The Canadian Investor - Penny stocks, investing psychology and stocks on our watchlist

Episode Date: August 9, 2021

In this episode of the Canadian Investor Podcast we discuss the following topics: How risk is different from volatility Lessons from the book Psychology of Money by Morgan Housel Defining your investment goals and your endgame Penny stocks and why they are so risky Stocks that are currently on our watchlist Tickers of stocks discussed: LSPD, TTWO, ATVI, PINS Getstockmarket.com Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital 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

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We got lots to talk about today and we are in the middle of earnings season, so there's always lots to talk about. Simon, let's kick it off with a topic we discuss often and we'll continue to discuss. Especially around earnings season, when stocks move up and down based on results from expectations from analysts, you are bound to see a lot of volatility in some stocks you own. So let's talk about volatility. Yeah, it's a subject I know we've talked about before, but the reason I wanted to talk about it today is because I also will have a section later on about penny stocks and you cannot talk about penny stocks without talking about risk and volatility.

So risk versus volatility. Volatility to begin with is simply a measure of how much a given asset moves up and down in price over time. Risk on the other hand is completely different. So the best definition I found of risk was potential for financial loss. It's important not to confuse with capital preservation being less risky, which I think is one of the biggest mistakes that people can make when they invest. Remember what Warren Buffett says in terms of his rules of investing. Rule number one, never lose money. Rule number two, never forget rule number one. Probably one of his best quotes, to be honest. And it's used a lot i'm

sure everyone has heard that one before and i think you've even said it right yeah 100 and and to go back to that just to emphasize that i got a question the other day about how risky are the portfolios you know over at stratosphere what's the what's the beta on them? And I said, I've never measured a portfolio's risk by beta. I don't know anyone who does after they finish business school. So I don't know the answer to that question because I don't track it. Beta is a measure of how different the stocks move in comparison to the index. So if it's low beta, like less than one, it is less volatile than the index. And if it is more than one, it is more volatile than the index. And some of these portfolios are more concentrated. Of course, they're going to have more volatility than 500 names. So I don't believe

the holdings are less risky than the index or than the average company in the index, but the beta or the volatility might be higher. So it's very important to distinguish those two because they're not equal. exactly they're completely different so beta is volatility and risk is completely different from it and that's why i think warren buffett's rule that i just mentioned is so great because it really reminds you of that that you sh your main goal should be to not lose money and increase your purchasing power so if you go and ask someone why they invest in bonds fixed income income, GICs, or put money in a savings account, I would be ready to bet that in most cases people will say

that they invest in those vehicles because they perceive them as being safer or less risky when they don't need the money for decades oftentimes. You know that classic 60-40 for example. And keep in mind that a lot of strategies advocating for a high bond allocation first started when bond yields were double digits and they haven't really evolved that well over time either. So the correct answer for me would be you invest in these type of assets, so fixed income, for example, because you want capital preservation, because you will need these funds in the near future, and because these assets are less volatile. But in reality, these instruments are actually riskier than stocks when you use the definition that I just said a bit earlier, when you look at long time periods.

Let me repeat that. They are riskier than stocks. And I know, don't tweet me, don't DM me saying like, I have no idea what I'm talking about. I didn't do like business 101. I have done business 101 and I've done a lot of research. The reason is quite simple and the evidence is clear. Historically, over long periods of time, let's say 20 plus years, even a bit less than that, you can go 10, 15, but 20 plus years for sure,

equities will allow you to grow your wealth, keep up and exceed inflation, therefore increasing your purchasing power. So if you have money in bonds on a long time horizon or saving account, then over time, yes, you'll grow your savings on a nominal basis, but you will lower your purchasing power. So this means you're actually taking a financial loss. So don't let it fool you in terms of false safety in these type of vehicles, because if you're investing in a government bond or government treasury over 30 years, that's giving you 1.5% per year. Well, you know, you have less purchasing power at the end of that period. Yeah, well put. And before you quote Simon that he said bonds are riskier than stocks because it's really easy to frame that up and make them look silly.

