8 Red Flags When Analyzing a Stock

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[00:01:13] 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 Braden Dennis and Simon Belanger.

[00:01:27] The Canadian Investor podcast, welcome into the show. My name is Braden Dennis. As always joined by the very charming Mr. Simon Belanger. This is what we'll call the red flags episode. I love the topic that you picked.

[00:01:46] I got some fire coming in later and I know you do to round us out, but I really like your first topic on the slate today which is almost the most instructive type of checklist.

[00:02:01] It's like when you're finding a job, a romantic partner, or in this case an investment. You gotta know what you don't like to know what you do like.

[00:02:12] That's a good way to put it. These are red flags. I think for some of them it's not necessarily three strikes. It's more one strike and if there's a valid reason, you have to...

[00:02:25] If there's a really valid reason behind it, maybe I'll still further investigate the company, but it's usually any of these. If I see these, it's usually not a good start to begin with.

[00:02:37] It's really instructive, too, where I have these kind of red flags. I'll chime in on a couple. I share many of them with you.

[00:02:48] But when I just hop on a company's financials, pull them up on Fynchad and just kind of see right away or look at the numbers, look at what they do.

[00:02:57] It's actually really helpful to have a process of things you just don't touch in a pile that's either too hard or you gotta work out too much or it just doesn't fit your criteria.

[00:03:10] So without further delay, let's get into it.

[00:03:12] Yeah, and I think that's a great point, just because we all have limited amount of time and to be able to weed out some companies, just because you see like maybe one or two of these red flags, it'll save you a lot of times.

[00:03:25] And, you know, if you don't have these and then you start reviewing the company and then five hours down the line, you're like, "Okay, no, this is not for me.

[00:03:32] This will help you with saving some time." And these are not all of them. These are just some red flags that definitely come at the top of my mind when I'm looking at a new company.

[00:03:43] Now the first one, I know you'll agree with that one, is declining revenue. So this is pretty straightforward.

[00:03:49] If I see a company's revenue declining over two or more years, so I was very specific to or more years here because we saw during the pandemic, sometimes there's some unforeseen event, acts of nature, whatever you want to call them.

[00:04:03] But two or more years, that's a red flag for me. It's really unlikely I'll want to invest in that business just based on that.

[00:04:10] And like I said, I'm not necessarily saying I would automatically write it off, but let's just say that this is a big strike one.

[00:04:18] If I don't write it off, then it's most likely that I'm looking at the company as a potential like turnaround or value play.

[00:04:25] People who know my portfolio, you know it as well, Braden. I do sometimes take some value play approach, but it's pretty rare in general.

[00:04:34] Yeah, there are, I like that you specified a timeline here. Some people had some pulled forward growth.

[00:04:42] I think if you look at Apple, like year over year, they kind of have a replacement cycle thing happening now with their revenue.

[00:04:49] It's like, it doesn't mean you're going to sell the company or you know, you're instantly not going to look into it.

[00:04:56] But if it's a declining, it's a melting ice cube, what I like to call them, then that's ding, ding, ding red flag.

[00:05:05] Yeah, the one that comes to mind when I think about this as a red flag and it really paned down and I know you'll agree with this because we've talked about this before is Blackberry.

[00:05:14] Because Blackberry was supposed to always, you know, all it's coming, it's coming and it never really came.

[00:05:20] Dumpster Fire. Yeah, yeah, there's a difference between a turnaround with a catalyst and a turnaround because the management team says it's possible.

[00:05:31] Yeah, exactly. Those are materially different.

[00:05:34] Okay, John Chan I'm sure is enjoying his retirement. So he's the one laughing right now.

[00:05:40] My dude better be on a beach or something. He's been just taking it for 12 years there as the CEO.

[00:05:46] Yeah, exactly the second one here. High dividend yields. So this one I wanted, like, it is something that can be a red flag for me, definitely.

[00:05:56] And we had a question coming to our email, so I thought it was good to specify this.

[00:06:01] So my rule of thumb here is that regardless of the company, if I see double digit yield, that's a red flag.

[00:06:08] So that is kind of my rule of thumb if I see 10% it's a bit arbitrary. I get it. The 10%, maybe it's a round number.

[00:06:15] That's why I use it. But this is really sector and business dependence. So for example, a tech company paying 5% would be a dividend 5% for a tech company would definitely be a red flag.

[00:06:27] Whereas a utility paying 5% is pretty standard by itself and wouldn't be a red flag for me.

[00:06:34] Just be like, "Okay, that's actually like just looking at the yield without looking at anything else. This dividend, there's a good chance that it is sustainable."

[00:06:43] You and I were just talking about BCE. Bell. So here in Canada, sport in a good old 8% dividend yield.

[00:06:53] Yeah, it's a utility, I get it. There are a lot of companies that sport high dividend yields and then get beat up, like this one for a perfect example.

[00:07:07] That approach is like double digit dividend yields. There is tobacco stocks approaching double digit dividend yields.

[00:07:16] I think Altria and BTI sport 9% dividend yields. I guess the underlying thing here is, is there something seriously mispriced or is this truly a red flag?

[00:07:33] At least the alarm bell should be going off for an investigation. Is a good way to frame it.

[00:07:40] Yeah, and even using the BCE examples, if you look at just some of the comparison in Canada, just based on the yield,

[00:07:48] there is significantly higher in terms of yield compared to their two biggest competitors like Teles and Rogers.

[00:07:54] So I think that's just an indicator. Of course, like you mentioned, I think this is definitely more of an indicator where you need to dig further.

[00:08:03] I have allied property read that currently yields over 10%. But I've researched that company. Yeah, it's gone back down.

[00:08:12] I think it's because of the CPI print that was higher than expected in the US and then everything.

[00:08:17] Anything that's related to that is down today. But that's an example I own it. But I know the company very well.

[00:08:23] My premise is that it's overdone and over the next few years, up to five years, things will turn around and the market is just being overly bearish.

[00:08:32] But again, I could be wrong. My premise could be wrong. And I could end up losing money there. But there's a valid reason and I did my research.

[00:08:39] And I think that's important for people to understand the yield to me.

[00:08:43] It's always an indicator because the higher the yield, it just means that the lower the price of the stock is.

[00:08:48] So if you're kind of new to investing, it doesn't mean that the dividend necessarily increased.

