Are we in an AI bubble?

[00:00:00] 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

[00:00:13] The Canadian Investor podcast. Welcome to the show. My name is Braden Dennis as always joined by the powerful Simon Belanger. Today we got two awesome listener questions. I'm going to answer the question.

[00:00:31] So are we in an AI bubble? I've been getting this question a ton personally. I got it at a conference that I attended last week.

[00:00:41] So we'll dive in a little bit into that and then we'll talk about being dividend drunk, which I think is a recurring theme on the podcast and we'll get touch on it today.

[00:00:53] Good sir. How about this? You can answer the first question off the slate today. I'll read it to you and then you take it away. Yeah, that's good. Go for it.

[00:01:02] Would you have any resources for a guide on how to look at a company's financials? Have you considered doing a course or video about this? Actually looking into the paperwork pulling out the info you need.

[00:01:14] I understand a lot of the terminology used, but a bit overwhelmed looking at a 10k. Any help would be appreciated. Thanks for all you do. No thank you for Amanda for this question because you come to this podcast because you want to do your own research.

[00:01:31] You want to hear us do our own research. And it's like what are the things I should be looking for right out of the gate?

[00:01:37] Yeah, I know exactly. Great question from Amanda. So some quick clarification because if we have some new investors, some may not be familiar with the term 10k. So that's just what the annual filing is called in the US for US listed companies.

[00:01:52] Not, I think it's a different name though, slightly different for foreign companies that are listed in the US, but 10k if you have like US domicile companies, that's what they'll refer to.

[00:02:03] And then obviously I use finchad.io to do a lot of my research, including looking at like filings that are all available there. So that's a great tool if you want to try that out. Obviously getting all the metrics and stuff.

[00:02:16] That's probably one of the most attractive features of finchad.io. But the fact that you can pull those filings because there is a lot of good information there. But again, it can definitely be overwhelming because it's pretty common to have these annual filings being 100 plus pages long.

[00:02:34] So you know when you start looking at a company, especially if you're just starting your research for a company, maybe you're not quite sure if you want to invest in.

[00:02:42] You know, you don't want to waste too much time necessarily on that, especially since we all have a finite amount of time. So first of all, I'll say is control F is definitely your friend when you're looking at financial statements or looking at annual reports.

[00:02:58] But more specifically, you know, if you want to look at certain terms, if they come up, that's always an interesting thing, especially with, you know, what you talked about AI, right? If you want to see how companies have evolved.

[00:03:11] I mean, you just look at a few annual statements, maybe like four or five years in a row and you just have a look at how often AI is mentioned in the annual report or for a while was blockchain.

[00:03:23] Right? It was the the word that was constantly mentioned. No, I think that's exactly right. And all of these resources are things that the company is putting out to investors because they're a public company to be in the public domain for people to find.

[00:03:38] And, you know, I appreciate the FinChat shout out because of course we don't tell people how to work, how to do their own research, or even if a stock is undervalued overvalued, that kind of stuff.

[00:03:51] We just provide everything in one place so that you're able to do that.

[00:03:57] And some of it is numerical. Some of it is a little bit of reading and I think that you just hit down that with the good old control left, whether you want to focus on specific sections of the report or just follow along.

[00:04:12] For me, I mean, this is really relevant because people who listen to podcasts are probably audio listeners as well of just listening to the conference calls as well. Right? And so you'll get a lot of that color.

[00:04:27] And the Q&A that is done from those analysts asking who know a lot about the company, that's a gold mine right there, right? Is having Q&A from shareholders, from analysts directly to the management team. There's so much juicy content in there.

[00:04:46] So yeah, I mean, there's so much to go through. So carry on. Yeah, exactly. And that's one of the things in addition to the 10K I was going to mention is the earnings call. And I think I don't... I want to be clear here.

[00:05:00] I think people sometimes will just stick to the transcript and it's fine to look at the transcript while you're listening to the call.

[00:05:07] But I think it's a mistake personally to just look at the transcript because there are things that you cannot get on paper the way, the tone that they're using, how they're responding to questions. How they're hesitating.

[00:05:22] Sure, you might be able to kind of catch out a little bit with the transcript but just hearing them talk and being able to rewind and listen again to what their answer is.

[00:05:32] I think that brings a whole lot of value because I've listened to calls where you may not be able to tell so in the transcript, but then you listen how they answer a question and then management gets extremely defensive.

