The Canadian Investor - Why Commodities Shouldn’t be Ignored

Episode Date: January 5, 2023

In this special episode, Braden interviews the host of the Millennial Investing podcast Rebecca Hotsko. Rebecca talks about what she’s learned from guests since becoming the new host of the Millennial Investing podcast and why investors need to pay attention to commodities in the years ahead. 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  Listen to Rebecca on the Millennial Investing Podcast 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

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. How are we doing? It is a special episode here because you have myself, Brayden Dennis, as always joined by the legendary Mr. Simon Belanger. But we're just popping in here for a few minutes to talk about a topic that I think is relevant for many people. It's one often discussed online,

and it's a good prelude to the interview I do for this episode with Rebecca Hotsko from the Millennial Investing Podcast, part of the TIP Network. And it got us thinking, how should we intro this show? How should we talk about millennial investing and the challenges they face? So we just brainstormed a couple ideas and we're just going to wing it today. Simone, what are things that come to mind, the challenges that young people face? You know, it doesn't have to be some age range, but just generally younger people, what are the challenges they face financially and then getting started with investing? Yeah, I mean, I think there's a lot of things that come to mind here. I think one that comes to mind pretty easily is just some of the pressure to buying a home and

feeling that you can never get ahead by doing so, whether it's saving for the down payment, whether people or millennials are struggling with student debt or debt in general. I think there's still a lot of people who want to buy a home, and it's very difficult in the current financial climate, especially with rising rates, if you're tackling with debt like I just mentioned, but even home prices right now that have not gone down all that much. Yes, they have gone down. But if you're looking at the price of your mortgage payment and you compare that to higher interest rate on the current mortgage you can't afford versus even just a year ago,

it's hard to argue that it's more affordable. So that's definitely one of the things that would come to mind that make it probably concerning for a lot of millennials. And just everyone, especially in a major market in Canada, it's no secret that we rank at the very top in some of the major cities as the most overpriced real estate for residential homes or condo dwellings. And so you can get lots of fun facts like that as well, by the way, on the Canadian Real Estate Investor Podcast, which is one of the podcasts in our network.

So Rebecca and I had a very interesting conversation about investing, of course, and primarily about stocks. I wholeheartedly agree with you. There's this pressure of needing to buy a home, even if it doesn't make any financial sense. There's a societal pressure to do so, even when it may not be the right move financially or just life flexibility wise. But that pressure exists, no doubt about it. And it seems like a goal for so many, whether a young person or not, is when home prices are at that level, a 20% down payment can feel like a goal that is just not reachable. You're like, okay, if I save this much and then you kind of graph it out, you're like, oh, I'll be 187 years old when I can afford this. Perfect. And so

that's very troubling for a lot of people, especially young people. Yeah, exactly. I mean, it can just feel like an unreachable goal, right? $100,000 or 50,000, whatever it is, right? There are programs out there, government programs to help people buy homes. But like you said, I mean, depending on which market you live in, it could be really difficult. And even if you're not looking to buy a home, I mean, it could also be just finding money to invest, whether it's in stock or something else. But obviously, we were big proponents of investing in the stock market with this podcast. And I think you mentioned one of the points you said is just the pressure to flash on social media.

And as younger people, the pressure you feel to some people will feel of, you know, getting the newest iPhone, getting the newest type of clothing or brand luxury brands and things like that. And, you know, I think for me, it's not as difficult, but I was at an age once where I definitely felt that pressure and trying to balance that, I think, with social media and the way, you know, the world is today. I think for a lot of people, it's just really hard to, let's just say, control that impulse, right? Yeah. I mean, status games is a concept that has been around since human civilization began. You know, back in the day, it was flexing gold chains, which is still relevant today, but you get the picture. Now, today, it's fancy stuff, fancy trips on social media.

