The Canadian Investor - What S&P 500 Companies Are Saying About 2023

Episode Date: March 16, 2023

With most companies having reported earnings and providing guidance for 2023, we look at how it stacks up by sector and historically. We then discuss how people would approach investing if they only had a total of 20 companies they could invest in during their lifetime. We finish the episode by answering a great listener question! Symbols of stocks discussed: CSU.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense. Register for ShakepaySee omnystudio.com/listener for privacy information.

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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changing on a daily basis, we'll have a better view of the fallout of this whole situation. In the meantime, we're sure that you'll enjoy this episode and make sure to tune in on Monday for our breakdown and take on SVB. 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. to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome into the show. How are we doing? Happy that you are here.

My name is Brayden Dennis. As always, with the very thoughtful Simon Belanger. How are you doing, good sir? I don't know if you've seen, but we got a ton of good reviews on the show lately. I think I've been kind of harping on people like, hey, hey, go do that. And thank you. It makes us feel really good. We got one here I'm going to start the show with. Addicted to TCI is the review title. Driving the kids to school on Mondays and Thursdays gets kicked up a notch when they hear that familiar tune. So the kids are into it. Dad's into it. Braden and Simone provide level insights to a wide range of portfolios in Canada and abroad. I don't think I've missed an episode since 200 and neither have they. Like clockwork, they roll out quality content twice a week, every week. Great work, guys. I admire your dedication

and stick to it, Nevis. I don't think that is a word, Matt, sir, but thank you so much for the review. That is Matt J. from Canada. Thank you, man. Appreciate it. Yeah, thanks a lot. It's great. I mean, I almost choked. That's how good it was of a review while I was drinking my coffee. But I will use- Your coffee's a little too hot.

Yeah. I will use that word. I'll just say if I play Scrabble, just say, well, you know, someone else used it. It's good. Yeah. Matt J from a podcast review used the word stick to it navis it must be it must be a real thing um let's get into it i'm going to talk about canadians by income interesting post i saw you're going to do a roundup of kind of the year year that has been here now that we're in march

on just the overall market i'm going to talk talk about the Buffett punch card. I've been rolling with the Buffett content lately, but it just is the gift that keeps on giving. And then we'll do a listener question. All right. First on the dock, I'll kick us off. Canadians buy income. Here's a blog post by a measure of a plan. I've brought up his or her content before. They're an anonymous independent blogger on Canadian finance. They're a plan, I've brought up his or her content before, their anonymous independent blogger on Canadian finance. They're a legend, whoever they are. And they make some great content and visualization, so very props to you. The data is a little outdated because it's end of 2021.

So I think it got published in the first or second month of 2022, but still useful. I mean, this is not going to be that different here in March of 2023. So the average income across all ages is $50,300 across all ages. And it obviously goes up and down as you get older, and then it starts to taper off in retirement. Canadians are making the most money in the 45 to 54 age bracket, which I'm not totally surprised. Basically, you've climbed the ladder at that point, and you're probably in your prime. And then the next data points, people start to retire. So I'm not really surprised by that. Some interesting data points here.

In that 45 to 54-year-old range, average income is $66,000 versus only $45,000 for the 25 to 34 age group. Calgary is home to the largest share of high income earners of all cities. 2.4% of Calgarians are earning over $250,000 versus just less than half of that of 1% for Canadians as a whole. Go Calgary. I was born, not raised, but I was born. What do you make of this data? I'm not surprised. I'll tell you what. I see it and I'm not surprised to see the debt to income levels because that number is lower than I would have expected in aggregate, to be completely honest. Yeah, I'm not overly surprised by the data. What I find interesting too is the 45 to 54 and then 55 to 64. One additional thing to consider because I have

experience in human resources is that the 45 age bracket, but probably towards the end is usually when people may enter disability disability long-term disability as well so if employers have coverage there it'll be to reduce rate typically around 70 percent or no coverage then obviously it's it's a bit easier so there are kind of health related things that could impact that income especially around the 55 to 64 plus obviously like you said the retirement so there's kind of a obviously as you get you get older, chances are that there's a higher proportion of people that will develop health issues. So that's just one thing I was going to add. Yeah, good context.