[00:08:53] It just means that the stock has gone down in value, therefore making the yield higher.

[00:08:59] So it's the market basically telling you something. And then it's up to you to decide whether the market is correct or wrong.

[00:09:05] Now, the next one here, I just see Braden nodding. So I'm going to say that he agrees with me on sustainable payout ratio.

[00:09:12] So this, again, Israel related to dividends. So if I see a company that has a unsustainable payout ratio from both a net income or earnings perspective or a free cash flow perspective, that's a red flag for me.

[00:09:25] Of course, if it's a one off year and the company has not had a history of having an unsustainable dividend, I'll definitely take that into account.

[00:09:39] But if the company is constantly paying more than 100% of its free cash flow and that's the one I tend to focus a bit more on, it means that they're either using debt or issuing shares to finance a dividend.

[00:09:53] It's one of two options because they're not able to cover it with their operations.

[00:09:57] And when that's the case, the company is typically on the path to a dividend cut, unless they make drastic changes to the business elsewhere and exhibit, exhibit A, and we'll see if I'm right or not.

[00:10:08] I think it could take some time, but BCE is definitely paying has been paying more than 100% of free cash flow for, I think it's three years now.

[00:10:16] I know they'll try everything to not cut it, but at some point in the next five to 10 years, if they don't right size of business, there may be a point where they just have to buy the bullet and cut it.

[00:10:27] So, that's real important.

[00:10:29] Anyone who's investing in dividend company should always keep a close eye on the payout ratio.

[00:10:36] Yeah, totally.

[00:10:37] This is related to number two.

[00:10:38] You've got to look at them together, and as you mentioned, as a percentage of free cash, knowing that free cash is chunky, so you do got to consider that.

[00:10:51] But a traditional payout ratio you'll find on 99% of analytics websites will use earnings, like net income.

[00:11:01] And just note that more than the unsustainability of the payout ratio is just really around like the capital allocation.

[00:11:14] There have been growth stocks that I have found that one that comes to mind, dude, why haven't looked up this name in a long time?

[00:11:22] Remember you flyer the electric.

[00:11:24] You might have met his pain.

[00:11:25] You fly the bus company.

[00:11:27] You fly the bus company.

[00:11:32] I haven't looked at it in a long time as the electric bus maker.

[00:11:37] Yeah.

[00:11:38] The company's had a rough couple of years there.

[00:11:42] This is a name where it's like a growthy name, and the fact that revenues were up and to the right all the way from 2013 to 2013 stuck.

[00:11:53] I don't know what happened to business, and after that, clearly nothing good.

[00:11:58] But this was a growth stock.

[00:12:00] It was an electric bus maker.

[00:12:02] Investors were excited about the name for all of those reasons because it's in the right space.

[00:12:09] It's in the electric vehicle market.

[00:12:11] It has this kind of tailwind.

[00:12:13] It's growing like a weed.

[00:12:15] And then they'd pay out like 70% of earnings to dividend.

[00:12:20] It made no sense for a company growing at that pace.

[00:12:25] And you are hoping a company in that position.

[00:12:29] Even if they can cover the dividend, you ask yourself, if I was running the company,

[00:12:34] why would I be paying out shareholders all this cash when I can reinvest it and become the premier global manufacturer of electric buses?

[00:12:43] Like, this is a growing industry around the world.

[00:12:47] And so that story never matched up.

[00:12:50] The stock.

[00:12:51] It looks like the story never matched up accordingly.

[00:12:54] And so just think about these kinds of things logically.

[00:12:58] Should this company growing this fast, be paying 70% of their free cash to the dividend?

[00:13:04] Probably not, and that never made any sense to me.

[00:13:07] Yeah, and it's always useful to just pick back on what you're saying also compared to what peers in their sector industries are paying in terms of payout ratio.

[00:13:17] Because you'll see utilities, the best utilities, really sustainable ones will have a similar payout ratio.

[00:13:23] And then looked at utilities any time recently, but it could be more around 80%, 85%.

[00:13:30] It's going to be higher because they have more stable cash flows, whereas a tech company, a Microsoft,

[00:13:36] probably around like 10, 15%, right?

[00:13:38] It's not very high or an apple.

[00:13:40] It's going to be low.

[00:13:41] And again, if you see a tech company paying like 80%, 85% of its free cash flow,

[00:13:47] that would have alarm bells going on for me.

[00:13:50] I'm looking at this name right now.

[00:13:54] The dividend yield got up to almost 6% before they slashed it in the March ending quarter of 2022.

[00:14:03] So they finally figured it out.

[00:14:05] The payout ratio was exceeding 100% of net profit for 2020, 2021, and 2020, before they cut it.

[00:14:15] So, you know, this stuff's not hard to find, right?

[00:14:19] Like, it's hiding in plain sight.

[00:14:21] Yeah, and especially companies that have a history of paying a dividend.

[00:14:25] Unfortunately, the tendency for management teams is to wait until like, essentially, the writing is on the wall and everyone knows.

[00:14:34] So it's easy to spot.

[00:14:36] Like, just, I would say, for most people, like, trust yourself when you see something that's not really lining up.

[00:14:43] That's out of whack.

[00:14:44] Like, the numbers are the numbers, right?

[00:14:46] If you have like three, four years in a row where they're not covering the dividend.

[00:14:50] I mean, sooner or later, something's got to give, and that's something that should be part of your toolkit,

[00:14:56] especially for your looking at dividend stocks.

[00:14:58] Hey, Matt, Matt is a dividend stock now for all the dividend, bro, so...

[00:15:02] There you go.

[00:15:03] Oh, man.

[00:15:04] You finally have a tech name you can put in there.

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[00:17:00] So the next one here, debt to equity ratio that is constantly increasing.

[00:17:04] So you can look at it in other ways as well.

[00:17:07] So there's all different kind of financial health or debt metrics you can look at.

[00:17:11] But if they're steadily getting worse, that's something that is a big red flag for me.

[00:17:16] Because I want a company that's able to be sustainable over long periods of time.

[00:17:21] And when these debt ratios are getting worse and worse,

[00:17:25] especially if this was happening prior to 2022,

[00:17:29] if the company was getting debt ratios that were getting worse and worse,

[00:17:33] imagine how difficult the company would be in a tough spot right now.