When we are talking on this podcast, we are almost talking about multi-year time periods, like five plus, 10 plus years. We're long-term investors here. So we don't even really recommend you buy stocks for money that you need next year anyways. We've been very clear on that during the mailbag episodes is if you need money within the year, don't put it in equities. Stocks are volatile. The holdings may not be risky, but it is risky to your financial position if you have to withdraw it when you see stock market drawdown. So when he says that, he's talking about long periods of time. There's no chance that if I have a 20 plus year time horizon, I'm putting it in anything other than great businesses that can compound my money over time. So yeah, that's a good distinction. And we're going to be talking about penny stocks later

because we've been getting all kinds of requests for these companies that are like $20 million in market cap that we don't follow. So there's a reason that we don't follow them. And Simon's going to lay them out. Not to say that some of these companies aren't great. Maybe they are. There could be the next big winner there. But it's difficult to weed them out. And Simon's going to talk about that.

Yeah. And just to add to what you said, and obviously don't take me out of context. If you need the money, I would say general rule of thumb in the next few years, but within five years, then yes, you'll probably want to be in a more capital preservation mode. And then those fixed income type of vehicle make a lot more sense. But listen to what I said, take it in full context over long periods of times, look at the data, and you'll see that I'm right. Bonds do not perform well over long periods of time. Not always. And I'm more than happy to say when I'm not right. Yeah. All right. Let's switch gears to a book. I mean, if you've been listening to the podcast,

you're getting the odds. We are sponsored by Audible. And you know that I listen to a book. I mean, if you've been listening to the podcast, you're getting the odds. We are sponsored by Audible. And you know that I listen to this book on the platform. So, The Psychology of Money by Morgan Housel. I really enjoyed this book. And I got some takeaways because I think there's like 17 chapters in the book. There's more than 15. That I know for sure.

And these are the three sections of the book. There's more than 15, that I know for sure. And these are the three sections of the book that I found to be very useful and very relevant to investors in particular, because a lot of the book is about personal finance, which, by the way, is just as important, or if not more important, in getting the capital to actually invest in the future. It might actually make a bigger difference in your financial future than any investment decisions you make. But this is the investing podcast.

I'm going to talk about three sections I really thought were useful to an investor. So the one chapter is called confounding compounding. So the one chapter is called confounding compounding. Not only is that pretty clever, but it is really important that he stresses humans are incapable of really understanding the power of compounding. Even if we've put a compound interest calculator into what can happen with $10,000 over 30, 40, 50 years, we still underestimate its power. So we're always underestimating the power of compounding, even though we are reminded constantly of the results it can yield. So it's quite mind bending what time can do if you're willing to hold on and let businesses compound. So this is directly from the book. $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday.

So 81.5 of 84.5 came after his 65th birthday. His skill is investing, but his secret is time. That's how compounding works. Number two, never enough. And this is a great way to think about personal finance. So happiness, as it said, is just a results minus expectations. It's pretty much everything. Go on a family vacation. It's results minus expectations on how much fun you have. So everywhere you look, there's going to be someone more wealthy, more successful than you. It is a never-ending path to go down.

If you're not a millionaire, you want to become one. If you're a millionaire, you see folks with vacation homes in Palm Springs and yachts off the coast of Bermuda. And they're like, wow, they have a lot of net worth. That must be nice. And then if you're one of those Deca millionaires that have the vacation homes, you know, a few wealthy CEOs that make your net worth in one single year. So then they're like, oh, I really wish I was that person. And there's this constant keeping up with the Jones effect all the way until you reach the richest people in the world. Even a billionaire, a billionaire might think, yeah, it must be nice to have 200 billion like Jeff Bezos. At the end of the day, you reach a point of diminishing returns when you're accumulating more wealth.

So my dad, he always says to me, you can't bring it with you when he buys something. When he buys something nice, buys a new golf membership, you guys, well, you can't bring it with you. So there's a balance between enjoying yourself, so you're not bad with personal finance and you're a slave to work and always trading time for money, but enjoying yourself. There's this constant balance. So if you're doing that, you give away your most valuable thing, time. You want to do what you want to do and when you want to do it. I'll be dead honest with you guys on this podcast. I always like to think about spending money if I'm doing it for me or to just show off. So people are so quick to show off on social media. And this is a growing, growing trend, right?