Calgary and Edmonton are leading the country in terms of major cities that buy income on average. There is a large gap there between male and women, I think, just due to the most cyclical income levels just given the price of oil and how much that has changed in the past 10 years and how much shakes up the... My entire family lives out there, so I'm always hearing about how much it affects the local economy. Yeah, yeah, definitely. I mean, oil clearly is a big determining factor for a lot of jobs in Calgary. Hopefully that becomes less and less the case just for cyclicality in the future. But, you know, we've talked about it before where there's more and more people that seem to be in the tech space around the Calgary area, that at least a startup space. So maybe over time it'll be a bit less dependent on that. But I don't think,

you know, at least for the next decade, I feel like it's still going to be predominantly dependent on the oil and gas industry. Let's get into the year that has been, I mean, we're not fully through the first quarter here, but, you know, we have at least some time to look back on what the market has done so far this year. Yeah. So I pulled some interesting data recently. So I wanted to look at the S&P 500, a bit of an earnings roundup in 2023, because now we have a good idea of what companies have reported for 2022 as a whole. It's a bit harder to find some good data. I find for the S&P TSX, there's just a lot more content out there when it comes to the S&P 500. And a lot of people, they'll kind of base obviously how the investments

or how stocks or equities are doing based on the S&P 500. It's usually one of the biggest, doing based on the S&P 500. It's usually one of the biggest, well, I think it is the biggest index right in the world. So people use it as a bit of a baseline. It is the de facto benchmark. Yeah, exactly. So the baseline, I guess, wherever you're located. Now, there's a couple of reports here. The one I'll mostly look at is a report from Factsheet, which was issued on March 3rd, 2023, with almost all of the S&P 500 companies having reported for the full year and also issuing some guidance for the year ahead. So the first thing here that I took out, so earnings growth for Q4 2022, earnings declined 4.6%, which was the first quarter of decline since Q3 of 2020. Not overly surprising, I think on both fronts, the fact that Q3 2020 was

declining. I think we just go back to COVID, right? I think companies were really impacted by that. And the latest quarter, I think it's been mostly, you know, we've started seeing some weaknesses in some sectors. One that we've talked about in a recent episode was retail, for example. So that's one of the sectors. Any comments on that one before I go on? No, it's just funny though, because in aggregate, it can be so different from just like the companies that we talk about. When you see earnings decline of 4.6% and then you're just so used to, I think in the last like two, three years, you read the prints off of companies that are highly discussed, the big techs of the world. And you see these massive EPS growth year over year, year over year, year over year.

And it might not be the determinant of the entire market. And so I personally get lost in the numbers. And this is useful for me to step out and see what's happening broadly with earnings growth in aggregate of the largest 500 companies in America. Yeah, I know. Exactly. And that's good. And the other thing I'll add is we went on another podcast recently, the Investing for Beginners podcast, and we were talking a lot about free cash flow or free cash flow per share. talking a lot about free cash flow or free cash flow per share. So, you know, this earnings decline, you know, it I would go on a limb and say it's probably slightly higher if you look at free cash flow per share. That would be just because, you know, there's always these shenanigans

you can do with earnings and stock based compensation is one of the most obvious one. Not that it's a shenanigan, but it's a way for businesses to basically say, oh, you know, we're not actually paying cash, but then a lot of them will turn around and buy back the equivalent number of share, which I mean, essentially you are paying the cash, right? You're kind of offsetting it. So that's something just to keep in mind because earnings can be a little bit misleading. Now, looking at earnings guidance for Q1 2023, 81 companies have issued negative EPS guidance and 24 issued positive EPS guidance. And for the rest, I'm just going to assume that they don't issue any earnings guidance, but it didn't say specifically in the report.

That would be my assumption because we talked about a Costco and I think also a lot of companies were burnt early on in the pandemic or stop issuing guidance and I think some just continued not issuing guidance. So something to keep in mind here. The valuation, the Ford 12 months P ratio sits currently at 17.5 compared to 16.7 in December. That's below the five-year average of 18.5, but above the 10-year average of 17.2. So whether to say it's cheap or not, I think it's really hard here because if earnings end up being better than expected this year, then you can make a case that it's pretty cheap. If earnings end up being worse than expected, then you can make a case that it's still pretty expensive, since it would mean that it's higher than 17.5. And obviously, if expectations are correct,

then I would say it's reasonable, but not really cheap either way. Sector valuation estimates for 2023. This is where I think it really gets super interesting. So for 2023, the change in sectors for earnings per share. So December 31st to February 28th. So just the change that they're seeing for each sector. So it really varies for the most part. It's actually quite negative, unfortunately, to not be the bearer of bad news here. So the only sector here that sees a positive EPS would be consumer staple at 0.2%. Then all of them are negative with utilities being almost flat at 0.3% negative, and then consumer discretionary being one of the