[00:17:38] So these are, like, this is pretty easy.

[00:17:40] You can use debt to equity.

[00:17:42] You can use, like, interest coverage ratio if you want to see how much

[00:17:47] of their profits are going towards the interest expense.

[00:17:50] There's all different kinds of ratio.

[00:17:51] But if they're steadily getting worse, that is a big red flag for me.

[00:17:55] Again, if I see this, I need to understand why this is the case

[00:17:59] and there better be a good reason for it, especially coming from.

[00:18:03] for management, perfect.

[00:18:04] So now we'll go on to the next one here.

[00:18:07] So number five, management constantly misses

[00:18:10] to the downside on guidance, or doesn't execute

[00:18:13] on a long-term plan.

[00:18:15] So this is not that hard to spot.

[00:18:17] You'll have to put a little bit of work, 'cause typically,

[00:18:19] you'll have to literally listen to at least a few calls,

[00:18:23] probably four or five.

[00:18:24] Typically, I would recommend Q4 earnings calls

[00:18:27] or investor presentation days, because then management

[00:18:31] will do a kind of a recap of the year,

[00:18:33] or the investor day, typically they'll do that

[00:18:35] for like, unveiled their capital allocation plan

[00:18:39] over several years.

[00:18:40] But if they're constantly missing on that,

[00:18:42] that to me is a big red flag, and actually,

[00:18:46] I don't think I would invest in a business

[00:18:48] where I see that being the norm.

[00:18:50] And again, the same old true if management

[00:18:53] misleads investors, right?

[00:18:55] So the one that comes to mine is Intel,

[00:18:57] and we were just talking about dividends.

[00:18:59] So Intel last year, we covered that.

[00:19:01] They reported their Q4 2022 result on January 26, 2023.

[00:19:06] And then less than a month later,

[00:19:08] they announced they were cutting the dividend.

[00:19:10] And to me, everyone knew that the writing was on the wall,

[00:19:14] but to me, the fact that management did that in that fashion,

[00:19:19] I would have zero trust in that management team.

[00:19:21] That is my perspective.

[00:19:22] Maybe someone else will disagree with me, and that's fine.

[00:19:25] But the fact that when it was so obvious to everyone

[00:19:29] that they wouldn't say it on their Q4 call,

[00:19:32] I think that is just plain misleading investor.

[00:19:35] And unfortunately, I would not touch Intel

[00:19:39] until the current CO is gone in current management.

[00:19:42] And maybe when they leave, if the business looks good,

[00:19:45] I would consider it.

[00:19:45] But currently, I would never consider Intel

[00:19:47] for that main reason.

[00:19:49] - There is a very easy way to look at guidance.

[00:19:55] Beats and misses, you can look at the analysts tab on FinChat.

[00:19:59] And just compare, talking about meta,

[00:20:04] just compare a meta to a Snapchat in terms of execution

[00:20:08] on consistently beating expectations

[00:20:11] or consistently disappointing on expectations.

[00:20:15] There are companies that consistently surprise.

[00:20:20] And the companies that are great,

[00:20:23] almost consistently surprised for multiple decades,

[00:20:28] sometimes.

[00:20:29] Like-- - To the upside.

[00:20:30] - To the upside, yes, to the upside.

[00:20:32] There are, it's just kind of that winners win mentality

[00:20:37] or the best talent or the best management teams

[00:20:41] continue to impress.

[00:20:43] They continue to spin up new businesses.

[00:20:45] They continue to spin up new optionality and find new growth

[00:20:49] when no one had it pegged,

[00:20:51] like no one was writing,

[00:20:54] underwriting Amazon web services into the Amazon story.

[00:20:59] But generational type leaders like Jeff Bezos

[00:21:02] continue to surprise.

[00:21:04] And this happens time and time again,

[00:21:06] this is why investors, like if they're betting

[00:21:09] on seed stage companies,

[00:21:11] they're like not even really betting on the idea

[00:21:13] or the traction, they're just betting on like a few people.

[00:21:16] Like they're betting on the co-founders.

[00:21:18] This is the reason that I sold Unity back, a few years back.

[00:21:22] Unity's a gaming engine company.

[00:21:24] I thought that I think they kind of fumbled the bag

[00:21:27] over the last couple of years.

[00:21:28] And John, what the heck is his last name?

[00:21:32] He was the former EA CEO.

[00:21:35] He just always kind of rubbed me the wrong way.

[00:21:37] And then he wasn't like the EA, by the way,

[00:21:40] and he's now gone at Unity.

[00:21:42] So, you know, again, these people continue

[00:21:45] to surprise on the downside as well.

[00:21:48] They're kind of rubbing the wrong way.

[00:21:51] The capital allocation decisions,

[00:21:54] the zero interest rate phenomenon acquisitions

[00:21:59] they were doing didn't make a whole lot of sense.

[00:22:02] And it just seemed like the vision was all confusing.

[00:22:05] So just, you are investing in the management team

[00:22:09] to be stewards of your money and treat it as such, right?

[00:22:13] That's the way to think about it.

[00:22:15] Yeah, exactly.

[00:22:16] And when you have management companies

[00:22:18] that exceed expectation, to me, it's just basic.

[00:22:22] I mean, even in customer service,

[00:22:24] like I know a lot of people I'm sure have worked

[00:22:25] in the customer service space,

[00:22:27] saying that goes, it's just under promise over deliver.

[00:22:32] You can literally give the same exact service to a client.

[00:22:37] But if you under promise and over deliver,

[00:22:40] they'll be extremely happy.

[00:22:42] And if you over promise and under deliver,

[00:22:45] with the exact same service, they'll be pissed off

[00:22:48] because you're setting expectation.

[00:22:50] And I think it goes the same thing for management here.

[00:22:53] And the good ones who constantly exceed expectation

[00:22:56] is because first they know their business well.

[00:22:58] And second, they are most likely going a bit more

[00:23:02] on the conservative side to make sure

[00:23:04] that if anything unforeseen happens,

[00:23:07] they do have a margin of safety baked in

[00:23:09] because they weren't overly optimistic.

[00:23:11] That's the way I see it at least.

[00:23:14] Isn't the saying that happiness is just the Delta

[00:23:16] between expectations and reality?

[00:23:18] Yeah, I think so.