So Morgan Housel discussed the topic when you buy a flashy car to impress people. the topic when you buy a flashy car to impress people. This is from the book. If you spend money accumulating stuff to impress people, they won't be impressed. In their mind, they're just thinking, what do I have to do to get that as well? And that's really an interesting concept, right? So instead of when you get that new BMW, the person thinks, wow, they look so cool in their BMW. People think, how can I get that? Or, wow, they look so cool in a beast, least BMW they can't afford. Like it's people aren't impressed by things. And it's just the truth, right? It's just, it's just this truth. And Morgan kind of exposes that. All right. The third thing, the third takeaway, this may be the most important concept to understand for investors. And we talk about this all the time. So this is a quote from the book. A lot of things in business and investing work this way. Long tails, the farthest ends of a distribution of outcomes, have tremendous influence in finance, where a small number of events can account for the majority of outcomes. because in statistics and business, a long tail of some distribution of numbers is the portion of the distributions having many occurrences far from the head or central part of a distribution.

So if you think of a normal distribution curve, most things happening in the middle, the outliers on the left and right side of that normal distribution curve is where a lot of the actual impact and outcomes come from. So it's very similar to the Pareto principle, which is like 80% of results come from 20% of efforts. So it's the phenomenon that results come from a few rare events. Here's another quote, anything that is huge, profitable, famous, or influential is the result of a tail event. An outlying one in thousand or millions event and most of our attention goes to things that are huge, profitable, famous, or influential when most of what we pay attention to is the result of a tail. It's easy

to underestimate how rare and powerful they are. So what this means with investing is that a few positions in your portfolio are going to drive most of the returns. This is completely normal. It is so very normal to have a portfolio carried by one or two positions that drive almost all the returns. And Simon, I'm sure you've seen this in your portfolio as well. If you have held onto Amazon shares through all the volatility for the past 15 years, pretty much meant nothing at all what you did with the rest of your portfolio. If you bought Amazon shares 15 years ago, the rest of your decisions just didn't matter because you got super wealthy from Amazon stock. You would have had stellar returns even if you made

mistakes with the rest of your portfolio. This is completely normal. This happens for very many industries and particularly in investing when a few rare events drive almost all of the outcome. So I take this as what I've preached on the podcast is don't sell winners, man. Hold on to them. If the business keeps getting better and you keep making money, let your winners ride and compound over time. This is the long tail driving your portfolio. Those are my three takeaways, Simon. 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. No, really good. I would say the one I liked the most was to, you know, it's fine to spend, but I think it's really important to create a good balance between, you know, spending and saving. So still enjoying yourself while, you know, you're healthy, you can still enjoy that money, but not going overboard. And I think just asking yourself the question, am I doing for myself or am I doing it to impress someone else is really important. I'm a firm believer that I'm more impressed, for example, if I'll meet someone and later on, whether it's six months, a year later, you know, I'll find out they're a millionaire. And they never told me they're

super successful, but I have a lot of respect and I find that personally way more impressive than some guy that, yeah, he may be successful, but he's flashing this expensive car like and I go, OK, good for you. I really I could not care less about that. So that's just my own thing. And if you have that kind of mindset makes it a lot easier to be saving money, but creating that balance, in my opinion, on what makes you happy spending and then saving money as well yeah like if you're if you're a car guy and you like spending money on cars because it legitimately makes you happier then that's yeah that's awesome that's awesome for me i i literally couldn't care less if i drove a toyota or ferr Ferrari. It wouldn't make a single difference for me. So if I go out, barring that my tastes don't change, I'd probably just be doing it for someone else if I was

buying that car. And if you actually like that stuff, then go for it. Spend the money. But it's that balance that he talks about and it's an incredibly important concept because if you don't think about these things, you're going to be working for money, trading time for money all the time. Yeah, well put. So that was probably my biggest takeaway. And I'm also listening to an audio book on Audible. I don't have the exact title in front of me because I wasn't planning on mentioning it. But when I'm done, another psychology of investing type of book, really interesting so far, so I can do my own takeaways as well. But now we'll transition to, have you thought about your actual investing goals? So define what your goals are when you're investing. What is your end goal? I'm guilty of taking for granted that a lot of our listeners are just