worst one at minus 6.3%. And then obviously, if we have- So these are EPS estimates for the year by sector? Yeah, exactly. Okay. That's it. So essentially just a change between December 31st and 28 in those estimates. So there's already been a significant change in just the span of what, two months. Yeah. Right. Yeah. One full month and one shorter month. Yeah. Yeah, exactly. 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 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. It's fascinating because you see this and these estimates, and you have a big enough sample size that it correlates to exactly what you would think in a down cycle. The consumer staples has actually an increase of EPS estimates, and you have a decrease on consumer discretionary.

on consumer discretionary. My one point here is I think that with the large enough sample size aggregated here at scale, this is probably going to turn out to be quite accurate. I mean, there's tons of analysts covering these companies. You have a large enough sample size of companies, analysts, and it's only one year out. It's not like 2028 estimates. It's 2023 estimates. It will come out somewhat like this. That being said, I wonder how much of it is based on just very cautious guidance. What analysts are... Like what we talked on the last episode, like, you know, just kind of following like what should happen versus what might not happen. And it's important here looking at this data to do, you know, bottoms up research on the companies you own, because you can see this and think, oh, I guess, you know, earnings per share growth is

going to be negative for, you negative for every single company I own. That might not necessarily be the case. And estimates are often wrong. So, I'm saying this in two ways. I'm saying this is probably going to be very accurate, but also make sure you're doing bottoms up research on the individual companies you own as well. Yeah, exactly. Basically what I'm saying, never go full macro. No, no. You never go full macro or else you get burned.

Yeah, I think here it's just to get a sense of exactly, not exactly, but a good sense of what will. There's a good probability of happening this year. And then the last chart I kind of pulled out, which is really interesting. So this chart goes back to 2006. And then for every single year, it gives the change in EPS year over year. So the good news is that, you know, this upcoming year, so calendar year 2023, and they do specify calendar year because reporting schedules will vary from company to company, while they're projecting a downturn of minus 3.4% as a whole for earnings per share. So that's actually, you know, not that bad if you see the graphic here.

So it's in line with calendar year 2019, in line with calendar year 2016, pretty close, like a few percentage points. like a few percentage points. It's actually better than calendar year 2015. And it's way better than calendar year 2009, which was down 18%. So it's just I wanted to provide that additional context, even though it may look like it's pretty bad. It's not too bad when you think about it. And it's actually a little worse than 2020. So calendar year 2020 saw a decline of minus 1.5%. I think for the most part, if you look at quarter to quarter in 2020, I think Q2 was probably a really bad quarter, but then I'm sure it picked up for the back part of the year. Some businesses really profited quite well from the back half of 2020. And the first quarter of 2020, things were pretty much open, right? So I think 2020 was a bit of, obviously,

it was a really weird year. But what's your thoughts on that? I thought it was just kind of interesting putting it in context, looking at it. it doesn't look that bad looking at it from that chart. Yeah, it looks like we're going to be fine if you stack it up against some of the other years. And I think that that's probably true. You had this gigantic drop in 2020 and obviously shocked the markets, it shocked real companies. But it was such a dichotomy between the companies that were doing well during that time and companies that couldn't even operate. So that's probably a nominally, as you mentioned, to throw that out. But yeah, if you zoom out

2015, 2016, I mean 2008 was only four. It's like it stacks up to those years. It's just in aggregate. My answer is I don't hear the previous you know the previous comments i make and necessarily freak out and this just reminded me how bad 2009 was as well like minus 18 percent i did not like and you was bad in 2009 following the financial crisis i just then realized that profits were down that much dude people thought like it was the end of the world as we knew it in terms of capitalism and these large companies and banking. Like it was complete pandemonium. The S&P bottom to trough had what?

Like a 50%? Like peak to trough had a 50 decline that sounds about right i haven't looked at it uh recently but i think that's about right yeah like things got absolutely smoked um i'm looking here i wanted to kind of look up some data while you were talking. And I found the source of change in the S&P 500 index from 2010 to the end of last year. So the most recent data that we have. And source of change in the price of the S&P 500 index came from 73% of increase of profits, 7% from net share reduction, and 20% from valuation increase. So yes, multiples expanded. We saw 20% on that. But about three quarters of return composition actually came from the constituents in this index becoming more profitable.