And you know what? Like, sure, If you want nice things and you like going on nice trips, I certainly like going on nice trips. That's all good. That's all fine. But if it's going to create more stress for you than not, then it just doesn't seem like, like it's worth it. And so another thing I was thinking about too, is like, okay, a solution to this is what I do. You own your home, but that's because you're starting a family and you get so much value out of that. And you've made some money on it for sure. Me, it's like, I'm building a startup. My path is very different. Renting makes the most sense for me. That's what I do.

different. Renting makes the most sense for me. That's what I do. And I invest money aggressively through a dollar cost averaging strategy in publicly traded stocks because you don't need, I could get a million liquid and do it, but that's just not what I'm going to do, right? I'm going for an absolute home run with building businesses. And so that's just what makes sense for me. So it makes sense for most people to just in this situation to just put some money aside, either invest in themselves or invest in a dollar cost averaging strategy of indexes or publicly traded high quality businesses. But if you don't know what you don't know, which is what so many people are in that situation, how are you supposed to know? These low-cost index funds are out there and such a good option for people. If you don't ever have that aha moment or are ever told, how do you get to a place where you don't know what you don't know? It's not going to just magically appear.

You're not just going to have some magic light bulb moment that that's a good idea. How do we tackle that? No, I know. I mean, it's not easy and especially investing, right? It's not like you can really show it off. And I think that's probably one thing that people don't like. Right. It's not. I think you know me well enough. I'm not the kind of guy who likes to show off very much. It's just not how I'm wired. But I know a lot of people want to be able to show it. And owning a home might allow them to do that or having nice clothes or a nice car they can't afford or whatever it is. But I was actually listening to the Millennial Investing Podcast earlier today, and she had a guest on, Rebecca. His name is Joseph Hogue. And I've watched a few YouTube videos

that he makes. Interesting channel. He's a CFA in the States. And he did a really interesting argument for owning a home that I never heard before, but it made a whole lot of sense. He said, you know, one big plus for owning a home is that some people just need a goal

to be able to save money. So the down payment that they, because they want to get that home, the down payment, the money that they put towards that, if they didn't have that goal, they just would not be investing at all. Or just saving in general. Yeah, exactly. Just saving. They would not be saving. They would not be investing. They'd go for instant gratification. And the fact that they have that goal of owning a home might be the best investment they ever do because they would not invest otherwise. Obviously, it's debatable whether owning a home is a good investment or not. I mean, I think you can make a case against or for it. Or a lot of people say if you're not getting a cash flow, it's not investment. But the reality is for a lot of people, that's where a lot of their wealth will be because they just won't

have any other types of investment. That's a good point, right? As it's tangible, people can see it, feel it, show it to their friends. And that's what makes it so appealing. Whereas, you know, you have a $10 million in broad market ETF. Like, that ain't very sexy, man. Like, cool, what are you going to show them? Like, show off a screenshot? And so, no, that's never going to happen. And that would be extremely cringe.

So, it's not, we're talking about status games earlier. Yeah, or you say you can't go on a trip because you're investing money. I mean, usually people will understand a lot better if you say, oh, I'm sorry, I can't afford it because I'm saving for a home, right? So it's just like, I feel like it comes across a lot better for people as well. So I just thought it was a really interesting point. Something I had never thought about before. And honestly, I think he has a really good point for a lot of people. Yeah, it's weird societal conditioning here on this front. All right, well, let's not delay any further.

Let's get into my chat with Rebecca Hotskill, also a Canadian as well, which I didn't know until I was talking to her in person. So another Canadian. So it's perfect fit for the show. Here's my chat. another Canadian. So it's perfect fit for the show. Here's my chat. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones,

all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on

there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking,

sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the app store and I'll see you there. All right. TCI podcast listeners, as promised, here is my interview with Rebecca Hotsko, which I learned recently, fellow Canadian, you're in interior BC, right? I'm in Kelowna, British Columbia right now. Yeah. Kelowna is a beautiful place. I'm quite jealous. The summers there are exceptional. Let's get right into it. So let's get a primer on you. You are now one of the hosts of the Investors Podcast Network, which I feel like if you listen

to finance podcasts, you know, at least the brand and the shows they host. How did that opportunity come about? I think it's a pretty cool story. Yeah. So I started with TIP and I now host the Millennial Investing Podcast. I started in August of this year and really it just happened because I was a fan of the show. I listened to the podcast and I heard on an episode that they were looking for a newsletter writer. And so I applied for that, went through the entire process. And then they ended up when I was going through the interviews, Stig and Robert were like, would you like to be a host instead? And I had never thought about that. I applied to be a writer.

