The Canadian Investor - Sunk cost fallacy, financial planners and Berkshire’s returns

Episode Date: December 6, 2021

In this release of the Canadian Investor Podcast, we discuss the following topics:  Sunk Cost Fallacy and why it should be avoided Questions to ask when trying to find a good financial planner Software integration as a moat for software companies Looking back at Berkshire’s returns over the past 30 years What kind of returns to expect from bonds going forward Braden revisits Nordberg’s gambit for converting CAD to USD https://www.stratosphereinvesting.com/blog/how-to-convert-cad-to-usd-norberts-gambit-questrade/ https://thecanadianinvestorpodcast.com/ Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Stratosphere 🚀 https://www.stratosphereinvesting.com/See omnystudio.com/listener for privacy information.

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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. Live from the great white north, this is the Canadian investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. How we doing?

It is December 1st, 2021. My name is Brayden Dennis, as always, joined by the great Simon Belanger. Simon, today is December 1st. We're now into, you now into the holiday season. When is it okay to put up your Christmas tree? December 1st, that's my answer. I agree with you. I know a lot of people putting them up early this year because they need a little bit of cheer, which I can back that. But don't you kind of want to save the delayed gratification of the Christmas time?

That's just my opinion. Yeah, I guess if you're from the States and you celebrate Thanksgiving so close to Christmas time and it kicks off the holiday season, maybe you're okay with US Thanksgiving. But in Canada, I think December 1st is the right date. Yeah, fair enough. Maybe late November. I have a friend that put up their Christmas tree, him and his girlfriend put up their Christmas tree in late October. That is a criminal offense. You should be locked up for that. All right, let's start the episode, guys. We have lots of fun stuff we're talking about.

I'm going to have a little segment here about the sunk cost fallacy, holding on to losers. Sounds good to talk about financial planners and what to look for in financial planning. We're going to have some hot takes about Berkshire Hathaway and the buff dog, the goat, him and Munger, and then finish off the show revisiting a very, what I believe, very important topic, which is called Norbert's Gambit, which is an elite way for Canadians to buy US stocks. This is what I do. This is what Simon does. I did it the other day when I was buying a US stock. And with RRSP season coming around, I know people are going to be deploying lots of money into their investment accounts. So let's take it as an opportunity to revisit Norbert's Gambit. We've talked about it before, but talk about why we do it and how to do it. All right, Simon, sunk cost fallacy. I've been

meaning to do a segment on the show around this, but here it is. So the sunk cost fallacy, by definition, describes our tendency to follow through on an endeavor, even if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits. That's the key at the end there, whether or not the current costs outweigh the benefits. So when it comes to investing and managing your own portfolio, I hear this all the time. Does this sound familiar, Simon? I bought this company X's stock at 20. It trades at $5 now and I'm waiting for it to rebound. Or how about this? I'm holding onto it until I get my money back. Here's a real world example I heard the other day, Simon, which is I bought

Aurora Cannabis. This is not me. This is someone I heard. I bought Aurora Cannabis at $100 at the top of the hype and it trades for $6 today. But I'm trying to get at least half my money back and then cut it. These are real things that I've heard. Now, these are arbitrary price targets that are completely irrelevant to reality. The reality is that the market doesn't care what you paid. It cares about where the business can go into the future. So, when you invest in public companies in the stock market, not all of them are going to play out how you expect. This is completely normal.

No one bats a thousand in the stock market. All right, now here's where the important part is. When there is some negative price action on the stock you own, before you go and cut it loose, you have to ask yourself, has the stock price gone lower or has the actual real business fundamentals gotten worse? Because in the long term, stock prices follow business fundamentals on the underlying security. However, in the short term, they can be greatly detached from each other. On a long view, very often a losing stock is attached to a losing business. If you want to own the greatest company, sometimes it's time to let it go. Now, this is not the same as short-term price sentiment and business fundamentals, you know, just not really

acting in the way they should because of short-term momentum. Let's use a real world example of a stock I just added to a few days ago, Spotify. That is with a P, the music playing app. Spotify is leading audio. They have 390 million active users, 172 million of them being paid subscribers on Spotify. I think they could eventually hit 1 billion monthly active users. They have optionality in podcasts, advertising, live events, owning the actual content, and much more. Simon, today's Spotify stock is down 26% on the year, year to date, spot, ticker SPOT. So don't hear what I'm not saying regarding selling losers based on the share performance. I mean that sometimes it makes sense to avoid arbitrary sunken cost fallacy when it just doesn't make sense to do so. Some of these businesses that you could be holding