If you zoom out way, way, way back and you get the S&P 500 price and Bloomberg earnings per share estimates over time, they track themselves extremely well. It's one time the black line goes higher than the blue line and sometimes the blue line is higher than the black line. But they end up basically at the exact same finish line from 1990 here till right now at the end of 2022 in EPS estimates and the price. And so what do you make of this? It's like, okay, well, yes, the estimates clearly track the market well. But you see a general trend in this chart

is that it goes up and to the right like it always has. And that's because these businesses have become more profitable on an earnings per share basis. And that's what drives stock market returns. Everything else in the short term is mostly just noise. Yeah. And yeah, exactly. The other thing I noticed from that chart is it feels like the estimates are always a bit off. So it's like they're slow to react to big changes. So it's like the estimate is slow. And we saw like we're seeing it. The chart clearly shows it where it seemed like the estimates were being overly confident in 2007, 2008. And then it took him a while to actually adjust. And then same kind of thing as the market picked back up and profits starting to go back up. It took a while for the estimate to kind of adjust upwards as well. So just it's a good, you know, overall, it's quite close. But again, I mean, it's normal that it's relatively close because they adjust them usually on, you know, at least on a yearly basis. So, you know, you can only miss it by so much when you think about it. So that's the other thing I would say. And the last thing I'm going to say, too, is just caution in terms of using valuation metrics for like price to earnings ratio. And that's one, you know, we've talked mostly about earnings here. And depending on where you get the data, just be careful, because if you look at it from a trailing 12 month basis, a company could look really cheap because their profits were higher

last year than they will be this year. So this is skewing thing. And if you adjusted for their actual profits this year, then the company would actually look much more expensive. So that's something just to keep in mind, because I know we've had that kind of question before where people will see, for example, banks are notorious for that kind of stuff, too. They'll see and they'll say, oh, it's like trading at like an 8, 9 PE. Well, yeah, last year they had really good profits and this year is going to be a down year and you're looking at the trailing 12 months. The trailing 12 months, you know, it's fine if you think this year is going to be the

same or higher. But if it's not, if it's going to be the same or higher but if it's not if it's going to be lower it can be misleading so just just to be careful when using those type of metrics because it can lead it could lead you to making a wrong decision because you think something is cheap when it isn't yeah good point especially with cyclicals right like this stock might be cheap uh for a highly cyclical business when its PE is at historical highs, which is contrary to what you'd think. Because there's two numbers in price to earnings.

Exactly. It's not just one. It's one number divided by another number. And so those two inputs both need to be looked at. I think this is a good time because I'm looking at what we're just talking about. You were discussing lots of graphs. I was talking about those graphs. I even, while you were talking, was scrambling to find more graphs. And there is a lot of graphs. So what we've started to do is take the show notes of the stuff that we are looking at and put it on our website at

thecanadianinvestorpodcast.com. We will take certain segments like this one and you can see the visualizations and read our thoughts in a more concise way at thecanadianinvestorpodcast.com. At the top there, it's called show notes. Is that what it's called, Producer Mel? Show notes. Okay. Yes. At the top, show notes, and you will be able to read what we have to say. 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 or investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo-style education lessons that are completely free.

You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there.

All right, let's talk about the Buffett punch card analogy. And this is a really interesting framework. And, you know, I'm using up all – I'm going to be out of Buffett content soon here because I am just throwing it at you on here on the podcast. But luckily, he's been doing this for so long that we have lots to work with. And luckily, you're going to the annual shareholder meeting. So, you'll get some more. I'll have more from Omaha this May, more Buffett content. Now, here's a quote. I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you only had 20 punches, representing all the investments you could make in a lifetime.

And once you'd punch through the card, you couldn't make any more investments at all. This has been on top of my mind a lot lately. And my investing style is to try to own truly great businesses and do my best to pay an appropriate price, which is obviously easier said than done. Myself and many other investors make mistakes in this area all the time. Overall in your life and certainly in your portfolio, having an extremely high bar for quality and investment ideas that you can understand, have a nuanced take and have conviction to hold them. Double click on that. Conviction to hold them for a really long time if the business and the investment thesis remain compelling, regardless of short-term volatility and share price changes. So this Buffett, Warren Buffett punch card analogy forces you to be very selective. When you only have 20 slots, you can only take 20 train rides with this punch card. You have a select set of decisions and it forces you to only focus on your very best decisions.