doing it solely for retirement. I'm sure a lot of them are, but I'm sure of taking for granted that a lot of our listeners are just doing it solely for retirement. I'm sure a lot of them are, but I'm sure also just based on the questions we receive in the mailbag episode, we have some people saving for other things. So are you looking to retire with this money? Are you looking to use the money for a eager to buy a house or are you okay being opportunistic, keeping that money invested that you're potentially using for a down payment and kind of going with the ups and downs of the stock market? And just, you know, if a good opportunity presents itself, you're fine with selling part of those investments regardless of what the market is at. Are you investing to get your kids through college or university? Is it something completely different that I don't even have listed here? How much money do you think you'll need to achieve the goal, whatever your goal is? And what's the time horizon do you or what time horizon do you have to achieve that goal? So regardless of what your goal is with

investing, it's really important to know why you're investing in the time frame you have, because how close you are from your goal and how big it is, it really will have a big impact on the type of investment that you'll most likely target, type of investment vehicle that you can use to achieve this as well. And it will also give you a goal to strive for. If you're saving for a child's education, for example, an RESP would make a lot of sense. On the other hand, if you're looking to buy your first home, then taking advantage of the first-time homebuyer program with your RSP, like Brayden mentioned in the last episode, would be something to consider. And if you're saving for retirement and you have a really generous defined benefit pension plan, then you'd probably want to max out your TFSA. So these are all questions that you'll need to ask yourself. Everyone's different when it comes to their investment goals. I'm sure most people are saving for

retirement, but it's possible that people are saving for retirement and something else as well. So I just wanted to mention this quickly because that's something we tend to take for granted and not really think about why we're investing. That's a good point to bring up because it'll change the way you think about investing as well. If you have a 20-year horizon until you think you're going to retire, even 10, 5, say you're young and you got 40 years of compounding. It's going to change the way you think about buying specific securities, especially because if you have that advantage of thinking in multi-year time periods, you have such an advantage over the broader market. The market thinks in six months, maybe a year being generous, really. Honestly, the market is very short-sighted in the way it prices stocks

in the short term. So if you have a long-term horizon and you're thinking about businesses that are going to be great in 20, 30 years, and you're willing to hold them, and I got to say that again, willing to hold them for decades, not many people are able to do that because they see some price action and they act irrationally. So the best investors act rationally for a long time. But if you have that time frame and that investing goal, it'll help you think about some of these things for decades, not for just a few years or even traders to think about things in hours and days. So this is your advantage is time. Yeah, yeah, exactly. So let's move on to penny stocks now.

A fun topic of penny stocks. I'm sure a lot of people will be interested in that like brayden said at the beginning of the episode the reason why we wanted to talk about penny stocks is we get people pretty frequently what's your take on this micro nano cap that has zero revenues and so on and personally when you ask me that i don't really i'll just look at the market cap and if i see 20 million or something like that i'm not going to waste any time trying to review a company because i'm not interested in investing those companies not that i don't want to give you my

take or anything like that but if i'm gonna look at a company it also has to be a company that i have some interest in so what are are penny stocks? Despite their name, penny stocks are typically seen as stocks that trade for less than $5 a share. That's actually the definition that the SEC in the state, so the Securities Exchange Commission, uses. However, you could argue that a stock like Bonberg's, for example, which has a market cap around $3.75 billion, but trades at $1.50 a share, may not necessarily be considered a penny stock. You have to use your judgment a little bit for that, in my opinion. You'll see a lot of people using the term penny stock interchangeably with micro and nano caps. Micro caps typically will be in the 50 to 300 million dollar range,

and I guess again this is subjective, and nano caps will typically be around 50 million dollars or less. I'll go over some of the issues and risk of investing in penny stocks. So the first one is a lack of information. These stocks will most likely not meet the requirements to be listed on any of the major US or Canadian exchanges. You'll find them on the TSX Venture or on over-the-counter pink sheets. Because of that, they have less regulatory requirements than major exchanges. They are also less followed by analysts and sometimes not even followed by analysts these are the types of stocks that you'll go on their investor relations website and guess just general company information but nothing more you'll even find some that are doing

stock promotion and the only thing you'll see on the website is to put your email for mailing lists which that's a big warning sign. If you see that on an investor relations website with nothing else, no financials, nothing else. And I've seen that. Have you seen that before, Braden? I have seen that. And it's common on the venture. Yeah, it's like, I don't know, big, big flashing red lights in my head. As soon as I see that and it's really difficult to find the financials, that's already like a big no big flashing red lights in my head. As soon as I see that, and it's really difficult to find the financials, that's already like a big no-no for me for a company.