onto that are losers are on a structural decline, the business, and sometimes it makes sense to move on and not wait for some arbitrary price to get back to it. On the contrary, if the price is going lower on a business that continues to improve, gain more users in this case, you know, reach free cash flow positivity, have optionality, that could be opportunity. And so I just wanted to kind of discuss that. Yeah, those are really good point. And that's why I get so fascinated with the psychology of investing, because a lot of this obviously is psychology, a lot of investing. Yes, there is math behind investing, there's understanding the business, but a lot of it is just understanding your own psychology and knowing, catching yourself when you're doing

these mental things just like that, like the example you get where the person says, oh, if I only get half of my money back, then I'll sell it. These are just arbitrary price points. And it's important to recognize that. That's why it's really important just to know yourself. And you can see sunk costs in other different ways. I talked about simplified approach of researching new stocks to avoid these type of situation of researching 15 hours and then maybe feeling obligated to invest in the company, even if you end up not thinking that it's a great company because you've put so many hours into it. But at the end of the day, it's understanding the business and it's also being critical. So not being biased just because you want to get your

money back on an investment. It's very easy to be biased on us, whether it's positively or negatively for a certain stock. And yeah, just keeping that in mind. So that's why I definitely recommend to anyone who's investing, read some psychological book on investing. I think it will really help you in the long run. That's a good point. The sunken time fallacy, like you mentioned, and the sunken cost fallacy are behavioral nightmares when you're managing money.

And that's because you want to separate behavioral mistakes and managing money. The problem is, is it's very hard to do because money does something into a human's brain that sometimes makes them act completely irrational. This is a good segue into your segment here on finding a financial planner. Like even if you're a good investor, it may make sense to have some of that assistance. So do you want to take this one away? Yeah, definitely. So my goal here is just to help people finding a good financial planner. Like you mentioned, you could do your own investments, which I'm sure a lot of people listening do, because that's what we want to help people do with this podcast. Personally, I do think that a good financial planner can provide value even if you manage your own investments and have great returns on those investments, even if you're beating the market. A good financial planner can give you an independent look at your overall financial situation,

not just your investments. And that's really important because some will even be able to provide you with some tax advice, for example, retirement planning. I know investments have a big role to play in that, but they may be aware of things that you might not have think of or considered and definitely really help you do that. Finding a good financial planner is not always easy because there are some good and bad ones out there. Before I get going, I think you've talked about it quite a bit where you go to the bank and they'll have their own financial planners and they'll try to push their mutual funds, which are really high fees. And that's something that

you want to avoid, right? That's right. It's a good point. Focus on, before you get into good questions to ask a financial planner, but understand that even someone who is extremely skilled and has your best interests in mind, if they work for an institution that is setting them up to put you into high fee managed products, this can be disastrous. And it's very prevalent in Canada, more so than in the US, for example, especially on the fee side. So I'm glad you pointed that out. Exactly. So personally, I'm not a big fan of financial planners who work for bank or insurance company. I'm not going to say that they aren't any good. And there's some good ones that I'm

sure that work in those organizations. So I'm not meaning to put them all in the same bucket, but based on personal experience and that of friends and families, they tend to push their own products like mutual fund, like Brayden just mentioned. So it's something that we've touched about on the podcast before, and I'm sure we'll touch about on that in the future as well.

So if I were to look for a financial planner, I'd look personally for an independent financial planner. So one that's not associated with a financial institution or insurance company. But again, like I said, there will be some good and bad ones as well that are independent. So you'll want to find one that is good. And here are some questions that I recommend asking when you look for a financial planner. First of all, ask them what their training and certifications are.

You'll want ideally someone that's a certified financial planner. It's not easy to become a CFP and they have standards to adhere to. So that's really important. Ask them how long they've been a financial planner for. Ask them if they're going to do training, education, continuous learning to learn new concepts and offerings that might be out there. Ask them if they have a specific area of expertise. For example, do they specialize in retirement planning, estate planning, tax planning? So you'll have different financial planners that may be better in some of these aspects than others.

Ask them how they get paid. Is it fees, commissions, bonuses? Personally, I prefer a fee-based financial planner that does not get any commission from financial products. This means that they'll provide you with advice and charge you a flat fee or an hourly fee. Some will charge you a fee as a percentage of your asset, which I'm not a fan of personally, because we'll probably not get a lot of value out of it. From what I've seen, the rates that they'll charge, it'll be a percentage and it'll vary a lot depending on the amount of asset under management that you have. Obviously, clearly, the higher in terms of asset that you have, the lower the fee will be in terms of percentage,

but higher in dollar amount. Ask them what products and services they offer. Some will offer insurance, investments, tax, and estate planning. Ask them if they are affiliated with a specific company. Ask them if they can help you develop a financial plan, if that's something you're looking for. You can also ask them if they'll review your file and how frequently they'll review your file, if they have an action plan. Another important thing to ask them would be, do they have agreements with other professionals that may be outside of their circle of competence? So here I'm thinking lawyers, accountants, insurance specialists, notaries.