And while new idea generation, new companies is very helpful, you want to turn over more stones and then that'll actually uncover what is high quality and what's not. But if it's not in the highest hurdle rate for quality, then it just doesn't need to be acted upon. So it's not don't do anything. It's just be more selective with the decisions that you actually make. And this does two things really well in my mind. One, it stops you from over trading. Lethargic activity level is typically a trait among the most prolific investors. And two, it forces you to build deep conviction in the business before making a certain decision. And so, I like this idea. And here's another thing that is a discussion point that you and I can have, I guess.

and here's another thing that is a discussion point that you and I can have, I guess. I believe a starter position goes against the Buffett punch card analogy. Because a starter position is like, yeah, I'm starting to get, I'm starting to understand the business. You know, I just opened up like I, you know, bought a few shares and I'm still learning more about the business. And this is incentivizing me to learn more about the business. The punch card analogy would say that is complete BS and don't do that. And I'm starting to think that that's true because you only have the highest quality bar for new positions. And I don't know. I think there's a good way to live. And I don't know, I think there's a good way to live.

Yeah, yeah. I mean, I get what he's saying. At the same time, he also does this for a living. So I think, you know, you have to keep that in mind where it's like that's all he does and obviously enjoys doing that. And in a starter position, I think the advantage is it gives you that extra incentive to learn that company. But there should clearly, you know, before you start a starter position, in my mind, you should at least have already a pretty good understanding of the business. And, you know, have some key things that you look at that it checks, you know, most, if not all the boxes. And then you have maybe a bit more to learn about it.

That's probably, you know, the way I would see it. I would just, I would personally avoid just starting a position because, okay, I heard this company looks interesting. Look five minutes into it. Okay. I'll start a position. Like that's, that's what I mean. I mean, to me that it's a bit different. So that's probably the one thing thing i'd say but clearly having just 20 slots um you definitely would make sure that uh you use them wisely so i i can understand that and you know it's i think he's i don't know if it was him but yeah you don't have to swing at every single pitch or every single no. No called strikes. Exactly. So you can be really selective and, you know, there are really good companies out there. You just have to, you know, make sure you choose the right one. And, you know, there's probably hundreds, if not, yeah, probably hundreds of wonderful businesses. And you only need to choose a few to end up a big winner, to be honest.

Yeah, it does tangentially relate quite well to what you're talking about, the science of hitting and no called strikes and only swing at really good pitches. And I think that this is kind of saying like, you might only have a select number of amazing pitches you're going to come across. And so, be selective on them. And the number is arbitrary. I mean, if you're doing this for a really long time, you're going to have more than 20 pitches. You're going to have more than 20 punch card opportunities. It's more so, of course, all of these things are analogies for high level decision making and high hurdle rates. I think that having

a high hurdle rate for quality is a good way to live, not just as an investor. It's the people you hang out with, who you choose as a partner, the business decisions you make, having a really high quality, having a really high hurdle rate for quality is just a really good way to live and i think it's a good way to be an investor too yeah and you have to remember too you don't need to invest in a business if you're not 100 sure like right now you can easily get five percent on your cash so it's pretty i mean we haven't seen that in a really long time. Clearly, if you factor in inflation, you'll probably still lose a little bit of money in terms of real interest rate. But, you know, you're still getting 5% compared to last year when

inflation was at the beginning of the year, what, like not 7, 8, 9%. And you could get what, maybe 1% if you were lucky. So that's something to keep in mind. We're in an environment where you do have that option. I'm not saying to keep like 150% in cash. I'm just saying if you're not sure, you can get a good yield on your cash. And the other thing is if you're not sure on a business, then another option is index ETFs. So if you're really not sure, then bet on the market. Those are two things that people can and I think should consider if they're not sure about investing into a specific business. I think that that's really well put, right? And that is, by definition, your hurdle rate, right? Your hurdle rate is what you can get on cash risk-free. That is the risk-free rate. That is the hurdle rate. And another hurdle rate that should be

considered that doesn't get discussed is what if I just put it in an index? That of, in my mind, that's the benchmark. That is my hurdle rate right? It's the market, which should far and exceed what I can get on just cash. So two things to consider there. And I think that this is all tangentially related. Let's move on to a listener question. I don't know what your answer is on this question. I'm excited to hear it, actually. Yeah. So we got a question from Shay on our Join TCI after we just posted our latest update for the month. And it was a great question for Shay. So my apologies, Shay, if I didn't answer on Join TCI, I thought it would bring value to our listeners as a whole. So that's why I decided to bring it here.