Yeah. And when you're talking about the micro caps and, you know, talking about penny stocks in terms of market cap, it's probably a more useful metric because in case of Bombardier, the example you just used, is they kept doing, you know, in their, when times were good, they're probably doing stock splits. And that's why, you know, the share price kept getting reduced. And then as their stock price fell off a cliff, it's like $1.50. So maybe they'll do a reverse split at some point. That's never a good sign because usually companies will do that when they're risking delisting.

Exactly. One of the other risks is there is no minimum standards. For these smaller exchanges, you will have either no minimum standards or very low ones to be listed. An example of what requirements there could be for larger exchanges are a minimum float of publicly traded shares so typically it'll be in the 1 plus million range, a minimum share price requirement in the states they do require that, and specific industry based requirements and the TSX does do that. So there are requirements to be listed on those major exchanges. Another risk is a lack of history or a poor history. So penny stocks tend to be either really

very newly formed businesses or businesses that might have been good at one time but are actually heading towards bankruptcy. Newly formed businesses tend to have little to no revenue. Investing in a business that has no revenue is extremely risky as nothing as things may not pan out. Whether it's a junior miner or a company that has a revolutionizing product, nothing is really done until you start getting revenue. So as much as you may be excited about a company or the future prospects, if it's only a prototype or a junior mining company, if they haven't started extracting and getting revenues, you never know what's going to happen because financing could dry up,

their share price is already low, so they probably don't have a lot of flexibility to issue new shares. So oftentimes what just happens with those businesses is they can't monetize them and they just go bankrupt on the other end you can have a business that like i mentioned was once a very good business and is clearly heading towards bankruptcy and they've been recently delisted from a major exchange and they're burning cash at a rate so great that you probably only have weeks if not maybe months before bankruptcy an easy red flag for this is like i mentioned when a company is delisted i mean sears it happened years ago but you can think about a

bunch of other businesses i think luck and coffee for different reasons for fraud i got delisted so it's not always due to that but very frequently that's the reason they get delisted yeah great point and when we're talking about pre-revenue companies these like micro caps nano caps pre-revenue or you or you get these huge ballooning companies that like nicola that it to $30 billion in market cap pre-revenue. Those are terrible. But if you think about the landscape of entrepreneurship, it has changed a lot and is this ongoing trend that's probably happened in the last 15, 20 years, ongoing trend that's probably happened in the last 15, 20 years, which is it is not very hard to get seed capital and venture capital from angel investors and venture capitalists.

These days, if you have a pretty decent idea, even if you are pre-revenue and you have a decent idea and you can sell yourself, you can get millions of dollars from angel and venture capital investors. It is mind-blowing how much money is available out there if you have a pretty decent idea and you can sell yourself. So these companies that are going public, there's no shortage of VC money. You can do series A, B, C, D, and barely even have a product these days. That's how much private capital there is. So when these things are public and this ongoing trend of big companies going private, raising more rounds until they do their big IPO and everyone cashes out and makes a lot of money. That is an ongoing trend that's happening. So when these companies go public pre-revenue, it's like, what is going on? Like, it seems to me like it's a get rich quick and not someone who wants to build a business for the long term.

And that right away turns me off so much as an entrepreneur myself. It's like, what do you mean you went public? Are you trying to build an enterprise for the future? There's so much VC money out there that you can raise a ton of money. So this is a good point you brought up, Sam. Yeah, and the longer you stay private too, oftentimes the more you'll be able to keep a big portion of your company versus going public, right?