And if they do have special agreements, make sure that you also ask them if they get compensation for your referral, because that can also give you a good indication whether these other professionals have your best interests at heart. Ask them if they carry liability insurance. That's really important. A good financial planner should have liability insurance. Ask them if they can provide you with at least two references from existing clients. If they can't, I would move on to the next one. And again, if you're listening to this podcast, you probably manage your own investments. But a financial planner could also provide you with some investment advice. Make sure that you do compare if you do get the investment from them, that you compare them with

a major benchmark like the S&P 500. As a whole, if you're going to look for a financial planner, just make sure too that you will check with more than one. I would recommend at least two or three so you can see what kind of answers they provide you. I like that last point, which is what an industry we call three quotes. You got to see three quotes. And that's just to kind of survey the field because the first person you talk to could be the best. You just don't know that yet until you've talked to at least one other professional. And a lot of these people have good certifications. They know what they're talking about. I don't know. This is what I do when I'm interviewing for people

at Stratosphere. I ask them, this may be a little bit wild, but I ask them on the interview. Well, it's not wild for the interview. I asked them on the interview to pitch me a stock. Now it might be wild to ask your financial planner to do that, but it's something that I would legitimately do is pitch me a stock because they have to know all sides of the financial planning ecosystem and investing is one of them. So if they can't even come up with a stock pitch, or if they come out with something smart, like, Hey, I would recommend just an indexed passive strategy, then that would be like, you know, gold star. I'm good with that. But like, Simon, do you know what I mean? Like, I want to actually

know that they know something and can prove that to me on the spot. Is that too crazy? Or is that something you would do? Because that's what I do to people who interviewed stratosphere. And if you want to work in stratosphere, you got to pitch me a stock. Yeah, yeah, I think for me, it would be most I'd be satisfied if the financial planner would give me, for example, an index ETF. I think that would be satisfied enough if they have a good reasoning behind it, because some, depending on what they specialize in, they may not be that well versed on specific companies. That's probably my only thing, but totally agree with that. Oh, yeah, no, if they said an indexed passive

ETF strategy is what they recommend their clients, then that's great. But if they just don't know how to answer the question, then that's how you know, right? Yeah, move on to the next one. Yeah, like the ETF answer is a good one. Or if they're like, hey, yeah, this high quality business, that's good. But if they're like, oh yeah, some junior mining stock, like I'm just speaking from my experience when I interview people just to get a gauge of the people I want to work with in the investment business. If I get something that's really off-putting, like the interview is over. Anywho, so I think that this was a good list, Simon, and very, very worthwhile. This might be something we should put up somewhere if we can,

maybe on the website. Crap, I'm committing to putting it on the website now, aren't I? I'll do it. I'll do it, Simon. But this is a good list, right? And it's important because even if you are managing your own portfolio, you can't be an expert on everything. I'm not an expert in estate planning. It's a little bit out of my circle of competence because i have no experience doing it you know like i just straight up don't have any experience doing it yeah exactly same for me and do you have the willingness of learning that that's the other thing you probably tell yourself you know what i'd rather pay someone to do that part because it's it'll be probably better done

than if i learned i'd probably figure it out but out, but I know I'm speaking for myself. I'd probably figure it out, but I wouldn't be able to speak to it without learning. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host

to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, moving on. Let's talk about something for investing in technology companies. This segment is called software integrations. So integrations can provide deep moats for software companies. It can make them very defensible and have a very

strong competitive advantage. Software companies that can become the clear leader in a specific industry start to have all kinds of innovations, new startups coming in, building new and interesting projects, new and interesting companies on top of what you have built. Now, when you are developing, when a specific company starts to get all types of these developers working on integrations and this ecosystem develops, it can make the parent business or the company that all these integrations are being built on top of, that company becomes extremely sticky. And an interesting thing happens where their actual product keeps getting better without having to invest in the engineering of actually building

these plugins or apps that exist on top of your product. Here are some examples of companies with integrations being built on it. And sometimes entire application marketplaces being built. An obvious example here is Apple with the app store, you know, that provides that stickiness. And I mean, that's really what has developed an extreme moat for Apple. The App Store is a big part of that. Let's look at a less known one like Intuit with their integrations on QuickBooks in the accounting business. Let's look at Shopify with their App Store. There are 4,000 plugins that have been made for Shopify merchants to use. I saw Toby tweet that there are four public companies that are built on top of the Shopify