[00:23:19] (laughter)

[00:23:21] I think that goes for a lot of things.

[00:23:23] Yeah, and I guess the next one is kind of related to that.

[00:23:26] And I know you're-

[00:23:27] I love this one, by the way.

[00:23:28] I love this one.

[00:23:29] I think we talked about a couple of episodes ago.

[00:23:31] So management changes the KPIs.

[00:23:33] So KPIs are key performance indicators.

[00:23:36] So that's something you'll hear often.

[00:23:38] And if you go on finchad.io,

[00:23:40] you'll see Brayden's team has different KPIs

[00:23:43] for different companies.

[00:23:45] Now this is a red flag, but more one that needs

[00:23:49] to be further investigated.

[00:23:51] Maybe I would give them like just say a foul ball

[00:23:54] instead of a full strike here.

[00:23:56] Just because sometimes there are some good reasons

[00:23:58] why they are changing that.

[00:24:00] But most of the time when this happens

[00:24:03] because they're trying to use a metric

[00:24:04] that reflects a more positive life on the business,

[00:24:07] you know, is that bad or good?

[00:24:09] I think it's more of a case by case basis.

[00:24:11] But if you see them constantly changing those KPIs,

[00:24:15] that's an issue.

[00:24:16] A company that we talked about, like Apple,

[00:24:19] when they keep saying the number of units

[00:24:21] that they were selling every year for iPhones.

[00:24:24] And then they changed that and said,

[00:24:26] well, only talk about the total iPhone revenue.

[00:24:29] The market didn't like that.

[00:24:30] I mean, at first glance, it's not great

[00:24:33] because obviously it's telling you one thing,

[00:24:34] it's because they expect the number of units

[00:24:37] to either plateau or start declining.

[00:24:40] And they want people to look at the total revenues.

[00:24:42] In the big picture of thing,

[00:24:44] I think it's fine from an Apple perspective.

[00:24:47] But again, that's just an example that even for Apple,

[00:24:51] they were clearly trying to shift expectations

[00:24:54] when it came to iPhone sales.

[00:24:56] - I have up on the screen for you to produce.

[00:24:59] - Okay, yeah.

[00:25:00] - This, do you know what company this is?

[00:25:02] - Perksen Resort, that must be Disney.

[00:25:06] - This is Disney.

[00:25:08] - Okay.

[00:25:09] - And this page.

[00:25:10] - I just saw Media Network and Perksen Resort

[00:25:11] and I was like, this must be Disney.

[00:25:13] - You nailed it, you nailed it, this is Disney.

[00:25:15] And this page makes me want to throw up.

[00:25:19] There is, see this little eye?

[00:25:22] That means the segment's been discontinued.

[00:25:24] - Okay.

[00:25:25] - So how many one in two metrics

[00:25:28] have been discontinued on this page?

[00:25:31] It looks like the data is just missing.

[00:25:34] - No, this is, the data is right.

[00:25:38] You just have to play Jenga to match it all up.

[00:25:42] You have to work to match up all the segments,

[00:25:47] all the geography, all the EBIT segments,

[00:25:51] all the KPIs, oh, let's just randomly actually

[00:25:55] discontinue tracking monthly revenue per paid subscriber

[00:26:00] on Disney+.

[00:26:01] That's not a useful metric anymore.

[00:26:05] Let's stop tracking information about the hotels.

[00:26:10] Let's scrap our entire reporting segment

[00:26:15] and switch to this other one.

[00:26:16] Let's move over from parks and stuff to experiences

[00:26:20] and bundle in a lot of stuff.

[00:26:22] So if you notice here, they used to have like six segments

[00:26:25] and now they only have four or three.

[00:26:28] That is actually a leading red flag

[00:26:31] because that means they're taking a bunch of stuff

[00:26:33] that used to be broken out and bundling it in

[00:26:36] and hiding it under segments that are doing well.

[00:26:39] - Yeah, the, what--

[00:26:40] - This page is just red flag after red flag.

[00:26:43] - Yeah, did you notice that must be part of their strategy,

[00:26:46] but on Netflix now there's Home Alone, the movies,

[00:26:49] where it used to be only on Disney+,

[00:26:51] 'cause they own the content.

[00:26:53] And I'm saying Home Alone, but I think they're trying

[00:26:56] to get more revenue by not making it

[00:27:00] just exclusive on their platform.

[00:27:01] I think they--

[00:27:02] - The licensing into the other players.

[00:27:04] - Exactly, I think they tried make it exclusive,

[00:27:07] thinking that would bring in subscribers

[00:27:09] and I feel like the subscriber count

[00:27:12] is not what they would want it to be.

[00:27:14] So they're trying to get some more sources of revenue.

[00:27:18] I'm assuming they're making the calculation

[00:27:20] that the extra licensing revenue

[00:27:22] that they'll get outweighs the potential loss

[00:27:24] in subscriber, if they had that content exclusively

[00:27:29] for their platform.

[00:27:31] - Yeah, look at the global pay Disney+ subscribers.

[00:27:35] It's actually been pretty resilient in the last couple

[00:27:38] quarters, they had lots of churn coming out of 2022

[00:27:41] as to be expected, but overall surprising business,

[00:27:45] this might be one of the most hated large caps

[00:27:48] on the market these days, but I have no opinion

[00:27:51] on the stock because I don't like owning companies like this

[00:27:54] where I have to literally play Django

[00:27:55] with their financials, or not their financials,

[00:27:57] but their KPIs and their revenue segments,

[00:28:00] like it's hard to really put it all together.

[00:28:03] - No, yeah, exactly, completely agreed.

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[00:29:58] Now, the next one here,

[00:30:00] number seven, so an extremely complex business

[00:30:03] to understand, so this is more, I guess, personal for me.

[00:30:06] But if I can't fully understand the business,

[00:30:08] that's a red flag.

[00:30:10] It might be because I just don't have the technical knowledge,

[00:30:13] for example, pharmaceuticals, right?

[00:30:15] Like, I just, I mean, I guess I could learn it,

[00:30:19] but I also know that it would take me hours on end to learn it.

[00:30:23] And it's probably gonna be a still a very difficult

[00:30:27] industry to invest in,

[00:30:29] so I'm just not willing to put the time in.