Yeah. So it was a turn of events and then I ended up getting it and now I've been hosting the show. And so it was pretty interesting because it just kind of fell on my plate. I heard about the opportunity and yeah, I'm super happy that I did. Are you from BC? Because you sound like an East Coaster. That's the accent I get from you. I'm from Saskatchewan, actually. Oh, okay.

Okay. I've slowly moved my way out West. I was in Calgary and then here. Okay. Okay. All right. My way out West, I was in Calgary and then here. So, okay. Gotcha. Gotcha. Well, the people listening to this podcast can appreciate that. We have lots of people from many of the places you just listed. All right, let's do it. So you do a lot of interviews. That's your job doing lots of interviews. What are the top three things that you've learned this year from interviewing some really smart people? I'd be really curious to hear some takeaways. Yeah, it's quite incredible. That's one of the best things about my job is I get to

talk to the best people in the industry. And so this will be quite a long answer, but I wanted to really break this down because I think it's so important. And I'll start out with something that I've heard from several guests, and that is investors are going to have to think about investing so differently in this next bear market to hold on to the past cycle winners and wait for the comeback in certain companies because they believe it was a good company and they think it's going to come back over time and they kind of just anchor their expectations and their narrative to whatever they bought in at. And the reality is that focusing on what performed in the last bull market is likely a waste of your time. And instead, what investors should really be focusing on during this bear market is where is the outperformance going to be and who's going to be the new leadership coming out of this?

And my one guest, Louis Gov, talked about this in detail. And it just really hit home for me because lightning doesn't strike twice in one area, he said. And so it's if we're waiting for the tech stocks to rebound and be the next winners over the 10 years, we're likely wasting our time and capital. And that's not to say they're not going to rebound because there's a strong case for them to do so. They've been beaten down the most, but thinking very long-term, it's likely that other sectors are going to outperform more and be the leaders over the next decade. And two really come to mind, and that's first, commodities. And so this is probably the biggest

investment theme that I've heard from numerous guests is that we are in this new commodity bull cycle that can't be ignored. And I guess commodities shouldn't just be thought of as an inflation hedge anymore, but perhaps rather more of a growth aspect of your portfolio as well. And so that is one big theme that I definitely could dive more into if you want. And then the second one is emerging markets. So emerging markets minus China, which has done very bad. But countries in Latin America, Brazil, India, Mexico have all done so well despite high inflation, despite such bad economic backdrop.

They have held up so well and actually were among pretty much the only countries that were green this year and performed really strong. A lot of them are energy exporters, but a lot of them are also just in this mode of economic development that are going to be really positive for the economy's long term. And so I guess the thing to also mention is that over the near term, we know we're in a bear market and things are likely to get a lot worse before they get better. A lot of the guests I talked to were expecting earnings to still decrease about 20 to 30%. That's a quite likely scenario. The Fed has communicated raising rates up to 5.25%. And so lots of near-term pain is expected in the markets. But once the Fed pivots, which we

don't know exactly what that'll be, that is going to be very, very bullish for commodities, gold, silver, Bitcoin, it's going to be first and then it'll bleed into the stock market, which usually takes a bit longer to recover. Growth stocks will likely recover first, but then we'll see that transition back into value and really see value stocks start to shine again. And so that was kind of just the overarching view of the market and what's ahead from things that I've learned from the guests that I've had on. You're talking to a lot of bears. I've learned from the guests that I've had on. You're talking to a lot of bears. Is it that we bring on all the commodity bulls and the macro bears? That's who's coming on the pod.

It kind of sounds like that. And it's really interesting because sometimes I get into rhythms of talking so much macro. And I would argue that at this time, it's really hard to ignore the macro. And I think that if investors just follow a very fundamental approach where they don't look at any of that, follow a Warren Buffett approach where he doesn't read any macro news or economic news, but interest rates... That's my guy right there. I don't spend a second on it. But at the same time, interest rates are one of the most important things, if not the most important thing to stock valuations. And so having some grasp of where interest rates will be or what's the likely trajectory can be very positive because at the end of the day, the discount rate, what you're paying, that is your expected return. And

so that is largely driven by the interest rate. This is good because if you listen to this pod, me and Simone are basically an echo chamber into don't listen to macro, it's pointless. And companies need pricing power, so don't look at commodities. And we're a bit of an echo chamber and we need contrary opinions. What my counterpoint would be is what we tell the listeners is to focus on what you can control. I just can't control or predict anything commodity-wise, macro-wise. So what can I do? I can focus on great companies and keep at it or keep DCA-ing the index. I guess my question to you is, what is actionable from those insights from the listeners?

