's a really important you know thing to mention especially with the interest rates that are really high right now because obviously the back testing was done over long periods of time so you know we had periods where holding cast really didn't yield anything at all. So right now it does provide, you know, some additional flexibility. And who knows, right? If you do a lump sum, a partial lump sum, and then you DC over time, you know, it also

gives you some dry powder. So if you do see a sharp drawdown, you have the flexibility to deviate a little bit from that strategy and be opportunistic with it so that's an extra layer or two that's available depending on what happens but then obviously you have to be able to you know shift a little bit but that's you know it gives you an extra ammunition if you'd like if you're one of the thousands of new folks listening to the show recently, one, we love you. Two, DCA just means dollar cost average. It means you are taking a set amount and doing that amount consistently over a long period of time versus I have a hundred grand,

I'm going to throw it all in the market today versus, okay, over the next 10 grand, I'm going to throw it all in the market today. Versus, okay, over the next 10 months, I'm going to invest 10 grand each. And this just spreads out your market risk of getting unlucky. It can work both ways, but neither you, I, or Simone have one of those crystal ball things. So that's the whole point of it. All right, let's talk about what do you got? I was going to add the last thing is the data for the most part, I would say because it was done on several countries. So most countries, it was 1970s until 2020.

But then Canada was 1956 until 2020. And then the U.S., 1926 until 2020. So very large samples. Just wanted to specify that. That's cool data. And I know Felix does some cool stuff. I've talked to him here and there over the years. 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, let's talk about Chuck Ackrey on portfolio management. I found this cool little transcript when he was talking about portfolio management. Don't even know what year it's from. I just saw the screenshot, but I loved it. And I want to read it to you guys. Here it is. Quote, we don't have sell targets on anything we own. One of the hardest things for an investor is to manage the temptation to sell a business when the stock has gone up a lot or when it's having a lull in its performance. It's maybe particularly hard when you come from the sell side, as I did, where it's always been and remains to be about creating transactions. I don't care about transactions and I want to have as few as possible. I like to point out that if you have an investment that has gone up 50 times,

the next time it doubles, it is now up 100 times. Compounded return is staggeringly powerful. I have some investments personally that are up over 200,000% and I still own them. This is amazing because this is true. He has owned American Tower. I think his total return on American Tower is like 250,000%. It's ridiculous. And never sold a share. So that's a really interesting takeaway, that they never have sell targets

because they're holding businesses and letting them compound. It's easy to take those profits and run, but if the business is crushing it and selling winners to buy losers is like cutting the flowers and watering the weeds. So that's number one takeaway. And number two about transactions. Wall Street is incentivized for you to trade as much as possible because that creates the

most amount of money for the industry. It's always about creating transactions, he says. I don't care about transactions and I want to have as few as possible. Any thoughts here? I love this. I won Chuck Ackery's A Legend and his portfolio has done stunningly well over time. But his writings and a few media appearances that he has done are brilliant. I highly recommend people check it out. around compounding just think about it on a small scale it makes it easier so let's say you have a dollar doubles it's two dollars and then the two dollar doubles again it's four dollars but that one dollar is your starting cost so that's why the doubling becomes it's exponential so it

becomes bigger and bigger over time so that's why compounding is so powerful that's just a simplified way to say it yeah remember what was it um in math in like grade six like part of the curriculum was for you to learn about a penny doubling for 31 days do you remember this thing i mean i went on the to school on the quebec side so i don't remember that but you know grade six maybe it was just my teacher that's almost 30 years ago um miss shout out mr ad i don't know if he wants me to say this but whatever um he was by far my favorite elementary school teacher and i remember, what, 10 and a half if it's a 30-day month, and only five-ish if it's 29. February is like, only two and a half million. So those last few bits of compounding make up so much their turn. And it's exactly why Acri is talking about this here.