ecosystem. Four different companies. One of them is on the venture called WeCommerce. And those guys are actually really smart. I've listened to a few podcasts with them. They just buy Shopify partners and Shopify theme builders and businesses that all have to relate with Shopify. So it's a roll-up of the Shopify ecosystem. How interesting is that? Look at Salesforce. They have integrations galore. You can't even get started there, especially with their Slack acquisition. That's even more important. Microsoft, they have just way too many to count. Autodesk, if you look at architecture, engineering, construction, there's tons of integrations that are happening inside of that ecosystem as well. Even if you look at Zoom,

they have all these connections all over the place. Atlassian, which is tickered team. If you look at Jira, Trello, they have deep integrations with engineering technology, software stacks. Stripe, the payments company. The list goes on and on. I could list off a million here, but try to recognize some of these large software players that are developing a marketplace or a ecosystem in which new companies are excited to build on top of what they have built rather than in direct competition. Those are really big winners long term and it's easy to pick them out once they've been winners. But just something to think about when you're looking at new companies or smaller software companies, if that's something that

they're starting to develop and have this kind of developer, all these developers building new, exciting, interesting projects on top of what you're building. Yeah. I'm surprised you didn't put Android in there, their ecosystem and the app store for that. Absolutely. Yeah. There's a million of them, right? But that's another good example. It's very similar to the Apple one. Especially since you own Google. Yeah. Yeah. That's fair. Perfect. So now we'll move on to our next segment. And I wanted this segment I wanted to do because you hear a lot about Warren Buffett, Charlie Munger, and how Berkshire has performed well over the years, but recently hasn't really kept up with S&P 500 returns. And I'll put a little

bit of context to that. So I ran some numbers. These were as of about like 10 days ago, but it still gives you a pretty good idea. So looking at the one year out, Berkshire is up 23% versus 28% for the S&P 500. Three years, 29% for Berkshire, 68% for the S&P 500. Five years, 78% for Berkshire and 110% for the S&P 500. 10 years, 265% for Berkshire and 269% for the S&P 500. So basically a wash. That's dead on for 10 years, which is very fascinating. Yeah, exactly. That one was a wash. 20 years, then it gets interesting. So 506% for Berkshire and 303% for the S&P 500. And then 30 years, it's 1,080% for Berkshire and 1,120% for the S&P 500. So again, the 30 years is almost, I would consider that a wash. It's close enough.

I thought it was interesting because you hear a lot of people talking about that and it's good to put some actual numbers behind it so clearly for the most part Berkshire has performed pretty close in line with the S&P 500 there's that 20-year mark but the S&P 500 has the edge on most time frames that you're looking at here obviously if you go back 40-50 years I didn't go back that long but I would wager that Berkshire is probably in front for those. 100%. 100% Berkshire has outpaced the market on a longer term than 30. So here are a few takeaways from my point of view, and I know Brayden will have some comments on it as well. And I know we have slightly different opinions. So it'll be a fun discussion here. So personally, I'd invest in the S&P 500 index fund before I would invest in Berkshire. And actually, that probably goes well with what Buffett says, because he does tell people for

a lot of the time, like, you know, just put your money in S&P 500 fund. The reason for me is Berkshire tends to be more traditional businesses. Yes, he has a big stake in Apple. He's invested in IBM before a bit in Amazon and a few others out there. But the few others are not a big portion of their portfolio. But aside from Apple, really, and IBM, it's not been a major kind of tech investment. And I think going forward, tech will have a big part in returns for any portfolio. So I think that's where I'm a bit more reluctant to invest in Berkshire. Berkshire has a cash pile, a huge cash pile. And a lot of people criticize Warren Buffett and Charlie Munger

for that. To put some numbers around it, as of September 30th, 2021, they had $144 billion in cash on their balance sheet. That's up from $135 billion in December 31st, 2020. So about nine months difference. So we're seeing this cash pile going up. That's a bit of an issue for me because that cash pile, especially we're seeing inflation pick up. Yes, they have it in treasuries, part of it, but you're not keeping up with inflation. I get that Buffett is waiting to get a good opportunity to invest. And I also get that with the size of Berkshire, I mean, they need to make pretty significant investment to move the needle because the company just so huge right