What can I actually do? How can I apply that? Because it's nothing that's in my control. How can I actually position myself if they're right to succeed given that? Yeah, that is a good point. And I tend to agree with you in the sense where we should only focus on what we can control as investors. Otherwise, it becomes so confusing and overwhelming if you're constantly trying to filter in this macro news and all of this into your investment process as well. But I would add that I would just go back to what one of my biggest lessons was from speaking to so many people over the past year is that

what worked in the past might not work in the future. And so if that is the case, I don't want to be left in the dark because I didn't want to invest in more commodity sectors and just even getting a broad exposure, just having more diversifiers. I think the biggest aspect was it was relatively easy to make money in the past decade where you just had to pick one of the top companies. But what's actually true is that it's interesting when you look at the top performing companies, they tend to outperform the market in the five years leading up to joining the top largest market cap.

But once they join the top largest market cap, they tend to be flat and then underperform in the next following five years. And so that just really brings the point home about one mean reversion, which is a topic I want to get into. And then also overpaying for growth in these expectations. And I guess my biggest message is don't throw your investment philosophy out the window and start just being macro and investing in commodities you don't understand. But at the same time, we're in Canada, we're so lucky, half our equity market is already made up of energy companies. So if you even just bought our market, like our VCN or some market-wide index, you're still getting a lot of exposure. And I think the point is then you could start diving into maybe a Suncor or see Canadian, yeah, exactly. Enbridge. We have so many great companies at our disposal. And I would say that I had a conversation with a guest that was super helpful about getting commodity exposure through companies versus say through prices. And because I was looking into, I'm very bullish on copper and silver after just learning about how that is going to be the biggest resource needed to really make

this clean tech future happen and to drive the energy transition. And copper- What is silver used for? So it's just used, I don't know exactly what silver is used for in that, but basically copper is going to be the biggest metal that is used for energy transition. Clean tech, it's also predominantly used for the semiconductor industry and so is silver. And so that's something that's happening.

China could be potentially looking to replace using lithium with silver. And so there's lots happening that you can't ignore because when you look at what's going to drive, I guess, the future in the next decade, it's a lot of these narratives of things that are commodity produced. And so I asked my guest, what's the best way to get exposure to commodities? And he said, it's through companies that produce them or they mine for them rather than the commodity themselves. Because if you're just buying an ETF that tracks silver, the futures or something, you

can only make money one way when the price goes up. Whereas when you invest in a company like a mining company or something, you make money even if silver doesn't go up. And so there's a buffer there. But I will add, it is tricky to find those companies. And it's something that I think investors might have to just get used to though. And again, it's not saying completely abandon your strategy. I just think it's something that an investor shouldn't ignore in this next decade. I think that's a fair take. It's something that

obviously shouldn't be ignored. It's worked recently. Okay. Interesting. I just don't agree that people can predict that they'll go up. And lots of smart people go on the media and go on their little tirade about some commodity price gone up. And then you look at their track record and it's like, dude, you got smoked by the index over the last 20 years. And so how do you navigate between these people being right in the short term and potentially historically being perennial underperformers? How do you navigate that kind of opinion? As you can tell here, I'm just trying to play devil's advocate here with the opinions of all the people that you interview. 100%. And I think an important distinction I want to make is I'm not saying I can predict prices. In fact, half the guests say we, no one can predict prices. And if you meet someone that says they can predict a commodity price,

run away from them. And so it's not necessarily that aspect, but what is hard to ignore is the structural supply and demand that is very conducive to expect, I guess, higher prices going forward. And I can kind of walk you through the case just briefly on why this is. I think it'll help the listeners understand the bullish pieces behind commodities. And so I'll focus on energy here. the bullish pieces behind commodities. And so I'll focus on energy here. So there's really a few key drivers to this energy narrative. And starting with demand, there are a few main drivers that are expected to really support this demand going forward. First is a growing population. So we've added 1 billion people to the world over the past 10 years. And that is a ton of mouths to feed. That's a ton of housing, food, natural resources need to meet these incremental 1 billion people. And the