It's like, I've been lucky enough to own 50 baggers that doubled again, you know, like that's, that is really what is exceptional wealth creation for him. Cause he has been lucky enough to own some of these darlings like American Tower for all these years. He's owned Constellation Software for, oh gosh, like 15, 20 years now. He's owned Constellation Software roughly.

And so many times he could have taken chips off the table. And that 50 bagger just doubled again. Next thing you know, I have a 100 bagger, and it's exceptional what it can do, and this is why he is so reluctant to sell winners. Yeah, no, well put. Now we'll move on because we have a couple more segments, including stocks on our radar with EQ Bank, some new stocks, so make sure you you stick

stay until the end uh now this one here um you know i'm gonna dunk a little bit on two stocks that you own but i'll give you a chance to uh you know to give your thoughts on that so not to do obviously another episode on svb but i wanted to to talk a little bit about the rating agencies and what happened here. So if we go back to the great financial crisis, rating agencies were heavily criticized for putting AAA ratings, which is, if you're not familiar with ratings, basically, these agency will put a rating depending on how good financially the company is in terms of their debts or bonds that are issued by the companies. Typically, there's a whole lot of different ratings. There's probably around 20 per each rating company. They have slightly different numbers, numerical numbers, I guess,

or letters associated with it but the two biggest things they need to know is there is investment grade and there is non-investment grade and non-investment grade is essentially called junk bond so there's usually a much higher chance that the company may go under and depending on how low it is on the non-investment grade or the junk bun kind of ladder, then there may be also a significant risk of defaulting. Now, here, fast forward to SVB, and it's not the same, but it looks awfully similar where the mortgage-backed securities in 2008, the agencies were criticized because they were putting the top rating on those i think mbs's had triple a ratings and they were literally filled with like a you know a tnt that was

ready to explode yeah exactly it was basically bad loans and they were still saying that they were really good loans that's essentially what it was and the big short the movie there's a pretty there's an interesting scene where they go to the rating agency i can't remember which one it is but they basically like the rating agency basically admits well you know we're not going to do it because our competitors are not going to do it and if we do it then we're going to lose their business that's essentially the gist of it. Now, what happened with SVB here is on March 8th, the day of the infamous SVB call by management saying that everything was fine, but they needed to raise a couple billion dollars in liquidity. Moody had an A3 rating on SVB.

A3, essentially, it's still considered investment grade now after the call it was downgraded by one notch to baa1 that's still investment grade so it's a couple notches before like above the junk status or the non-investment grade now on march 9th snp global another rating agency downgraded svb again by one notch both both considered investment grade again. On March 10, when a 10 grader or even a grader could have told you that the bank was a absolute dumpster fire, both agencies actually downgraded SVB all the way to their lowest rating. And the reason why I wanted to mention this is, you know, isn't it not their job to be able to identify this kind of stuff? So we were, you know, we were talking on the SVB episode, whether, you know, where the blame lies a little bit.

And, you know, is it the depositors or is it the Fed? Like, who is it? Is it management for SVB? Like, who is it? Is it management for SVB? But of all of people or all the different, you know, institutions, whatever you want to call it, that should have seen this coming. It sure feels like credit agencies should have been a bit more on top of it. I know it's not all of their business is just part of it. So I think that's important to mention it.

But I was just wondering, like, what your thoughts are on that, because I know you you have small stakes in both companies, Moody's and S&P Global. But the fact that I don't know if this will impact the confidence in their services or not. I know it didn't really happen after the great financial crisis. But yeah, I wanted to mention this and what your take is on that. to mention this and what what your take is on that yeah i have a couple of interesting takes and i have lots of conflicting thoughts and opinions here full disclosure i own i own both of them equal weight uh s&p global ticker sbgi and moody's ticker mco they are you know essentially in a duopoly there's also fitch in there with rating bonds. If you have a bond and you want to issue it, it needs to be rated. They have like a regulatory moat. And there's two names in town for the most part that need to rate them. And it's Moody's and S&P Global.