[00:30:31] So in that case, I'd probably just pick an ETF

[00:30:33] if I want more exposure to that sector.

[00:30:36] And it could also be because I'm an extremely complex

[00:30:39] organizational structure.

[00:30:41] And one big, let's say, strike against Brookfield,

[00:30:46] because I do own it,

[00:30:47] it's the complexity of their structure.

[00:30:49] That's always been a bit of an issue.

[00:30:51] I mean, I still own Brookfield,

[00:30:52] but I'm not really adding,

[00:30:54] and I'm not planning to add any time soon to Brookfield.

[00:30:58] I think I'm just fine with the position being as it is,

[00:31:01] and most likely going down as my portfolio grows,

[00:31:04] and I inject some new funds.

[00:31:06] Because to me, that's still a risk for Brookfield

[00:31:08] is unfortunately I have to put a decent amount of trust

[00:31:12] into that management team,

[00:31:14] which is fine.

[00:31:15] I think they have a good management team.

[00:31:17] But again, I think it's just a structure

[00:31:19] is just so complex, unfortunately, for Brookfield.

[00:31:23] - It's not, it's more so that,

[00:31:24] yes, the structure is complex.

[00:31:26] I mean, the subsidiary is you got a tie it all together,

[00:31:29] and the ownership stakes back to the mothership.

[00:31:31] But it's really around like the governance

[00:31:33] and black box around it,

[00:31:35] that makes it difficult for investors.

[00:31:38] And investors that just say, "Ah, you know, not for me."

[00:31:42] I totally get it.

[00:31:43] - Yeah, me too.

[00:31:44] - Yeah, totally, totally understand.

[00:31:45] It's like one like, what the hell does data dog do?

[00:31:50] Bro, I got someone who works there

[00:31:52] to explain to me what data dog does.

[00:31:55] And I left more confused.

[00:31:58] I literally was like, thanks man.

[00:32:00] I know less about data dog now.

[00:32:02] Like your explanation was fine.

[00:32:05] It's just that, what?

[00:32:07] Like, you know, that meme's like one?

[00:32:09] - Yeah.

[00:32:10] - What?

[00:32:11] Like that was me after the explanation

[00:32:12] of what data dog does.

[00:32:14] And it's a 44 billion in Marquis Cup software company.

[00:32:18] Like this is a large, large business

[00:32:21] that apparently is solving a large, large problem

[00:32:24] for customers.

[00:32:24] They went from a hundred million to revenue,

[00:32:26] two billion revenue in the last three, four years.

[00:32:29] Like they're doing something right.

[00:32:31] It's just that I don't know what they're doing right.

[00:32:33] And I don't know if I'm ever gonna know what they do right.

[00:32:36] It's just so confusing to me.

[00:32:39] - I guess at the high level,

[00:32:41] they analyze data for business.

[00:32:43] But that's the extent of what,

[00:32:45] 'cause I'm reading the whole thing.

[00:32:47] Like, what is data dog just on Google?

[00:32:49] And I mean, I'll read it for people

[00:32:52] to kind of make their own mind.

[00:32:53] Data dog is a monitoring and analytics tool

[00:32:57] for information technology and DevOps team

[00:33:00] that can be used to determine performance metrics

[00:33:03] as well as event monitoring

[00:33:04] for infrastructure and cloud services.

[00:33:07] The software can monitor services

[00:33:09] such as servers, the database and tools.

[00:33:11] Like, I have a general idea,

[00:33:13] but if you ask me to like explain like, you know,

[00:33:17] to people what they do in a simple fashion

[00:33:21] while understanding the business,

[00:33:23] like forget it, I don't think I'd be able to do that.

[00:33:26] - ServiceNow is a tech company

[00:33:28] that has just absolutely dominated at the enterprise level.

[00:33:32] It is ticker now, ARR has exploded.

[00:33:36] One of the best profitable software companies

[00:33:39] in public markets today.

[00:33:41] I kinda know what they do.

[00:33:45] The automate tasks for large enterprises.

[00:33:48] - Yeah.

[00:33:49] I think they do case management tracking too

[00:33:52] for clients and stuff like that.

[00:33:54] Yeah.

[00:33:55] - They do a lot.

[00:33:56] - Okay.

[00:33:57] - According to the website.

[00:33:58] - Yeah.

[00:33:59] Go to the website.

[00:34:00] It's like, I know less about the company

[00:34:04] and IT teams love it.

[00:34:07] Clearly they're solving a big problem.

[00:34:08] And if you work in the space,

[00:34:10] maybe you work with ServiceNow at your company.

[00:34:11] You might get it.

[00:34:13] But my goodness, again, another name of this,

[00:34:16] massive, massive company.

[00:34:19] The metrics are fantastic.

[00:34:21] But like, why do they do it better than anyone else?

[00:34:25] If the stock goes down and I can't answer that,

[00:34:27] I'm not in a position to own it.

[00:34:29] (laughing)

[00:34:30] No, that's good.

[00:34:31] And then I guess the last one here before,

[00:34:34] 'cause we definitely spent more time

[00:34:36] than I thought on this segment, but it's a fun one.

[00:34:39] The last one here, so again, with management team.

[00:34:42] So management says they are unsure

[00:34:45] that the company will continue on a going concern basis.

[00:34:48] And I think this one should actually be number one.

[00:34:51] If you ever, ever see this in a earnings release,

[00:34:57] so if you're new, essentially a going concern basis

[00:35:00] means that the company can keep operating.

[00:35:03] If there's some doubt regarding the going concern,

[00:35:05] it's essentially that management is saying

[00:35:09] there's a real possibility that a company

[00:35:11] may not be able to continue its operation.

[00:35:13] So this to me, if ever I see that,

[00:35:15] this is like three strikes and you're out.

[00:35:17] Like this is something where there's a real risk

[00:35:21] that the company will be insolvent, may go into bankruptcy.

[00:35:24] And when these, especially when these earnings are out

[00:35:27] and they've been verified by auditors

[00:35:30] and they agree with the management team,

[00:35:32] it's not a good sign.

[00:35:33] Like it's a struggling business.

[00:35:35] Maybe they'll turn it around, but to me,

[00:35:37] I will not consider a business that has that

[00:35:40] because they're literally telling you

[00:35:41] that they could stop operating very soon.

[00:35:45] - Yeah, I mean.