So the question is for me, how come you don't own Constellation software? So the question is for me, how come you don't own Constellation software? Has Brayden not convinced you yet? I am interested in starting a position and going to start researching more, but curious to hear why you don't own it. My portfolio is a lot closer to yours than Brayden's. So that's interesting. So first of all, I mean, great question. I think I like that you're saying you're interested in starting the the position but still have to do more research and that you're not. That's already like, you know, I'm the consolation bowl but I'm like, check.

Like, you know, you're not just following my conviction into the business because that's a terrible way to go. Yeah, exactly. And I love hearing that because like Braden said, he has obviously some really strong conviction in Constellation. I have a really strong conviction in the names I own, but again, you can't borrow that. So that's really important. And first, I want to say I do own Constellation software indirectly. So I recently made some changes actually last week after the uh the most um the most recent patreon update uh but i made some changes to my pension funds and one of the allocation i now have is actually has a pretty good allocation to constellation software so i do own it just like a tsx composite type yeah so it's

actually a actively managed fund super low fee okay I think it's like 20 basis points, something like that. So I was looking to get a little more exposure to Canada, not a whole lot, just a little more. And that one still has some energy names, but it actually has Constellation Software at one of its top like six, seven holdings, which obviously the index would not have it that high. So that's kind of what, you know, got me interested in that one. And the index is just heavily weighted towards financial and energy. And this actively one actually has a better mix, in my opinion. The reason why I'm going active is also because the fees are super low. Like the difference is fees is actually

quite minimal between that and the index. So I'll go over the reasoning for the fund change in the next Join TCI update, but I wanted to mention that. Now, Constellation has been an amazing performer since it's been publicly listed. It's easily outperformed the market. It's grown free cash flow per share at amazing rate. And although it has slowed down a little bit in terms of free cash flow per share recently, not a lot, but a little bit, given its track record, I'll just assume that this is temporary and will start growing once more. Now, I wouldn't say I'm not interested in Constellation Software, but I simply haven't dedicated the time to it and I have to do more research in the company. And obviously, Braden liking the

company as much as he does is still, it's a big plus, but I will need to do more research if I do decide to start the position. And my biggest concern about consolation, maybe you can address that, is probably what I call the Berkshire effect. So Buffett has alluded to this many times in the past and mentioned that in order to make needle moving investment, Berkshire has to invest some pretty significant amounts of capital because they're so large, right? They can't, you know, if they invest like $50 million in a company, like it's not going to make a difference for them. It's just not. It's like, I mean, the company would probably have to go 100x for them to actually be needle moving. So consolation is nowhere near the size of Berkshire.

I completely understand that, but it's also not a small company anymore. And although the acquisition strategy has worked really well, I just wonder if at some point there's just not going to be enough of these acquisitions to be needle moving. And if they go towards bigger acquisition, then they'll start having to fight with other potential acquirers. Right. So that that's my biggest concern about consolation. So what's what's kind of your take on on my biggest concern there? What's kind of your take on my biggest concern there? That has been the kind of like easy to point to bear case for the business for its entire existence. And it's a good point to make because I think in terms of expectations moving forward, it's important to recognize in terms of expectations.

Because what? The stock has 115 X since IPO. It is a hundred bagger and then a bunch since IPO. And I've made tons of money off it, but I have not like the hundred bagged it. So don't worry. I've only been holding it for years, not decades. And so that's not going to happen again. It's not going to 100 bag here from 50 billion CAD in market cap. That's just not going to happen. Even the spinoffs, the chances of that happening are almost zero. So that sets the stage on expectations moving forward. But to combat the fact that they have had justify the market cap with these small couple million dollar acquisitions? How can they possibly be needle moving? I think that that's a great question. And what have they done? The number of businesses actually purchased under Constellation's

empire. So if I go into Constellation, type in CSU.TO on Stratosphere, you go to their KPIs, we track two metrics that are incredibly important. Number of businesses purchased has gone from 30 in 2015 a year. in last year calendar. That has compounded as a growth rate by over 30% year over year. So to justify the growing need to grow the install base, they've done so. They estimate that they have over 40,000 targets available for companies. I should also, maybe, I don't know if I should disclose this. They have reached out to me, while no one else has. Their tentacles extend deep because they've built this really decentralized operating group with a lot of autonomy, small teams, and they're highly incentivized to buy

more great vertical market software companies. And so in terms of capital deployed, they've deployed 236 million in 2015 to nearly 2 billion in acquisitions during that time. So that helps justify the market cap, as well as they have done larger and larger carve-outs of big companies, hundreds of millions in size of acquisition just versus a couple million. While still doing those small ones, they're now doing these large carve-out of software companies and vertical market software. So, they have done everything to combat that law of large numbers at an astounding pace. And so, I just no longer am doubting their ability to keep doing it. Competition for these deals, I do agree, is a growing concern. There's more kind of copycats.