So there's more incentive for the founder to do that. So it does raise some red flag when you say a company that's public and what has five or 10 million market cap, like really? Yeah, to me, it's just it's just yeah some red flags go off right there so now another risk is liquidity so we've talked about liquidity before with limit orders how it's important when a stock is not very liquid well one of the other issues with liquidity especially when you have a low share price is pump and dump risks and this can apply not only to penny stock

but like for those who are dabbing a little bit in cryptocurrency it's even more the wild wild west there when it comes specifically to alternate coins i won't use the word that's usually used over there come on shit coins so especially when it comes to shit coin um it's notorious for pump and dump risk but again we're talking more about stocks now so that is something that is very relevant when it comes to penny stocks because these tend to be small businesses on smaller exchanges the publicly traded float can be very small. Because of this, insiders can control the float and can make it as small as possible so it keeps the share price artificially high while hyping the stock. Then when the price is high enough, they flood the market with their shares and unload,

leaving small investor holding a bag of nothing, basically. So that is one of the big risks that you'll see with penny stocks. 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. That is questtrade.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. 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. The last risk that I'm going to talk about, or actually I'm going to transition, I mentioned the biggest risk already, but why people invest in penny stocks. With all of that said, with all the risks that I've mentioned mentioned that we've talked about, why do people still invest in those stocks? Well, the first reason is people falsely think that most of today's biggest companies were once penny stocks and they want to catch the next big thing. Unfortunately, this is simply not true.

Even looking at stock charts can be misleading because many companies will do stock blitz over time which make it look like the stocks the stock price was once a penny stock even though it wasn't so here's a few examples here of companies that everyone will be familiar with so the actual price of Microsoft when it started its IPO started trading was $21 a share. Amazon had an IPO price of $16 a share. Google had an IPO price of $85 a share. Apple had an IPO price of $22 a share. And Shopify had an IPO price of USD $17 a share.

So you can see none of these were penny stocks with the classic definition and i can guarantee they were also were not nano or micro caps this is such a good point you brought up because if you go on a max chart since ipo of apple which is by the way up up from IPO at exactly, as we're recording this, 245,000%. My God. You would think, if you didn't know how stock splits work, you would think that they IPO'd at $0.06. They did not IPO at $0.06. It's just how that math works when all the splits get adjusted. They have to change the chart or else it wouldn't make any sense so it's six cents uh if you you would think that i apple ipo that but they did not i if they ipo to what 22 boxes you just

said so i'm really glad you brought that up yeah and it's it's really easy especially someone who's starting to invest they'll just look on yahoo Finance and they just see the chart and they're like, oh, my God. Like you just said, Apple IPO and it was less than a dollar or whatever it was. But no, the true price was much higher than that. It's because especially Apple, they're notorious for stock splits. They've done so many over time. Five for one. No problem.

Yeah, exactly. Second reason why people invest in those is they falsely think there is more room for appreciation. For example, they think that a stock trading at $0.20 only needs to go up $0.10 to gain 50% in value and it's much easier to do so than an increase from a company that's $100 to $150. penny that's $100 to $150. Unfortunately, it doesn't work that way and the opposite is usually more true than not because the business that trades at $100 a share will tend to be more established, have revenues, and be profitable. So therefore, it has more upside potential than this penny stock, which like we've mentioned before, oftentimes will not even have revenue. which like we've mentioned before oftentimes will not even have revenue. And the third reason, people love owning a lot of shares. People love having a lot of shares of companies.

They would rather have 10,000 shares of a business at 10 cents for a total of $1,000 than having one share of Google when it was $1,000 a share. They would rather have that because they feel like they own more. At the end of the day, you just have to understand that even if it's the exact same business, whether you have 1,000 shares at $0.10 or one share at $1K, you have the same share of the pie in the end. So it's just a share of the business. The main difference is on one hand, the pie is just cut in So it's just a share of the business. The main difference is on one hand, the pie is just cut in smaller pieces and the other one it is. So you have to keep that in mind. Yeah, it's a great point. Like my largest position, I have the least amount of shares in.

All right, that my top two positions, I have the by percentage of my portfolio are the lowest share count that I own, which are Constellation Software and Google, because both of them trade for in the thousands. Right. Like Constellation Software just passed 2000 Canadian. Google trades for what, like twenty three hundred US. So, I mean, it makes sense, right? Yeah, yeah, exactly. I mean, for me, it's more BP is one of the bigger ones in terms of my portfolio. But again, they're notorious as well for stock splits.