[00:35:47] - That's what I said.

[00:35:48] - I don't even wanna be even close to this going concern.

[00:35:51] - Yeah, this is drop everything red flag.

[00:35:55] No, this is, yeah.

[00:35:56] I mean, you see this a lot and people are searching around

[00:35:59] and junkie stuff on the TSX venture.

[00:36:03] You see it kind of all the time.

[00:36:05] Yeah, and maybe some people like to take bets and they'll, they may, can in it, like,

[00:36:12] they analyze a company and they think it's going to turn things around just personally.

[00:36:16] If I see that, if management literally is telling me that, I'm not even wasting more time.

[00:36:21] I'm moving on.

[00:36:22] If they turn it around, good for them.

[00:36:24] I don't want to be part of it.

[00:36:26] Let's move on.

[00:36:27] Simon, I have a man crush that I'd like to tell you about.

[00:36:32] I'd like to tell everyone on the podcast,

[00:36:35] I have a man crush.

[00:36:37] This investor, his name is Dev.

[00:36:41] I'm going to mess up this last name.

[00:36:43] Dev, Cantessaria, okay?

[00:36:47] He runs a firm, a fund called Valley Forge Capital.

[00:36:53] Valley Forge Capital manages just under $3 billion.

[00:37:00] He is the portfolio manager of it and he's been running this fund for, you know, a couple

[00:37:04] of decades now.

[00:37:05] I'm going to go through the portfolio, but I'm also going to go a couple, a couple

[00:37:09] stats of what Valley Forge Capital management has and what Dev, Cantessaria, has done during

[00:37:16] that time.

[00:37:17] I sent him a LinkedIn request, which has gone unnoticed so far.

[00:37:22] So Dev, if this makes it to you, just give me a little, little LinkedIn now.

[00:37:27] Give me a little LinkedIn follow.

[00:37:28] You need more followers on LinkedIn or friends or whatever their colleagues, whatever their

[00:37:34] stuff.

[00:37:35] I have enough clout on LinkedIn for him to see it.

[00:37:37] So the just under $3 billion of asset management looks like from the stats here on the 13F,

[00:37:44] the position size is eight companies.

[00:37:48] It's mostly concentrated into just six names, which I'm going to go through.

[00:37:53] The average holding period of a stock in the portfolio, see, Mom, drum roll, please, is

[00:38:01] 21 years.

[00:38:03] Is that bad?

[00:38:05] Or is that bad?

[00:38:06] Yes.

[00:38:07] Yeah, that's, that is amazing.

[00:38:09] Turnover of the last years.

[00:38:11] It just says zero.

[00:38:12] So there's been no portfolio of turnover, like this guy just, absolute beast, okay.

[00:38:18] So you guys know I'm into these wide moat financials, not to be confused with banks.

[00:38:25] I'm talking these S&P global FICO, BlackRock, these wide moat financials that have extremely

[00:38:36] competitive positions.

[00:38:38] Think of like a FICO.

[00:38:39] They just have like a monopoly on their scores business in the US around like the FICO score,

[00:38:44] okay.

[00:38:45] A portfolio is one quarter FICO, one quarter S&P global, roughly another quarter master

[00:38:53] card.

[00:38:55] And then the rest is Moody's into it, Visa, some small tech, small tech company that I've

[00:39:03] never heard of and ASML, okay.

[00:39:06] This is a badass portfolio.

[00:39:08] It is very high quality.

[00:39:11] You're seeing what he likes, monopolies, you know, like he likes, in this case, sometimes

[00:39:20] I might fare off into say do wopply's.

[00:39:23] And this portfolio is what I strive to be to have a Valley Forge capital management.

[00:39:30] You can look it up on Finchiat and get their 13 F.

[00:39:32] You can see all the history of all the companies they've owned.

[00:39:35] Here's a spoiler alert, it doesn't change very much, but this is an awesome portfolio

[00:39:40] in what I strive to accomplish.

[00:39:42] Yeah, that's pretty impressive, honestly.

[00:39:45] I'm kind of waiting for you to buy a railway.

[00:39:48] I mean, all these monopolies doesn't get, I know it's, I like, has said Evie compared

[00:39:54] to other like a Visa MasterCard, but still I'm a big fan of railways just because they're

[00:40:00] a track record.

[00:40:01] I mean, they're slightly outperforming.

[00:40:02] I think the S&P 500 at least the Canadian ones over long periods of time and, you know,

[00:40:08] the luck building said new railway.

[00:40:10] It's just, yeah, yeah.

[00:40:12] I think that you're totally right.

[00:40:15] I mean, the results are there and I think you're probably going to beat the index with

[00:40:20] those names moving forward.

[00:40:22] It's just that you can think of Visa and MasterCard as like the rails of transactions

[00:40:28] with a lot of room globally to grow, like where are the rails building new rails outside

[00:40:34] of North America, right?

[00:40:35] Like, they're just kind of constrained, like, just by physics and geography.

[00:40:42] So they're fantastic, but I look at some of these other names and it's like asset light.

[00:40:49] You get all the same kind of upside in terms of quality and moat with less constraints.

[00:40:56] I don't know how else to put it.

[00:40:58] Yeah.

[00:40:59] Yeah.

[00:41:00] Yeah.

[00:41:01] I guess to me it's more like, I guess a pricing power because there's just few little options.

[00:41:03] You can increase the efficiency as well, but I get what you mean.

[00:41:07] I still, I love the railways.

[00:41:09] I have Canadian national rail.

[00:41:10] I'm definitely debating just doing equal weighted with CP and just just have both going forward

[00:41:16] and enjoy the natural and regulatory motes that they benefit from.

[00:41:23] You should go on Finchette and type in Chris Hone or TCI fund management.

[00:41:28] That is a roughly 30 billion AUM company, TCI fund management managed by Chris Hone for

[00:41:35] a long time.

[00:41:36] You'd like this name.

[00:41:37] It's.

[00:41:38] Oh, wow.

[00:41:39] Yeah.

[00:41:40] General electric riding the turnaround and then CN rail, CN rail, Visa, S and P global, Moody's

[00:41:46] Google and Thermo Fisher, it's the whole company.

[00:41:49] It's pretty good.

[00:41:50] Yeah.

[00:41:51] Pretty impressive.