And that's why Mark doesn't talk publicly at all. Basically at all. Like he doesn't do the letters anymore, you know, at least not as frequent. And there are growing copycats of people trying to buy similarly niche software companies. And so that is a concern. That being said, there's a gigantic pool of them and they're doing more and more deals. You know, they're doing one basically every other business day right now buying a company. And so there's two things here I want to talk about, right?

I just gave like my pitch on the company. I hope no one listens because I really don't want people buying the shares. That's how much conviction I have. Don't buy the shares. You don't need it. Don't buy it. I want to buy them. So, there's that. But I just gave you all those facts and figures. I'm not looking at any notes. I'm looking at just some numbers from Stratus. I know all of that just off the top of my head because I know the business very well. And that means something. Like, you know, that's important to specify in terms of like the conviction I have versus maybe you'd be developing.

Yeah. And like it's also a good reminder, right, to, you know, like you mentioned in your question, Shay, is that, you know, make sure you do your own research. And, you know, we say that constantly. This is not investment advice. We have our own, you know, portfolios. We disclose it when we own something. And I like the breakdown that Braden did. And the one thing I will say that's probably a tailwind for them, at least in the short term, is the carnage that we've seen in the tech space. There may be some pretty good small companies that are maybe not desperate for capital, but are looking for capital. And, you know, someone like a Constellation may be able to kind of swoop in and get it at a better valuation. Like I know, I'm assuming they go after companies or small tech companies that are

producing free cash flow but again you know sometimes you may have a company looking to have more capital to expend and maybe that's somewhere a consolation can i swoop in and be like well you know we won't provide you that capital but we'll buy you outright there's something like that yeah exactly um so i think there's, I saw this question come in and I was like, we got to talk about this because there's so many, so many things here, right? Like you and I talk for hours, one-on-one to each other every single week. You know, we text constantly. You're one of my best friends and you have had to, like, before you would enter a position, you have to build that conviction on your own. And maybe me influencing you can maybe

light that fire or, you know, at least you're going to like learn from other things that I've said. So that gives you a head start. But until you build that on your own, like you're just, it's just a bad time to be a shareholder of a company you hardly own. One thing that I thought was interesting, I don't have any brokerage app on my phone. And I was thinking, this is actually a pretty useful tip that people can use in their life, actually a pretty useful tip that people can use in their life is I purposely do not have my brokerage app on my phone because any decision with your investment portfolio that can be made quickly is probably not a good one. I just heard about this Whisper stock at a party. And my buddy says it's going to go to the moon. He doesn't know anything about it, but he's convinced me after five beers that,

you know, this is a great business to own. And I'm on my phone and I'm at the bar and I hammer, you know, a buy order. Lucky for you, the markets are closed, so you can still change it. Yeah, yeah. But you put in an after hours order. Or maybe, you know, you're doing lunch beers. Who knows? The point being, I think it's a great idea to not have your brokerage app on your phone.

And I get it. It's so convenient. I can do it all on my phone. Yeah, it's great. If you can do it on your laptop, chances you have the the right tools and the the right time the right amount of time to make decisions so that's my hot tip of the day yeah i have it on my phone but i pretty much never use it um one of my biggest things too is just uh well what you mentioned but the other thing is there's not as many functionality so the most common thing i'll

do in my quest rate account is i'll go in and just see you know what dividend i got paid and you can't see that on the app so that's why like that's the me again i've like you have to go through the website no you can't see i mean i haven't figured out how to do it so don't don't don't incentivize me to go on the app there you go well you definitely can't see that but that's okay uh the point being like you know take your time you know take your time to understand the business but also like to make decisions you know like impulsive financial decisions are almost always bad. Sometimes they work out.

But, you know, take a breather. And I think not having your brokerage app on your phone can save a lot of people some oopsie daisies. Yeah, especially right now. I mean, we're recording this today and, you know, markets are really volatile. So, you know, someone would be a bit more nervous. It'd be easy to make some pretty rash decisions and just go ahead and sell a position just because it's dropping 4 or 5 percent. Because you get those notifications too. Oh, I know. As soon as they're on your phone, you get the notifications.