Now, the 08 thing, absolutely. The 08 thing, absolutely. There are fingers to be pointed here at the rating agencies incentives around rating these bonds and getting their business. Absolutely. Because the incentives are set up to fail. Say S&P Global starts being really, really, uh, aggressive with rating the bonds lower overall. Instead of giving it AA+, they're giving it, or instead of giving them AAA ratings, which is the highest prime rating, they're giving them just regular AA, AA, which is still high grade rating and probably reasonable. And Moody's is throwing AAAs. Which rating company are you going to go to? It's like you're a student and you're like, hey, I have my test and I wrote this essay. And Brayden's really, really nice. And he gives everyone an A plus. And Simone's more

accurate and realistic. And this is probably only like a B minus of an essay. Who am I going to hand my paper to? My incentive is to give it to the nice guy. And so that comes out in their financial results. And so they are stuck between a rock and a hard place for both these companies with their incentive structures. So that's my first thought, which I don't love. I don't love that. Second thought is the business moat is so strong that it doesn't even matter. They're set up with such supreme regulatory moats that, yeah, maybe it's not the best way to run this business, but it sure does work. Have you looked at free cashflow per share? So that's in there as well. That's maybe my more capitalist mentality going in there. And my third thought here is I don't think they did that bad of a job here

with SVB on March 9th when it was downgraded to BB, that on the verge, it's like an analyst putting a hold rating. They put a hold rating, but you know what a hold rating means? It means sell. It's basically them doing that without losing their jobs. And I think that's enough signal to the market. I know it's broken. I know it shouldn't be like that, but it's enough signal to the market in my mind to go all the way from a AAA rated bond to next to the junk pile in just a few weeks. I think it's enough signal to the market that they're doing their job. Is it good? Is it the way it should be? No, I don't think so. Is it the way it is? Yes.

Realistically, yes. So, that's basically my thought on this right now. Yeah. I mean, that's fair. I mean, I definitely understand that point of view. If they were really, you know, if the incentives were really well placed, I think they would have downgraded them much sooner. And that's why, you know, there were cracks in the foundation for anyone that was looking for SVB as, you know, early as late last year. So I think that's where I kind of come from where it was kind of regulators the regulators kpmg their auditor and the rating agencies here all have a job to do and none of them were being critical enough clearly like clearly right like but kpmg is only there to audit right so they were following the rules though as vp in terms of you know the accounting principle i think kpmg would have flagged anything wrong with the accounting the accounting exactly so anyways no it was still a fun discussion i

just happened to see uh to see that an article on that and i figured it'd be interesting to uh to talk about it but i'll agree with you they they do make quite a bit of money so and keep in mind these businesses are now gigantic like software platforms too like the moody's analytics uh is close to 40 of the business by by revenue now and uh s&p with cap iq and the indices these are gigantic uh gigantic organizations you know moody's also owns uh the canadian securities institute you know when people get the csc or a lot of those accreditations to manage money moody's owns that dude these accreditation businesses are incredibly good because they have the regulatory moat you need to get it maybe the

the right question is is it the right rating system maybe that's the bigger question is should we should we be looking at that and potentially looking at changes um i guess that's a question for our governments because the regulators are the ones that would need to to agree on to make those changes and clearly they don't agree on anything so probably that much is going to change i don't see much changing here um to be honest and well if it didn't change after 2008 it's not going to change after this. Yeah. Exactly. In the meantime, they'll probably keep printing free cash flow per share growth for a long, long, long time. Such good businesses, but you're right. This world ain't perfect,

but I am irrationally optimistic. All right, let's move on to stocks on our watch list presented by the beautifully amazing people at EQ Bank, a longtime show sponsor here of the Canadian Investor Podcast Network. So shout out EQ Bank. It is time for stocks on our watch list. Simone, we both brought new ideas today. Mine is truly sitting on my watch list right now on stratosphere. So you can set up your watch list there. And I came across this business by using the product and it is called wise. It used to be called transfer wise. Have you used wise yet? Wise.com? No. Okay. Well, dude, yet wise.com no okay well dude you should um this is not sponsored content but it may as well be because oh my god i am totally endorsing it the product is pretty amazing basically it's paypal but without the fees concurrency conversions yeah it's like and they are going full Costco mode. It's like their mission is low cost.