[00:41:52] Yeah.

[00:41:53] So concentrated.

[00:41:54] He was big in the CN rail drama there.

[00:41:58] Before he wrote that memo we went over, that was like, oh, yeah.

[00:42:01] That was them.

[00:42:02] Yeah.

[00:42:03] Back getting back on the rail.

[00:42:04] What was it?

[00:42:05] He had a clever name for it.

[00:42:07] It was like to CN rail, to like, back on the track or something.

[00:42:10] Was that the Ford?

[00:42:11] Get back on track, which is just like hilarious because they were real.

[00:42:14] Was that before I guess before then you see, you came in, right?

[00:42:17] He was just.

[00:42:18] That's right.

[00:42:19] Yeah.

[00:42:20] Yeah, he was telling them to get rid of the, which they did.

[00:42:23] Yeah.

[00:42:24] Well, he owns four and a half billion dollars in CN rail stock.

[00:42:29] So I mean, so, CN rail is a large company, but any time you have at least like, single

[00:42:35] digit percentage of ownership in any company, the company will listen to you.

[00:42:40] I think a lot of people.

[00:42:41] He owns 6.18% of CN rail.

[00:42:44] Yeah.

[00:42:45] So that's, that's a lot.

[00:42:46] I think for a lot of people may not sound like a lot, but for one, a shareholder to own,

[00:42:52] like, I'm literally saying like, if they own 1% or more, it's massive.

[00:42:57] And the board and the company will usually listen to him.

[00:43:01] And if not, I mean, oftentimes these investors will be pushing to have at least a seat on

[00:43:06] the board as well.

[00:43:07] Yeah.

[00:43:08] They sold out a Microsoft interest interest.

[00:43:09] Yeah, I saw that.

[00:43:11] That segment of the day is called thinking and percentages, not dollars.

[00:43:17] So quote, the first hundred K is a bitch, but you got to do it.

[00:43:22] I don't care what you have to do.

[00:43:24] If it means walking everywhere, if it means not eating anything that wasn't purchased

[00:43:27] with a coupon, find a way to get your hand on a hundred thousand dollars.

[00:43:31] After that, you can ease of the game a little bit.

[00:43:35] I don't really know what that means, but that is end quote, Charlie Munger talking about

[00:43:40] how do whatever you got to do to get to the first hundred K and then you can lay off

[00:43:46] the gas a little bit.

[00:43:47] Yeah.

[00:43:48] Then you can put in your bank account, CDIC insured, boom, you're all set.

[00:43:51] Yeah, exactly.

[00:43:53] The quote is from the 90s and inflation adjusted.

[00:43:57] It's more like the first 250 K pitch and you got to do it.

[00:44:01] But I actually think that that's a really nice number, a 250 K for my young kings out

[00:44:07] there without large of sons of money, no inheritance and no large portfolios today.

[00:44:12] I do think that that's a really nice kind of North Star to drive towards in your portfolio.

[00:44:18] One thing that I learned through the years around saving, spending decisions, investing,

[00:44:23] portfolio allocation, everything financials in my life is to think in percentages, not

[00:44:30] dollars.

[00:44:32] And the reason why is because big outcomes are decided in percentages, percentages rule

[00:44:39] our world, percentages rule the math around our world and they give context that a nominal

[00:44:46] number does not.

[00:44:47] Simone, if I ask you, I say to you, Hey, this company makes a hundred million dollars in

[00:44:53] profit per year.

[00:44:54] Is that a fair undervalued or overvalued company?

[00:44:58] I'm that alone.

[00:44:59] I can't say.

[00:45:01] Yeah.

[00:45:02] You can't say you're missing information, right?

[00:45:07] Like you don't have the context.

[00:45:09] You don't have the ability to turn that into an earnings yield because you're missing a

[00:45:13] very key part of the calculation.

[00:45:17] That is a large number, a hundred million.

[00:45:19] It sounds pretty, pretty large, Red Sea Mo.

[00:45:22] But if the market cap is one billion or the market cap is 50 billion, that's going to

[00:45:29] happen.

[00:45:32] Those are very different conversations, right?

[00:45:33] Like one's an AI chip company, one's like a cyclical thing that no one really cares

[00:45:40] about.

[00:45:41] So this is why thinking in percentage matters, I'm going to rattle off, one, two, three,

[00:45:46] four, five, six examples here.

[00:45:50] And then I'm sure you'll have some, some comments.

[00:45:53] Your portfolio IRR, your compound annual growth rate.

[00:45:58] If you do manage to compound at 8% or more per year, for decades, even if you started

[00:46:03] with a small base of dollars, you end up with a great outcome.

[00:46:08] Regardless of what you started with, if you're able to do that for multiple decades, you're

[00:46:11] going to end up with a great outcome.

[00:46:13] What happens if you just increase that percentage to a few points of outperform and say 11 and

[00:46:19] a half percent, compennial growth rate, you end up with wealth generation beyond your

[00:46:25] furthest expectations.

[00:46:28] Let's look at interest rates on your home, on your car, these large purchase decisions,

[00:46:34] financing rates really matter.

[00:46:36] These percentages really matter.

[00:46:38] They rule the outcomes in your financial life.

[00:46:43] One of the most important of all Simone, your savings rate.

[00:46:47] Okay.

[00:46:48] This is a percentage sure making more money helps.

[00:46:51] But if you make a 250 k a year, your savings rate is negligible.

[00:46:57] You end up with a bad outcome.

[00:46:59] I know people that make 250 k a year and save less nominally than people who make a hundred

[00:47:08] k a year and have a good savings rate.

[00:47:10] This happens all the time, even on a lower dollar amount.

[00:47:13] If you have a sustained 20 plus percent savings rate compounding that by putting another respectable

[00:47:21] return.

[00:47:22] Again, another percent.

[00:47:24] You end up with life changing wealth.

[00:47:27] Your effective tax rate is a giant percentage and this one's harder because this is a kind

[00:47:34] of giant life decision on where you want to live.

[00:47:37] But your effective tax rate makes a big difference.

[00:47:42] If I live in Texas versus California and the US, those are, giantally different.

[00:47:48] They vary by province here in Canada as well.

[00:47:52] Not as substantially as the States.

[00:47:55] But you know, these things matter.

[00:47:57] Yeah.