now but I have a bit of an issue with that especially when they could use that cash pile just very small amounts to invest in new technologies just making small bets here that could really really go well over the long term and one thing I don't like about Buffett, but especially Charlie Munger, for his sharp words, is they're reluctant to embrace some new technology. And I'm thinking here specifically Bitcoin. And Charlie, you know, he doesn't mince his words when he talks about Bitcoin. But what would be the harm for them to invest, say, half a half a billion or even a billion of their cash pile instead of letting that sit on their balance sheet and just losing money over time. So that's where I have a bit of an issue

with the way what they're kind of doing. Yes, they're buying back stocks. They could probably pay a dividend, but Buffett doesn't want to do that. But clearly, there's a lot of good things that I've learned from Warren Buffett and Charlie Munger over the years. And that's why I wanted to make those points is that you may not agree with everything he does. You might not agree with everything I say, what Braden says, with any big investors. Obviously, I'm not considering ourselves huge investors. You're not allowed to disagree with me. What are you talking about?

Yeah, but, you know, it's fine to pick and choose what you like in terms of people you listen to people you read read on. And that's completely fine. And that's a beauty in investing. And the last three things I wanted to mention is the main three things I've learned from Warren Buffett. And there's other things. But first of all, invest with a long term mindset, invest in good businesses that you can buy at a fair price. And really be greedy when they're fearful and vice versa. To me, those are the three biggest takeaways from Warren Buffett. Again, I don't agree with everything he says and does, but that's totally fine.

You can kind of pick and choose and that's the beauty of investing. Yeah, those are really good points. I think what you're touching on is the fact that even the most, I guess, historically most famous and most skilled investor of all time, like he's the Wayne Gretzky of investing and deserves to be there. He's a true outlier. I mean, his returns are exceptional. His long-term track record is unbelievable. It's so, so good. But what Simon's saying is you don't have to, you know, take everything that is said even by the legends as complete gospel. And I think that that's a fair point.

If you look at their returns, it's been very similar to the S&P 500 over the last 30 years. Now, I'll take a counterpoint because I think that that's interesting. I think I'd rather own Berkshire than the index because I think you're going to get very similar to S&P 500 returns, probably with lower beta than the market. Now, the hesitancy I have there is the cash pile. It's been there for so long. And it's in what conviction do investors in Berkshire even have today? I'm not a shareholder, but if I was, what conviction do shareholders have right now that they are going to deploy that in any meaningful way? Because it's not, this cash pile is not new, Simon. Like how long has it been sitting over a hundred billion dollars? Years.

Yeah. Yeah. I can't, I mean, they've been talking about their cash pile. I mean, as far as I can remember, I think it hasn't always been $100 billion, but it's been pretty high up there for quite some time. Yeah. Warren has talked extensively about how difficult it is to deploy capital because they're managing so much money. And so, those kinds of constraints they have could be a reason for just owning the S&P. But if you look at what they own, they own utilities, insurance, railroads, a diversified portfolio of stocks, consumer staples, rock solid, low beta type businesses. It can serve a really good place to have phenomenal investors at the helm for no management expense

ratio. That's always been the way I think about Berkshire. Now, something I want to talk about here is Buffett is 91. Charlie Munger is 97. He is turning 98 in exactly one month from today. Charlie Munger is born on January 1st. Now, they are the absolute goats, greatest of all times. They're the Michael Jordan, the Tom Brady's, the Wayne Gretzky of investing. And they have tons of investing lessons about temperament, patience, capital allocation, entrepreneurship, and more. No one's done it more successfully and longer than these guys. Now, it is very difficult for them to deploy capital at their size and scale. Buffett has always said, if I was an individual investor

investing in small sums of money, I would be compounding way, way faster than I am with my hundreds of billions of dollars because he is just constrained. However, what Simon said, and I do agree, they own what they're comfortable with which is a learning point it's useful to know that but they haven't been comfortable owning the things that have generated lots of opportunity in the 2000s era on these infinitely scalable technology plays they have owned an egregious amount of apple stock that was a big bet from the buff dog and that's made tons of money one last thing i just wanted to leave you with here because I could talk about these two guys all day. Amazon's Jeff Bezos sat down and met Warren Buffett and he said, your investment

thesis is so simple. Why don't people just copy you and own good stocks and hold on for the long term and compound at 10, 12, 15% a year. And Buffett replied, because nobody wants to get rich slow. And that just speaks so much to Buffett, right? That just is so exemplary of his persona and his patience. Yeah, yeah, definitely. And we're seeing that now, right? With all these super high flying stocks, or you're seeing these meme, meme stocks stocks or you're seeing these meme meme stocks or you're seeing on the crypto side these shit coins that have one quadrillion in market supply and people are saying well if it only gets at one dollar well yeah have you made the calculation what the whole market cap would be if it hit one dollar the market cap would be above the global GDP. Yeah, it's complete nonsense.