So if they hadn't done, it would be a triple digit a share for sure. But it's just something good to keep in mind to focus on the business and stop worrying about the individual share price. We've talked about it a lot, but I thought it was even more fitting for penny stocks. And my overall conclusion for penny stock is quite simple. So you might, you know what, you might get lucky and make a quick buck when you invest in penny stocks. But you're more likely than not to lose money. And over time, if you keep investing in penny stocks, I would wager and be happy to wager that you'll lose money over time. And we've said it again and again, we just invest in good companies for a long period of time and

not in the self-proclaimed next big thing is usually, you know, especially for companies doing stock promotions and all the companies that have contacted us for stock promotions are penny stocks. All of them, they are. And essentially, they were trying to get us to help them pump and dump their stock, which we would never, never do. Yes, we're doing ads, but we would never pump a company and falsely lead you guys or listeners. And I was even thinking, and I don't know, Brad, I'm just kind of throwing this out there. You know, sometimes if we have another one that reaches out to us, we should almost just expose them. Because I hate those companies with such passion.

It's so annoying. Yeah. It's so annoying. Yeah. And I hate it because I feel like they'll contact tons of people and eventually someone will say yes. We won't. Yeah, if they're a smaller pod. Yeah.

Yeah, exactly. will say yes we won't they're smaller pod yeah yeah exactly yeah that's where these that's in this micro not micro cap in this uh penny stock arena that's where that's where the shady stuff happens i mean let's be honest that's the arena that it exists so anytime you enter that arena just be careful and this is not a knock on small caps There are great businesses that are less than 5 billion in market cap. There's that sweet spot, in my opinion, of that 1 billion to 5 billion mid cap that no analysts are looking at. These are highly profitable businesses. They're widening their moat. No one's looking at them yet. Don't mix those up from something trading at 10 cents that doesn't have any revenue.

So those businesses are completely different. All right, let's do the last segment of today's show. We're going to do what's on your watch list today. So this is a segment on the show we're trying to do fairly often. That's just stocks on our watch list that we do not own but are popping up in our watch list for one reason or another. I will go first. Due to our research on the podcast for Lightspeed, I do not own Lightspeed, but after our research into the business last episode and they reported earnings today with comp sales up 220% and added $50 million in revenue from their acquisitions.

The press release said gross transactions increased, the volume on those increased 98% organically. That's the number I'm looking for because now this business is a grow by acquisition and organic growth strategies happening at the same time. So I want to know what those numbers are, what's the total growth, and what's the organic growth because focusing on that underlying organic growth from a company like this is very important. It is turning into a bit of an acquisition strategy, so I need to do some more work on the name, but it has certainly earned a spot high on my watch list what's going on with you simon yeah the only thing for me i was going to say light speed as well because i did like a lot of the things uh when we were talking about and people say oh you chose algonquin yeah i mean just i had my reasons slack yeah exactly i

still love the light speed and what they were doing. It was still a valuation thing. So that was the main reason. But the only thing I would I want to keep an eye for light speed is the base effect from last year. So Q2 is when it was pretty rough in 2020. So, yeah, so that is one thing. I'll be very interested in how it goes, Q3 and Q4. And I'm more than happy to wait a little longer if i need to just to get a bigger picture it's just my my nature just the way i like to do things but uh it is also on my watch list um the one for me i only did one because i did a lot of notes for the rest of the podcast and a lot of editing for the mailbag which i enjoy doing but it's a lot longer to do. So the one on my watchlet is Pinterest. I know a lot of people noticed that they had a big drop. I think it was down, what, 20% in one day? Yeah, yeah. On earnings release, right? On earnings release. And the big lines,

and I haven't dug into it that much yet, so I still need to do a bit more digging just to see what's going on over there. But what I understood is the monthly active users did not increase as much as management had thought. I think there was an actual decrease. Yeah, I think it was in the U.S., but internationally they had an increase. I think it was kind of a mixed bag, and they also did not provide guidance going forward on that. However, again, the big lines I saw is they're showing some positive signs of increased monetization under increasing users. So that with the fact that the stock took a pretty big haircut based on the news,

it's something I have on my watch list. I'll probably try to dig into it a bit on the news. It's something I have on my watch list. I'll probably try to dig into it a bit on the weekend. And if I like what I see, it might actually be something that I'll do a starter position because I've always liked the platform and just love the idea of monetizing that because you go on there. I'm doing a construction project, for example. I'm going to go on there to have some ideas of what to do. There's a good chance I may need certain tools and things like that. So how great would it be for a Home Depot to advertise on there? It's right there.