[00:47:58] The one thing I wanted to add there, just for people that may not be familiar with these

[00:48:02] terms.

[00:48:03] So, there's two kind of things when people talk about tax rate.

[00:48:06] It's the effective tax rate, which is basically the average tax rate that you'll pay over

[00:48:10] a given year on all of your income.

[00:48:13] And then the marginal tax rate is whatever tax rate you pay on, like whatever additional

[00:48:18] income you're making.

[00:48:20] That's right.

[00:48:21] That compacts into a calculation, which you can call your effective tax rate.

[00:48:25] Yeah.

[00:48:26] A credit card, APY, you know, might not seem like a bad amount.

[00:48:32] If you have 20%, plus that's on the low end, maybe a high, high, high 20%, you get eaten

[00:48:40] alive into a debt spiral if that lingers.

[00:48:44] Your portfolio allocation.

[00:48:46] Usually this is a pie chart with percentages.

[00:48:49] If we just talked about a portfolio, we said, it's 20% S&P, 20, you know, 15% Visa, Master

[00:48:57] here.

[00:48:58] This is very important in terms of your concentration and both the upside and the downside you'll

[00:49:05] face in your portfolio.

[00:49:07] For instance, you know, 100k to have in one stock might seem like a lot.

[00:49:12] But if you have a $5 million portfolio, that is a 2% waiting.

[00:49:17] Is that a big position?

[00:49:19] No, not really.

[00:49:22] No, 2%.

[00:49:23] I mean, it would be like probably for you know, depending on the people, but 2% is a pretty

[00:49:29] reasonable waiting without too much exposure, I would say.

[00:49:33] That's right.

[00:49:34] And so if your portfolio is 120k and 100k is in one stock, that's a big allocation.

[00:49:41] You got to think in percentages and not dollars, of course, dollars matter.

[00:49:47] But if you think in percentages, you start optimizing things correctly.

[00:49:52] That's what happened for me anyways, is when you move from thinking about, okay, something

[00:49:57] is X amount of dollars versus that's X% percentages rule the math of our world and our universe.

[00:50:08] And so that really helped me focus on the, you know, the thousand foot view and really

[00:50:15] focus on what matters in percentages, not dollars.

[00:50:18] Yeah, exactly.

[00:50:20] And I mean, it applies to so many different things, right.

[00:50:24] When I played poker, it was always about percentages.

[00:50:27] You try to just think about percentages and units and not actual dollars.

[00:50:31] If you're buying a house and you're trying to get approved for a mortgage, they'll look

[00:50:35] at different ratios that are all percentage based, but investing as well, it just puts

[00:50:40] more context like a dollar value.

[00:50:42] Just, I know sometimes it's easy to focus on that dollar value, but at the end of the

[00:50:47] day, it just doesn't place a lot of context.

[00:50:50] And I think it's important, especially for new investors that may focus on, you know,

[00:50:55] penny stocks, for example, because the brain will look at it and say, okay, it's a dollar

[00:50:59] per share.

[00:51:00] If it doubles, you know, I'll double my money, it goes to two dollars.

[00:51:04] I double my money, but it's a hundred percent increase.

[00:51:08] The double is a hundred percent increase.

[00:51:10] It doesn't matter whether it's Apple stock doubling or that one dollar stock, it's still

[00:51:16] a double, right.

[00:51:17] So I think it's just people tend to look and see smaller numbers, and I guess they assume

[00:51:23] that the likelihood of something happening is greater.

[00:51:26] Like I'm not sure I think that's probably the reasoning behind it.

[00:51:29] Yeah, 'cause they're like, yeah, what's another dollar in the share price, right?

[00:51:34] Exactly.

[00:51:35] Well, it is a 100 percent increase.

[00:51:39] That's what it is.

[00:51:41] And when you think about these percentages, you actually think rationally.

[00:51:46] It helps save you from your bio, behavioral biases around finances and smart people, wealthy

[00:51:54] people are almost always thinking in percentages.

[00:51:59] If you see them spend super lavishly, expense up by some fancy car or go for some fine dining

[00:52:09] that costs like $10,000, that might be a percentage for them that is negligible, that

[00:52:17] doesn't even register for a lot of people.

[00:52:21] For most of the population, that is going to be a significant percentage.

[00:52:25] It's going to be their food budget for the year.

[00:52:27] That's what it's going to be.

[00:52:29] Budgeting's in perspective and percentages.

[00:52:32] Everything's in percentage.

[00:52:33] So that's the segment.

[00:52:35] No, I think it's great.

[00:52:36] I mean, that's, I don't know, maybe we're just too used to it, and that's how our brains

[00:52:41] work.

[00:52:42] But for me, it's always if I kind of feel lost, if I don't have a percentage, that's the

[00:52:47] feeling it is.

[00:52:48] Yeah.

[00:52:49] There's no context.

[00:52:50] No, exactly.

[00:52:51] Yeah.

[00:52:52] That's it.

[00:52:53] You're missing a piece of the calculation.

[00:52:54] And so always be thinking in percentages.

[00:52:57] That's the pod.

[00:52:58] Thanks for listening, folks.

[00:52:59] We really appreciate you.

[00:53:00] We are here Mondays and Thursdays.

[00:53:04] Thursdays, my South see monitor on Mondays, Dan Kenton's monitor on Thursdays.

[00:53:10] You guys do news, roundups, talking markets.

[00:53:13] We talk big picture stuff on Mondays.

[00:53:16] And we're so happy that you are here.

[00:53:19] If you want to support the show, you can go on joinTCI.com.

[00:53:22] You can see our portfolio updates for all three of the Amigos, as well as this podcast

[00:53:28] on video.

[00:53:29] Share lots of charts and stuff as we go through the podcast that is at joinTCI.com.

[00:53:35] You can go also on finchat.io 100% of the data we pulled up on today's show was from

[00:53:41] finchat.io.

[00:53:43] You can use code TCI for 15% off.

[00:53:49] We'll see in a few days.

[00:53:50] Take care.

[00:53:51] Bye bye.

[00:53:52] The Canadian investor podcast should not be taken as investment or financial advice.

[00:53:57] Listen and see more mail, securities, or assets mentioned on this podcast.

[00:54:02] Always make sure to do your own research and due diligence before making investment or

[00:54:07] financial decisions.