Yeah, it's just people, you know, they want to, it's trading for a fraction of a cent and people just think about like, oh, well, I could get rich quickly. And that's totally right. What he's saying is just, I guess it's human nature. And we were talking about the psychology of investing. And that's what it is. It's, I think, just noticing that, trying to just be in it for the long term. And like you said, I think for me, the biggest thing from Buffett is temperament, not to panic and just steady as she goes. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many

years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

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

But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Now we'll go on. And I wanted to just mention quickly what to expect if you own bonds going

forward. I did do a fun little Twitter poll on our Twitter account, which is at CDN underscore investing if you don't follow us already. I had a decent amount of votes and it was pretty interesting. About 15% of people do own bonds, whether they're sovereign bonds or corporate bonds. And I did say whether it's a bond ETF or the actual bonds themselves. In terms of what to expect going forward, well, the Fed in the US and the Bank of Canada and a lot of central banks across the world said they're speeding up tapering.

Tapering just means that they're lowering their purchasing of government bonds. So when they purchase government bonds, it basically increases the demand for those bonds. Therefore, it keeps the price high and keeps the interest on the bonds low. Well, central banks will probably also be forced to raise increased interest rates if we're seeing inflation. And we're getting signs from all the central banks that it's probably going to happen sooner rather than later. So if these things happen, and I did talk about that before, it will cause the bonds that you own, if you already own them, to drop in value. That's because if a bond is paying

you 2% interest, for example, and the rates go up to 5% for these types of bonds, then the market will adjust the price of the current outstanding bonds to reflect that 5%. So you'll actually be facing a capital loss on that because the value will be adjusted. Unless of course, you don't sell the bond and you just redeem them. But then you're facing another problem because your interest is probably quite low, and you won't be keeping up with inflation. So that's important to understand because a lot of the 60-40, so 60% stocks, 40% bonds that we read about, a lot of this has come from the 1970s, the 1980s, the 1990s, and even the 2000s, where interest rates were already high to begin with. So as the interest rates were going down, a lot of bondholders were

actually having capital gains on their bonds because it had the adverse effect of what I just mentioned. So I think personally, it's quite risky right now to own bonds. I don't personally own them. Clearly with that poll, it shows that a decent sample of our audience does not own bonds either. But I just wanted to mention that because we're talking a lot about interest rates potentially going up. And that's the effect that it will probably add, well, it will have on your bonds if you currently own them, if the interest rates go up. Now, I just want to touch on that because I think saying that Fed T-bills are risky is, I just want to clarify what you're saying and correct me if

I'm wrong, is they're risky on a real return basis. That's correct. Yeah. Yeah. Because that's what's important here, right? Is they're risky on a real return basis. But to say T-bills are risky doesn't really make much sense. But don't hear what Simon's not saying. He's saying on a real return, owning bonds moving forward could be risky. I tend to agree with him. I think that a better place for capital is in equity. So I'm aligned there. Yeah. And I think, and again, it goes back to the conversations we've had about risk and volatility, I think a lot of people still associate volatility with risk. And to me, I've talked about that before, but in my view, I like to associate risk with potentially the likelihood that you'll lose on your investment going forward.

And even if you don't lose on a nominal basis, if you like, you'll still be losing because your purchasing power will be going down over time. And to me, the main goal that I invest in is to make sure that my purchasing power goes up over time, not goes down. Clearly, there's such different situation and don't, you know, misinterpret what I'm saying here. Of course, if you think you'll need the money for something in the very short term, you'll want to have something that's not very volatile where you'll have a more, you know, you'll keep the amount as stable as possible. Yes, you may not keep up with inflation, but if you need the money on a very short term basis, you'll have it ready to deploy. You'll want to be careful. It's very volatile because if it goes way down on a short term, you're stuck cashing out. Then obviously it could be hurting.

So that's that's the way I approach risk personally. Yeah. So this is this bringing up an interesting conversation about capital preservation versus wealth accumulation. Let's have a candid conversation about this then. If you are retiring next year, what do you think, I mean, this is a huge, massive question to think about right now, but say you're retiring next year, Simon, what does your portfolio construction look like? I mean, you're not going to own 100% equities. Maybe you are. Maybe you are. I mean, like, not going to own 100% equities. Maybe you are. Maybe you are. I mean, like, hey, actually, you know what? If I think about that, if I'm 65,