They're very mission driven and they do really interesting things to optimize the business for really, really low costs and amazing currency conversions. They're like stupidly good. The currency conversions on this platform, like if I'm moving Canadian to US, they're identical to the exact currency conversion up to four decimal places, sometimes more, which is exceptional. You're not getting that at a bank. And so they take this tiny spread and you can see that reflected in their take rates. So from that perspective, it is amazing. Anywho, you dig under the hood

and the way that they're accomplishing this with over 50 currencies globally, by actually setting up everything and basically having this peer-to-peer transaction system, you're realizing they're onto something with a pretty wild network effect that is not impossible, but really hard to replicate infrastructure wise, no pun intended wise. So it is a UK listed FinTech. It's about 5 billion in market cap that the business today, I have almost moved all of my international business transactions from PayPal to here. actions from PayPal to here. And why not? It's saving me hundreds of dollars a month, maybe more. And I'm setting it up personally to use the FX rate. So that's how I came across this idea. In terms of the business, we added their coverage to Stratosphere so you can see all their

KPIs. Active personal customers since 2019. So personal customers, like if I set it up, not for my business, has gone from 3.2 million to 7 million on their latest annual number. Business customers has gone from 100,000 to over 450,000. And so we're seeing like, you know, four and a half X basically on the business customers and the personal customers. Total volume moving of money on the platform in USD in just since March of 2019 has gone from 27.1 billion to almost a hundred billion at 99.2 since March of 2019 on their trailing 12-month numbers. Exceptional. This translates to on the last five years of revenue per share growth of 25.7%. Even faster lately, the growth is accelerating. Revenue on a three-year is growing at 47%. Lately, the growth is accelerating. Revenue on a three-year is growing at 47%.

Earnings per share is exploding. They are gap profitable, but barely. It's not a cheap stock by any metric. If customer accounts and total volume does keep exploding like this, you can certainly justify it. Key risks here is that their mission is basically a race to zero. It's a cannibalize themselves type business. And they have, as a result, a true innovator dilemma. I like the product more than PayPal. I like the UI, I like the UX. I certainly like the fees a lot more. I certainly like the fees a lot more. And I got to be honest, this renders PayPal basically useless other than the fact that it has that existing network effect for the PayPal to PayPal

transactions. But it is a worse business. Like wise is a worse business on unit economics because of this mission. I mean, look at the take rates. They are abysmal. And that's kind of the bull and the bear case that the product continues to get better, but it's also like unit economics, not improving over time is not necessarily like, I don't know how that shakes out. So that's why it just exists, exists on my watch list. If I figure out how that works long term, then I'll be more confident in doing more research. And it was very interesting product, very interesting stock. I've added to my dashboard there on Stratosphere and I'm digging more into it. Yeah, it's funny that you mentioned this one in PayPal because PayPal, as I've been thinking of just selling my position for about a year now and just transferring that over to Visa and MasterCard. So

just kind of leave it at there. And then obviously I have my Bitcoin position to kind of balance the other end of it, have something more traditional financial rail and then something uh something different because uh yeah i have paypal has just shifted strategy over time and i don't have much conviction in it anymore i'll be honest and it's not a big it's not a big position either yes i knew the screenshot of the customer support i was trying to get on paypal because i couldn't get into my oh but you mentioned it was terrible yeah it was like an ai chat bot. And I would be like, Hey, um, I need to get into my account. Uh, and they're like, sure, I can help you with that. What can I help you with today? Oh boy. No, like I need to get in, into my account. And they're like, sure, I can help you with that. What can I help you with today? And it was this infinite loop. And it would bring you to different prompts, but then back to like, how can we help you today? And I'm