I'm actually open to the advertisement. So I really like the platform for that reason. So that's the one that I have on my watch list right now. It's one of those rare user experiences where advertising adds to the experience rather than takes away from it and that's what makes pinterest value proposition from a business quite quite compelling i i do want to see some more user growth though out of something like this so it was such a mixed bag of results and that's what sent the stock down so much. Because there was lots to like and lots to, to be quite honest, dislike as well. And the street reacted accordingly.

All right, last for me is, it's actually a two for one. Take-Two Interactive and Activision Blizzard, the huge video game publishers, are both down more than 20% from their highs. For completely different reasons, though, Activision Blizzard has lots of turmoil inside the company right now. Some ugly lawsuits. I'm not going to get into what those are. And the Blizzard president stepping down. And then Take-Two had, you know, so this I'm going to get sidetracked here, but Take-Two has very chunky earnings. They do not have a smooth earnings and growth profile because they have game releases that are not on a set schedule. Like if you look

at Activision Blizzard's historical financials, it will look so much smoother and better because they release Call of Duty every single year. They wouldn't dare not release a new Call of Duty title, but Take-Two has these bigger games that have this different release cycle. It's kind of random. There could be multiple years between some of their releases. Grand Theft Auto. Grand Theft Auto. I was going to forget it. Grand Theft Auto. That's still a game that people are still playing from Grand Theft Auto 5. When did that come out? Many years ago. If you own that stock, things are going to be more chunky. It's not going to be that smooth line. So shareholders should know that. But every time their earnings come out weak and they haven't had

any releases, the stock sells off. So both of these companies are going to print cash for a long time to come. I suggest, this is not investment advice advice i would buy them when the sentiment is weak and the sentiment is really weak on both these names right now and they're both great companies to come yeah nothing nothing else to add for that i had to look at take two a while back and it's always been like that it's always been kind of lumpy because it's really based on how their big titles are it'll be interesting though for them if they do come up with a subscription service that gets a lot of uptake because that may get them a little more consistency in their revenue and earnings.

If they can get some consistency and remove that, the multiple will expand a lot because investors apply smoothness and predictability of results. They provide a higher multiple towards them. That's why software as a service gets such a good, like as soon as some of these companies switch from licensing to recurring revenue software subscriptions in the cloud, their multiples just exploded because the market values that consistency of cash flows more so. So yeah, it'll be interesting to see if Take-Two does pivot because they would unlock a lot of value for shareholders if they had some more consistent results. But if you own the stock, you got to be aware of that volatility.

All right, guys. Thank you so much for listening. We also hope you guys like the second episode that we're doing for the week, which was some earnings. It is earnings season. So there's lots to talk about. We'll find other stuff and interviews to talk about on that second episode as well. If you have not checked out Stratosphere, it is an investment research service that I put together as well as software tools to conduct your own DIY investing.

We are DIY investors here and I have you covered with tools and research to uh to get you started that is get stock market.com if you go to get stock market.com it will bring you there we have a new platform launching later this month i'm really excited to bring that to you guys so uh yeah check that out that is get stock market.com we will see you later this week it's not a next week anymore it's see you later this week. It's not a next week anymore. It's see you later this week. See you later this week. Yeah, exactly. See you later this week. We'll be including quite a few Canadian name earnings too.

At least I think four or five we have lined up. So for those saying they want more Canadian content, we heard you. We got you covered. Yeah. Well, it is the Canadian Investor Podcast. We'll do lots of Canadian content. But I mean, we can't not talk about some of those big US tech names when they report Google's 62% revenue growth that is too good to ignore. So we're going to definitely touch on stuff like that. All right. Thanks, guys. See you later this week. Take care. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast.

Always make sure to do your own research and due diligence before making investment decisions.