UN predicts that we're going to get to 9.7 billion people by 2050, which has huge implications. Yeah, that has huge implications for commodity demand. And then the second thing, and that's maybe more important, is we're seeing so many highly populated emerging and developing markets like India, China, Latin American countries go through these stages of economic development and they have billions of people. And this is something that is so commodity intensive. This takes a long time to do. This can't be done in one year, commodity intensive. This takes a long time to do. This can't be done in one year, two years, even a decade. This takes several decades to build this out and it requires so many commodities and natural resources to do so. So that's the main second driver of demand. And the third is actually

the move towards clean energy. So this will require a shift in the demand for which resources are going to be needed going forward. So the transition doesn't mean that we're not going to need natural resources anymore. It's just changing the ones that we're going to need to meet this world. And so I mentioned- And natural gas in itself is a transition energy. Yeah. Like on a global scale, 100%. And so I kind of mentioned a few already, but instead of a world that revolves around coal,

oil, and natural gas to fuel our economies, it's going to revolve around commodities like nickel, lithium, copper, cobalt, and silver. And these will all be so much more important. So those are kind of the three key demand drivers. And my guest said something quite powerful. He was like, these are a base case expectation. He said that this isn't something that we're hoping will happen. He was like, this is our base case. And so commodity prices, when you think about it in the sense that are they going to be higher or not, it's likely to believe that they will at least remain where

they are because of these strong demand drivers. And then we have to look at the supply side because commodity prices, just because you have strong demand, if supply, if you get oversupply, that doesn't matter. So what's happening with supply? Well, we know that there's been structural underinvestment in the industry for a decade. And what's even more important is that it's not ramping up. Even though prices are the highest they've been in decades, producers are not increasing their capex spending. We are not seeing supply move onto the market to meet this demand. And so that's really where that imbalance is going to come from and where this long-term strategic case and I guess bullish thesis for commodities long-term are

coming from. And again, it goes back to, you can make money buying energy companies if WTI and WCS stay where they are today. They are cash flowing machines. Like they are paying- Well, at this price for sure. And yeah, there's upside there too. Yeah. And you're earning 10 to 15% on free cash flow. They are laughing at these prices. And so it's what, especially these large companies in Canada, they have quite low break-evens. And so if you dig into it a bit deeper,

you will see there is a buffer. If prices go down, a lot of them are fine. And so it really struck me as an interesting sector and one that, again, it's not going 100% or something into these, but it's something that's hard to ignore, I think. I love this for two reasons. One, we need some new fresh ideas on the show. And this is definitely that.

And two, you're pointing out that there are some amazing operators. Like CNQ is such a beast. And we're talking about Canadian home buyers aside. CNQ, Sunco. These are some of the highest quality energy assets you'll find on the planet. And they are listed here at home and interlisted across the border. And I guess I'll add a third one here is that there are many ways to manage an investment portfolio. And the one that makes sense to you, you have uncovered some learnings through your career and seeing some optionality in your portfolio, seeing what might work in the future based on your research. Some people just buy companies with pricing power. And there's no right or

wrong way to do this. And that's the point I'm making here is it just has to be the one that makes sense to you so that you can do it the longest, right? Because we have to do this for a long time. Like you and I are both fairly young. We got like what, a couple of decades of compounding ahead of us. We just got to do something that makes sense for us that we can keep doing for many, many decades and stay the course. sense for us that we can keep doing for many, many decades and stay the course. Yes, I 100% agree. And that actually gets into my second lesson that I wanted to talk about, because this is something that a guest said on a little while ago, and it just hit home to me. It was that there's really two ways to become a better investor. And you either have to make

better forecasts, or you have to use those forecasts on a wider range of stocks. And you either have to make better forecasts or you have to use those forecasts on a wider range of stocks. And so that's really the fundamental law of active management. And it's so important because it's what you said. There's no one way to make money. There are so many ways to make money in the stock market. You have to figure out which one works best for you, which resonates most with you. And so, for example, for myself, I tend to go to the latter where I like to make forecasts on a wider range of stocks. I do not like concentrating to a few stocks. I honestly don't even really like doing fundamental analysis. I am more of a quantitative investor. I kind of like taking a quantitative Buffett approach,

I call it, where I am buying many, many companies with these characteristics that Buffett looks for. But I'm spreading my bets across so many stocks because I don't know which one is going to perform. I know my limitations. How many names are we talking? Like 50 names? Yeah, at least for a strategy.