like, oh my God. So I write like, please give me a human. I have thousands of dollars I need to pay someone on PayPal for my business. And they'd be like, oh, I'm sorry to hear that. How can we help you? I'm like, okay, this is is it like we are done um and so i reached out to paypal support after like tweeting them and then they're like they're like how can we help you today i'm like oh my god you guys like you guys are so canceled you guys are so canceled uh so i am very bearish on the product these days, but purely anecdotally. Yeah, you know, exactly. Well, mine, it's an interesting name. I'm a user services.

I'm kind of like you. I'm not sure at this point if I want to be investing in a payment processing business outside of Visa and MasterCard. And that kind of, you know. The more work you do on it, you're like, oh, this all just goes through the rails, you know. Exactly. It's just so much easier to own the visa than the mastercard that's it now the one i have is a very profitable business one that i don't know a lot of people have heard of it's actually not a small company either so it's west pharmaceutical services ticker wst it's listed in the u.s so west pharmaceutical is a leading

manufacturer of packaging components and delivery system for injectable drugs and health care products so they have two main segments one being proprietary products and the other one being contract manufactured products the first one so so proprietary segment offers packaging, container solution, drug delivery system, and analytical lab services. So they'll make things like syringes, for example. That's what a drug delivery system would be, and obviously other kinds as well. The contract manufacturer focuses on designing, manufacturing complex devices for their pharmaceutical customers.

designing manufacturing complex devices for their pharmaceutical customers. So what's kind of nice with them is they're not the ones, you know, creating the drugs. They're just offering the equipment used by these pharmaceutical companies. I just kind of started slowly digging into it. So I'm assuming some of their products, I'm sure there's regulatory approval or FDA approval just because, you know, they're medical, they're still medical devices to some extent. But I'm sure, you know, with my limited knowledge of this, that it's not as, you know, complex as a, you know, a new drug and all the different kind of testings that are involved. Now, quick overview here. If and obviously if the listeners would like me to do a deeper dive at some point, just let me know.

I'd be more than happy to look into it. Obviously, I'm sure I would learn quite a few things because my pharma background is not the best. But, you know, always happy to learn some new things here. The market cap is $25 billion. They have a P of 42 and a price to free cash flow of 34. So not cheap, but definitely very profitable business. Revenues have compounded at 12% over the last five years. They have a pristine balance sheet, very little debt.

They have a net cash position. They pay a very small dividend that currently yields 0.23 percent it has been increasing over time not crazy increases but still steady increases and they're currently paying a whopping 12 percent of free cash flow so there is definitely some room for increasing the dividend without it being cumbersome on the business. And free cash flow per share has just been increasing steadily over time. And it's really based on the business because I was looking and their shares outstanding have gone down a little bit, but it's not like they've been like buying back shares at a crazy amount.

buying back shares at a crazy amount. And they have just, if you compare it to the S&P 500, they've just crushed it. And you're looking at a company too that, you know, the beta, like it's not varying, it's not a company that's overly volatile either. So for having such good returns, I mean, it's quite impressive what they've done but again this is just a high level overview um but uh definitely a company that has piqued my interest the organic sales growth i've i've just been on the stratosphere platform typing in all the kpis and the track that work i didn't even know we had this name to be honest but the entire s&p 500 is in here and uh the organic sales i like has been very impressive like double digits all the way through 1920 30 organic sales growth and third i wonder if they had a big covid bump like if they're

yeah they did yeah they were selling so they have it they had it on their website where they were selling a bunch of packaging for that. Yeah, they were selling. So they had it on their website where they were selling, I think, obviously the needles, but also the little containers that the solutions are in. The little tubes for the testing. Yeah, the little glass containers as well for the solutions. So they clearly benefited from that. solutions so um they clearly benefit from that but again it's not like it was a little bump but it's not like the business was going in the gutter like it was you know just going along and very good results even before the growth but still looking good overall yeah and i'll you know i need to do more digging but my assumption is they're probably one of the bigger or the biggest player in that field and really have a mode surrounding that probably distribution