I'm healthy. I think I'm going to live for another couple decades. I might fully be in equities, but that's me. I have extreme conviction in the companies I own. Most of the certified financial planners would look at me like I'm nuts that you're talking about earlier, and they should. What do you think about that? Yeah, I think for me, it goes down to temperament. I think it goes down to what we're talking about with Warren Buffett. So personally, if I were to be retiring next year, I'd probably own all of equities and most likely equities that are a bit lower volatility and pay a dividend for the most part. Obviously, I would try to balance that out. But for a lot of people, it would make sense

to have a decent allocation into bonds or something like it could be a guaranteed GIC, a guaranteed investment certificate. It could also be in a savings account that gives you 1, 1.25, 1.5%. Typically, you know, if you want something to have a bit more certainty, you'll want to have it in bonds or fixed income for the next five years or so. You can take a little bit less than that, say three years, but you want to have at least the next five years that, you know, you're able to sustain any kind of market crash that would happen in equities. But if you have the right temperament, and you're okay with the risk of potentially seeing your equities drop like 10, 20, 30, 40%, and you know that you'll still have enough to live the kind of

lifestyle that you want to live in retirement, you know, having a lot of it, if not all in equities might make sense. It's to me, it's, it's definitely a more individual question and how you'll react. Yeah, no, it totally is. It totally is. And that's why this podcast, absolutely not investment advice. We're just, we're just saying, you know, what we would do. And we, we think we know equities pretty well now it might make sense for people in that situation to yeah i mean lay off the gas a little bit and what they own in their equity portfolio some lower beta stock some dividend payers some rock solid blue chips and then maybe i don't know if you want to roll out an 80-20 type bond ETF allocation, I can get with that, even a 60-40 if you're really not wanting to stomach too much volatility. But

again, I think that these conversations are useful for people listening on the podcast, because that's what we would do. I mean, I'd probably own 100% equities. But again, that CFP you were talking about earlier, would think I'm absolutely nuts. Yeah. And it's the last thing I wanted to add and just revisit back is just what I was mentioning in terms of interest rates, right? And just think critically when it comes to that, you know, a CFP or someone that's a professional that's been investing since the 1980s. And like I mentioned, back then, you could get 10% in bonds and inflation was 3%, 4% what it was. Well, then it was a no-brainer to do that.

Now it's a completely different playing field. So make sure if you're close to retirement or you're looking to these kind of old adage of 60-40 and the specific bond allocation. That's basically what I was saying here. No, that's useful to know. All right, let's move on to the last segment of today's show, which is revisiting a strategy called Norbert's Gambit. is revisiting a strategy called Norbert's Gambit. And what Norbert's Gambit is, is it is a way to use your brokerage, your low cost brokerage, whatever one you use to exchange currency.

And my exact example is Canadian dollars to US dollars and vice versa. I mean, you can do this completely backwards and it works in the exact same way. So again, this methodology is called Norbert's Gambit. I do have a guide for it on stratosphereinvesting.com. We can link that in the show notes and I'll give it to you verbally here, which is basically what you are going to do laid out in a few steps. So again, this is if I do this, Simon does this. This is the elite way to buy US stocks and convert your Canadian dollars to US dollars inside your brokerage account. Step one is to buy an ETF that trades on the TSX called DLR.TO..TO just means it trades on the TSX. So depending on your brokerage,

there's going to be some suffix at the end there, but it's called DLR. And you know, you have the right one. If it is an ETF provided by a company called Horizons, be careful because there are, what is digital realty trust is also DLR on the, on the NICE, right? Okay. Yeah. So he's giving me a thumbs up. Must be a dog barking in the back. So just be aware of that. It is DLR, the horizons ETF. It trades from like usually anywhere between 10 and $13. Now you are going to buy that. And I spy personally, this is what I do is I put a buy order with the limit price set at the ask. So in the screenshot I used here is the ask is $12.71.

The bid is $12.70. I put it at $12.71, which is one penny more and put in a limit order there and press buy. It will fill instantly. If you put it in at the bid, you're basically just going to be waiting for currency fluctuations. Don't waste your time on a penny. That's my personal opinion. Step two, now you are going to call or email your brokerage. You're going to call them. So option one, you can call them and say, hey, here's an example conversation. Hey, Simon, can you please journal over my DLR.TO shares to DLR.U? Denied.

You're like, Brayden, you don't have any money. Sorry. Okay. So it's DLR.U. This is what you want to journal it over to. Or I email them because I hate waiting on hold these days. And Simon, what is with this? You know, every single company on the planet right now has a higher than normal call volume. Everyone ever in the world has a higher than normal call volume. It's because of the pandemic two years in. Yeah. They're still using that excuse. These excuses are so drawn out. Sorry, sir. We're expecting a higher than normal call volume. I'm like, it's midnight. Who's calling?