Position A, you know, position X, Y, and Z are all down 5 percent. And, you know, the market could be And the market could be down a couple percentage points that day. And there's lots of stuff that's down 5 plus percent that day. It has nothing to do with the business. But that kind of notification system while you're on the run, maybe you're having a bad day, it could be based off no fundamentals whatsoever. And so this is why we like we built a notification system on the dashboard of Stratosphere that just shows business results. It doesn't show, you know, this position's up and down 5%. We did that on purpose. We know people will probably get, you know, hooked on seeing those price changes, But that's a bad way to go, in my opinion. So,

those notifications on your brokerage app will drive you nuts. You know, this position's down 5%. This position's up 5%. Terrible. Get that off of there. Disable the notification to delete the app. You know, seriously, it's not a good way to go. And the last thing I'll mention here, completely different subject, but, and maybe we can touch this again, but I think, you know, the recent week or two has definitely shown why, at least, I know for me, I'm not going to speak for you, but you'll probably agree why it's so important

to be diversified, you know, outside of Canada and that Canadian home bias, because we're really where you're going. We're really seeing the Canadian dollar being hit way, way hard right now. I'm hoping obviously it doesn't continue too much like that, but it's just a reminder that, you know, having, you know, whether it's your income, whether it's your house, everything that you do kind of tied to the Canadian economy or Canadian dollar.

And I know TSX companies, listen, Canada, a lot of them do business outside Canada internationally. But a lot of them are actually still quite concentrated in Canada. So I think that's just a reminder to, you know, Canada is a small country. You don't need to put all your eggs in that one basket. The CAD is getting smoked. It stings down here. I'm in the States right now. And, you know, like I'll pay for something.

I'll top my credit card. And you get that notification from your bank, like, you know, what it came out with in CAD. Like I paid $14 for this thing. And then I see the statement hit my phone. $25. Yeah, it's like 25 bucks. And then I just erase that from my memory. I'm like, yeah.

Throw my phone back in my pocket. I put on complete blinders because I don't want to. You know what's funny too is I'm down here and I'm driving. And I know the miles per hour kilometer difference. Like mathematically, I'm an engineer. I have to know a lot of those conversions. And of course I know the, what the, the cat is like 73 cents on the U S dollar right now.

But I, I like legit just block it out. I'm like, you know, the, the, the miles per hour and kilometer difference, they may as well be the exact same, like in terms of like the USD CAD equivalent. Like, I don't know what it is right now, and I'm just going to hope that it's all going to be all right. Like I could be speeding. I could be blowing my whole bank account. It's all good. It's all good. I good i'm on vacation man don't worry about it no i just wanted to just kind of reinforce that um like clearly you know we love canada but the reality is um you know it's good to diversify away and you know i think we're probably still too canadian biased ourselves but i think we're we try to to have a you a decent amount of exposure to the US at least and internationally. You can't be all in CAD stocks.

How often do we see that? And we see it with the brokerage stats that come out. The top 10 names owned by – it'll be like nine Canadian names on a Canadian brokerage and then like Apple or Tesla. There'll be eight names in CAD on tsx and then apple and tesla four banks and bridge and yeah huge heavy dividend yielders people holding too much cash in their tfsa the old song and dance every single year thanks so much for listening to the pod today guys really. Really appreciate you. And thanks for all the ratings. The show goes on as always.

If you have not checked out Stratosphere, you can get 15% off with code TCI. All the data that we point to here is coming from there. And we don't show any price notifications. So you don't get caught up in noise. show any like price notifications so you don't get caught up in in noise as well simone have you ever messed with business moner business owner mode no i have the top right if you press the gear on settings and you press business moner business moner ode that's not it business owner mode you click that and it'll automatically hide price huh Huh. Yeah. It'll blur it out. Yeah.

Anything that's price, the actual price chart will go like, you can't see this, so you're on business owner mode. And I think it's quite nice because you can analyze the business like a business owner and not a stock trader. Oh, that's really cool. It's a fun little tool there. And you can unlock that on a essentials plan use code tci for 15 off we'll see you in a few days guys take care bye-bye the canadian investor podcast should not be taken as investment or financial advice brayden and simone may own securities or assets

mentioned on this podcast always make sure to do your own research and due diligence before making investment or financial decisions