manufacturing that it would be very hard for smaller players that's my assumption i may be out to lunch completely because i just started looking but that would be my assumption because you know it seems like a very specialized field and something that once you have scale it would be very hard for a competitor to come in dude this is quite the compounder i know i knew you'd love it it's like it's just boring enough that i'm gonna be into it um i mean that in a good way as you know yeah this is crazy um it's so funny that sometimes you just have these like kind of like industrial names it's i mean it's in the pharma space but it's kind of like an adult i mean they manufacture package goods for for pharma it's a company that no one will ever have any consumer facing idea of what

they do and it being incredibly important what are the margins like i these are that's my first question with these types of companies let me look at the margins here yeah i haven't uh 40% gross roughly oh but it like all goes to the bottom line. Wow, they're efficient. Yeah, gross margins are 40%, but free cash flow margins are 25. Net free cash flow. Yeah.

That's really high. Dude, this is sick. I like this. I'm into it. You got me. You got me it's you got me it's a pharmaceutical play without the pharmaceuticals is the stock way down off like because it was probably a covid beneficiary i was down i mean the time to buy was uh this fall yeah it had a big drawdown yeah in the fall now it's a bit more up but um definitely

you know down from the peaks of uh 2021 yeah i think again it's more research is required here but this is the kind of company at first glance i'll just you know you buy you forget about it and you look again 10 years later dude my concern here you know i can't just speak purely good about this because i have to have something my concern is how on earth are you or i gonna understand this business to a like good amount yeah remember when i did that like um we looked up companies based on market cap and I ended up doing that contact kind of company that implants, contact implants. I don't remember. I forgot the name, but oh, Star Surgical. Star Surgical. But I remember like learning about it. Like I had to reread. I had to watch videos on actually like how that kind of stuff worked because that was way beyond my understanding. And this one, I mean, I don't know. We'll see.

I feel like it's not that confusing. Well, I mean, I think it depends on the type of packaging. So that's something, you know, when that's something I would do when I research companies where it's way outside of my circle of competence. I'll watch some YouTube videos. I'll try to just understand the basics of the field. So I get a better understanding, even sometimes watch videos that a company puts out. But also you'll usually find some, you know, just people that are kind of science-driven

that'll explain this kind of stuff. So that's what I'll do to try and understand and then I'll start digging into the company more. Yeah, the key questions that I would have, like I have for every company is, how do I know it's durable? Like no one's gonna sound the alarm bell for me when all of a sudden the competitor has made a way better solution for their,

for West pharmaceuticals leading package products for like, you know, X, Y, and Z. That's always the concern I have with owning some of these names. But if you just purely look at the metrics, like it's obviously something there. You don't just come up with these metrics and becoming a $25 billion market cap just for fluke. That doesn't happen. No, exactly.

But let us know if you'd like me to dig into the world of pharmaceutical services. Let me know and i can uh slowly pharmaceutical packaging oh my god i love how boring that is yeah it's the it's the perfect boring sexy you know it's so boring that i'm into it um thanks for listening to the podcast today guys. If you have not checked out our website, we post the show notes. So we're going to post this for the first time, Stocks on Our Watch List segment on our website. And you'll see that we post for our conversation here live on the pod. our conversation here live on the pod, we are looking at a bunch of graphs and figures and numbers. And we usually screenshot them and put them on a doc so that we can be looking at the same thing. And we're going to be putting them on the website. We already are. You can check them out at thecanadianinvestorpodcast.com. You go to the show notes. This will be on there when it

comes out. So you can see the graphs that we're looking at and it helps provide some context. If you have some time to read, you go on thecanadianinvestorpodcast.com and you'll see it there. We will see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast

should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.