But what is also important to point out is that any strategy you think works, someone who is way smarter has probably already made that into a product or an ETF. And so a lot of the strategies that I like using are already made into these low cost ETFs. And then anything I want to do above that is just tactical and something to complement that already core portion of my portfolio. and something to complement that already core portion of my portfolio. And so I just, yeah, I really liked hearing this from the guests because I think that it's important to remember there are so many ways to make money and you should be realistic

with yourself about what you enjoy and what you can see yourself doing long-term. Because if you're constantly switching strategies, buying and selling as well, that is going to be so detrimental to your long-term compounding. I wholeheartedly agree. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees.

They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is Questrade.com. Calling all DIY, do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because

brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. All right. Did you have a third one or do we want to move on to mistakes you find? The

money investing podcast, right? So you're speaking to a younger audience. What are some common pitfalls or do you have a third takeaway for us? Yeah, I mean, this actually kind of ties into it. And so another big lesson, but I think mistake that investors make is that they don't take into account the impacts of mean reversion. And so mean reversion is so, so powerful. It exists in markets. It exists in markets. It exists in economies.

And it's widely known as the booms and bust cycles in economies or the peaks and troughs in stock markets. But mean reversion also exists on a micro level where profits are extremely mean reverting and high return on equities are mean reverting. And so this works by pulling down companies that earn higher than average return on equities are mean reverting. And so this works by pulling down companies that earn higher than average return on equity, and it ends up pushing up companies that have been recently performing poorly back up to their average. And so I guess this seems quite counterintuitive at first. And when I first learned about this, I didn't understand it because we're

often taught to find companies that are good companies. They have higher turn on capital. They are beating the average. And we're taught to avoid companies that have, they have losses, declining profits, bad management, all of these things. But what really is interesting about mean reversion, and when you look into the data behind this, the reason that this happens is simple. It's competition. And Warren Buffett stresses this so much in his letters. And he talks about the need for a competitive advantage, because what happens if your company doesn't have one and doesn't have a sustainable competitive advantage? Well, your return on equity will end up mean reverting. And

then you have likely just completely overpaid for your growth. And the chances that you made money are very, very slim. That's a good point, right? Like what maintains higher OICs and its competitive advantages? So I guess is the takeaway there then to continuously monitor competitive advantages, or is the data suggesting that on a long time horizon, you know, sustainable competitive advantages is like mostly a myth unless we're talking about like infrastructure. That is honestly such a good point because it turns out that only about 4% of businesses are able to earn this higher than average return on invested capital. And so the fact that that is

such a small percentage of businesses should be kind of a light bulb in your head where it's not that businesses are bad. And I think investors often mistake good businesses as good investments. And the reason that isn't always the case is because it's really, really hard to find these companies, these 4% of companies that are going to continue to outperform and they're going to continue to be these higher than average performers. And so even if you find a company that has a moat today or a competitive advantage today, that can change over time. And I think that is one of the most tricky things about it.

And so what was once considered a moat might no longer be that in five or 10 years. And so that's something that's really challenging. And I think the other thing I'll just point out with this is that over the long-term, your returns are more dictated by your return on invested capital. So if the company you bought has a 20% return on invested capital, and it maintains that over the long run, your return, your long-term return will be dictated by that. But in the short term, it is more dictated by the price multiple you pay. But on, I guess the flip side of that, if your 20% compound growth company then slows to 15% growth, but you were paying double the multiple. Well, you would

expect over time that multiple contracts then. And so I think investors underestimate the amount that the contraction of the multiple plays in their overall investment returns. When sometimes we just look to earnings growth as being a high driver of returns when that's all great, but you only benefit from that if the multiple doesn't contract and if the multiple stays the same or it expands. And when we're buying companies that earn higher than average return on invested capital, it is also likely that they're priced higher than average. And so I think that is just something to remember when you're looking