All right. So emailing them to save you some brain cells. This is an example script. You can say, hello there. May I please journal over my number of shares? You have to include the number of shares of DLR.TO to DLR.U in my account, account number X. They're going to need to know the number of shares, what you're journaling over, which is DLR.TO to DLR.U.TO in my account X. They're going to need to know that account number.

Thank you very much. Bye-bye. There's an example. So that is step two. You are going to journal it over. Now, step three is do nothing for four days. Oh, Simon's got his cute little puppy in the, he looks nice, but he's loud. He's spooky, Simon. Wait four business days. This is step three. It's the easiest one. You just wait four business days because there's two days to settle and two days for it to journal over. In four business days, if you go on your brokerage account, your brokerage will now have DLR.U in US dollars. So that's step three, do nothing. Step four, sell the DLR.U in US dollars. Voila, that's it. And if you're using like a brokerage account, like Questrade, the screenshots I have in my blog are here for Questrade, but you can use other

ones. You're going to trigger just a 495 commission for selling it and buying the ETF there is free. So you did all of this for actual fees of $4.95 in this example. Now, you can make or lose money in these four business days depending on the currency fluctuation in those four business days. Don't spend a single second worrying about it or trying to predict because trying to predict currency fluctuations in four days, like, dude, I'd rather go to the casino and at least have some fun. So that's how you do it. Voila, you sell your DLR.U and you have US dollars ready to invest in your brokerage account. This is the elite way to do it. This is how I do it. This is how Simon does it. Yeah, the only thing I was going to add, so i've done this quite a few times but make sure you use common sense here so if you're looking to invest just two hundred dollars and you know it's going to cost you five or ten dollars for the

purchasing or trade per trade exactly then don't do that just use the whatever currency conversion rate where it is like 1.5% because it's going to be cheaper for you. But as soon as you're looking at like larger amounts, then it will, it's a great way to do it. But again, if you're doing very small amounts, just make sure you compare the fee that you're paying for the transaction versus what you would pay in terms of currency conversion rate. Yeah, that's a good point. So let's look at an example of that, right? If you move over $1,000 Canadian dollars to USD, you're going to pay a 2% fee on most brokerages. So you're looking at $20

in currency conversions. I've seen some banks charge upwards of 3% for this exchange fee or worse, which is terrible. So your fee on this example of 2% is $20 for $1,000. If your brokerage platform charges $9.95 for the buy and then $9.95 for the sell, this was a complete waste of time on $1,000. You're just waiting. Yeah. But say you're in my example was only $4.95, then it does make sense to do the $1,000 if you don't mind sending an email and taking five minutes to do it. I usually say, just as a broad stroke, $2,000 or more is when it makes worthwhile sense

to do Norbert's Gambit. If not, just soak the conversion fee and move on with life yeah no that's a great point i think that's just the important thing that as a general rule the higher it is the more sense it will make in terms of the amount you're converting yeah and sometimes you make a few bucks on the the arbitrage between dlr and dlr you like look at that as a plus like it's just a complete fluke you don't control that, basically. So what you're saying with Nordbert's Gambit is you're essentially controlling the fees by doing so. You can't control the currency fluctuation, so just forget about that. You may

lose, you may win money on that. You're really taking control of what you can control, which are the fees. That's it. Well put. Very well put. Thanks for listening to another episode. Happy December. Joy of the holidays. You know, Simon, the best gift you can give to a loved one in this holiday time is to just send them the podcast. Just send them a link of our podcast of your favorite episode and boom i mean think of the value right simon yeah yeah exactly and if it gets spreading holiday cheer if it gets political at the christmas table just put the podcast on and then everyone's on the same page yeah exactly if the politics starts coming up you just put on the podcast, you blare it extremely loud. And then all of a sudden you'll have people arguing about stonks, which could be worse. What's worse in

that scenario? Actually, I'd rather talk about stonks than politics. That does it for this week, guys. Really appreciate y'all listening. We had our Spotify wrap today. Spotify does that really genius marketing campaign. Incredible job by them, by the way. We are cracking the 100 mark on Apple Podcasts and at 126 in Canada across all podcasts on Spotify. So that is really awesome. It'd be nice to crack that on next year's Spotify wrapped into the top 100 on the platform. So if you haven't given us a follow on Spotify, it's on the top or given us a subscribe on your podcast player. Oh, I'm getting a call here. That's okay. Leave it in editor. It's okay. We're an organic show. Thanks so much for listening guys. I got to take this. We'll see you in a few days. Take care. Bye-bye.

The Canadian Investor Podcast should not be taken as investment or financial advice. I got to take this. We'll see you in a few days. Take care. Bye-bye.