at very high growth companies. I think that's a great point, right? It's like, especially in a medium timeframe and shorter, your entire return decomposition is going to be from multiple expansion or compression. I think that that makes a lot of sense. And how did everyone get screwed in the past 16 months? It's because you had huge multiple compression and high growth, highly bid up stocks. It doesn't matter. You can say like, look, this company's doing fine. The fundamentals are solid. It's like, yeah, but you bought it at 60 times sales. There's no world of outcomes that that works in the short term. I guess the fallback is on the long term. If those growth rates can be sustained, then you might have a world beating company and then you're off to the races.

I guess what your point is, is that statistically that is extremely difficult and only very rare in about 4% of publicly listed companies. Is that a fair characterization? Yeah. And I will say, though, that now is the time where investors should be looking for those companies that like the Googles, for example. Google is a great example of this where it earns a way higher than return on invested capital than the market. But yet it's actually trading. I think it's either comparable or a bit lower. Below the market. Yeah. And so that should be a green light. And that to me is an opportunity because now you are paying less for more future growth.

But I think, yeah, the main point was always remember the impact of the multiple. And really, I guess that kind of gets into a broader theme where there's a few sources of long-term returns. And so that's multiple expansion, that's earnings growth, dividends, and buyback. And so really thinking about those four things and where are you getting your source of return from if you're investing in a company or in an index? And it's quite crazy to see the S&P 500, how it's evolved over the past decade, where one of the largest sources of returns is now share buybacks. And so you always have to think, is that going to continue or is that going to slow down? Because now perhaps companies can't afford to pay out or buy back shares.

And same thing with dividends. You have to maybe go through each of those four sources or returns for your company or the index you're buying and think about if that's going to persist and what are the risks that it doesn't. That's a very good point, right? So you get earnings per share growth or free cash flow per share, whatever you want to pick. Devs, buybacks. What was the other one? Dividends, earnings growth, share buybacks, and then multiple expansion.

Multiple expansion. There you go. There's return decomposition in a nutshell and also capital allocation for managers in a nutshell. composition in a nutshell, and also capital allocation for managers in a nutshell. And we talk about that so much on the pod, right? We see mistakes very often of new investors funneling their entire strategy into one of those capital allocation decisions that a management team can make, which is usually high yield traps. So their management team's heavily putting capital allocation strategy and returning cash to shareholders via dividend. Or they're buying stuff that is too frothy and you're not going to make any money unless the multiple at least stays there and you have more earnings growth. seen as multiples expand from like 08 to 22, right? That's basically, I mean, our entire investing lifetime was multiple expansion pretty much across the Shiller PE. So when that stops working, the tide goes out, you know, who's wearing pants? Not many. Not many pants are being

worn. Exactly. And I think that's the interesting thing because when you think of a multiple, so since we saw the correction a bit this year, multiples have come down a bit, but it's been largely because of the price. And so that denominator, the E, that is what still has to get downgraded. And that's what I heard from a lot of the people I talked about, where it's like, yeah, the price has gone down, but the E hasn't. And so now think about what happens if earnings have to get downgraded and say price doesn't downgrade what it should in an efficient market price should downgrade as much, but then your multiple could actually increase. And so there can be weird things that happen with the multiple and you have to kind of dissect, is this a price effect? Is this an earnings effect? And what's really driving that? And I think, again, there's still more pain to come in the

near term, but that just creates buying opportunities. And we're not trying to speculate markets or anything, but I think when you see certain companies drop over the next few months, it's a perfect buying opportunity. This is going to be a once in a lifetime opportunity for us to buy things historically cheap. Yeah. It's a good point you make. It's like the right time to buy cyclicals is actually when the PE is high, typically. It's so counterintuitive to the mind. All right. Let's talk about, we just hinted at some like div traps, overpaying for growth. We could go on and on. What are some things that you see very common, younger millennials or anyone, newer investors? What are the maybe top two things you

see regularly that are pitfalls that you see people fall into time and time again? It's like clockwork these days. I would say, I think we touched on it a little bit in the beginning, just falling for common biases. So one is popularity. So this is probably not news to your listeners, but just buying things that are so popular when in fact, most contrarian investors, they do the opposite. They want the stock that no one's talking about, that everyone hates. And so things like the tech stocks were just so popular over the past year where you had major FOMO if you missed out and you didn't own Amazon or anything. And so that is just one thing that it leads back to.

Rebecca, you should see this. I get this data firsthand and what's popular because I literally run a financial data company. The search volume on Tesla is absurd. Like it's goofy. It makes no sense. Absolutely. And so I think that is something everyone falls victim to. And you end up, what do you do when you fall victim to that? You end up buying high and selling low.

And so I think the second one is recency bias. And that goes back to what I talked to in the beginning, where we tend to think that near-term events are more likely, or we just think of the last few years that we have been investing as what is most likely when there are hundreds of years before that, that you have to look in the very long term to see what is actually likely to happen in the future. And I guess maybe the other thing that I didn't know, at least when I started investing, is that one of the common mistakes that investors make

is that they think to get higher returns, you have to take on more risk or you have to take on more market beta. And that is absolutely not true. And it's been shown that there are other risk sources that lead to higher expected returns over time that have nothing to do with market beta. It's things like value stocks have a slower growing book equity than companies that grow their book equity faster actually perform better. And then there's also something that combines the investment and profitability, and it's called a quality factor. So companies that are higher quality tend to outperform over the time. And so these are all things that they might sound like,

okay, that's obvious, but they're things that we miss in investments sometimes. And when you think about what drives higher expected returns, you need to think about characteristics like these. And so these are called well-known factors and they've been shown to empirically produce higher expected returns in the market over long periods of times because there's a couple explanations for them, but one is a risk-based explanation. So they are riskier companies. And so this is a type of risk that you're compensated for. And then also there's a ton of just behavioral anomalies and biases in the market, which drive things like this. So it drives value stocks to outperform growth over time because people like growth stocks better.

And so we bid up the prices of them to the point where they're overvalued. And then eventually value stocks earn the ones that no one wanted to buy. They end up drastically outperforming the hot growth stocks over time. And so I think just being aware of things like this, because you don't have to do any fancy strategies or really complex investment strategies to do well in the market. It can quite literally be super, super simple. You can hold a few ETFs, if you wish, that track a factor-based strategy or anything that you're interested in and you can do extremely well. I wholeheartedly agree. As long as you're willing to do this for a really long time, I think that's kind of the kicker and

something you and I both committed to is long-term investing. I think that everyone can agree on that. All right. What's your background, by the way? You seem very statistical and mathy. What did you take at school? Yeah, it was all economics. Okay. It was econ at school. Yeah. And then I did my CFA. So that's where I got my finance background because I actually didn't take a single finance class all through university. So I learned that a bit later, but yeah. Nice. Now you're on the fast track to learning now with this job. That's very cool. And congrats on the CFA. I know it's not an easy thing to get. I've debated doing it and then seen my friends do it and just went,

no, we're building software. Maybe for investors, but we're building software instead. Yeah. I mean, it was so amazing. I learned so much from it, but it is a grueling process. And I think if you don't plan to go into an industry, it's kind of, you can learn everything online now. Right.

Yeah. It's just like education in general, right? It's like, if you really want to learn anything, it's like, if I want to become... So my dream is eventually when I sell my tech company is to not be such a nerd loser and actually know how to build stuff. That's what I want to figure out. And imagine if I was like, yeah, I'm going to go to school for that. That just wouldn't make sense to my brain. It's like, I got to actually... People I know are in this industry. I'll go work for them for free, or I will just start taking on projects in the garage. It's just, you can extrapolate that to any industry, and especially something that requires

some scars and requires some experience like investing. I think that that just makes perfect sense. Rebecca, where can people find you online? I know you got the pods. Good time to just kind of hand that off. Yeah, so my podcast is Millennial Investing and we put out new episodes every Tuesday and Thursday. And then you can connect with me on LinkedIn or Instagram.

My handle is Rebecca.Hotsko. And you can reach out to me there. Thanks so much for coming on the show. And we'll be in touch soon. Take care. Thank you. 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.