[00:05:44] And that's a red flag, right? If they get very defensive is because they feel like they may have not done something correctly or something might be off. So I think it's something that's really important is listen to those calls and something that I do regularly.

[00:05:59] Now to go back to the annual statements. The first thing I'll do is I'll read the letter to the shareholders. So that'll typically be written by the CEO or top executives.

[00:06:09] Sometimes the, you know, the director of the board will be the one writing or it'll be multiple executives. It just provides a good overview of the last year and often insights on the future as well coming straight from the executives running the company.

[00:06:24] The second one, especially if you're looking at a new business is business overview and risk factors. This will go over the actual business and what they do and also the potential risk that they face.

[00:06:36] So whether it's competition, macroeconomic factors that tends to come back regardless of the business or geopolitical factor again tends to come back or even consumer concentration. That's something that we've seen for example in Nvidia.

[00:06:51] They're very concentrated in their consumers and for the risk I always push it a bit further though because sometimes it can be a bit vague. So I'm talking about macroeconomic geopolitical here.

[00:07:02] I find that companies will tend to just put that because they have to put it in there because it can be a risk. But I think it's good to also you do your own research on top of that because sometimes they may downplay some of these risks.

[00:07:15] For example, the customer concentration companies may downplay that but if you have your business is getting revenue for a handful of companies. That's a pretty major risk if any of one of them is actually falling off in terms of orders.

[00:07:31] The third one here management discussion and analysis MDN 8. So this section offers management perspective on the financial results including insights on the company's operation, market conditions, liquidity, capital resources and even other risks. Often includes a discussion on significant trends and future outlooks as well.

[00:07:53] So to me this goes hand in hand with the letter to shareholders. Obviously number four financial statements I think that goes without saying I don't think I need to go into much detail here.

[00:08:05] If you're not looking at financial statements, I mean what are you doing investing in visual companies? The fifth one here financial statement notes and to me actually this is equally as important

[00:08:18] as the actual financial statement if not more because it provides much more context to the financial health of the business. For example, say the company has long term debt you'll see it on the financial statement but you have no idea how it's actually structured.

[00:08:34] Is it variable fixed debt? Is it convertible debt where they can convert it to shares down the line? What's the term on that debt etc.

[00:08:43] So you have to be able to you have to actually drill down to the notes to be able to see that and when you read the actual financial statement usually you'll see the notes next to either the long term debt.

[00:08:56] For example, you'll see which is the corresponding note that you have to go to so you don't have to like reach every single note necessarily but at least read the ones where you need more information on.

[00:09:07] And then the number six here which is kind of sort of in the 10k at least I'll refer to it the executive compensation or corporate governance.

[00:09:16] So this will typically be found in a proxy statement but they will tell you in the 10k that it can be found in the proxy statement. Yeah, that's a great list those six right there and again this is stuff that the company is putting out there.

[00:09:33] One caveat I want to mention here is not every company is required to put out all this stuff.

[00:09:42] You know they have a list of things that they are required to do to be to be publicly traded in that geography like SEC filings your your case and your cues but they are not required to have public conference calls and earnings calls.

[00:10:00] They're not required to have investor day hoopla's and they're not required to have even letters from the CEO, you know addressing shareholders. So not every company will have them so if you're before you go. I can't find it for this company.

[00:10:18] Sometimes it may not exist for instance, the universe of companies that have earnings calls at least once a year let's say every quarter is around 7000 around $1,000. There are 65,000 active global companies around the world today.

[00:10:35] So that gives you an idea of scale of like how many of these companies actually run conference calls. I have two companies that I own in my portfolio that do not have earnings calls so you have to go use other resources to learn more about the business.

[00:10:53] Yeah, no that's a good point. I mean the big companies typically will obviously so the ones that you know will typically have that and you something that's worth noting is when a company does have regular calls and then they decide not to have one.

[00:11:08] That's usually that can be a sign of some things different whether it's good or bad.

[00:11:14] I mean I think we saw it may have been GME that did that during the whole like a meme stock craze where they either that or they had literally like a four minute conference call and that's it because they didn't want to I guess address what was going on with the stock and you know the whole meme stock craze.

[00:11:32] So something to take note when a company is like changing on a dime. There's probably a reason for it and just couple more things that I like to look at that are a bit outside of the 10k but we mentioned earnings calls earlier.

[00:11:46] Again something that they're not necessarily going to be required to put out but a lot of companies will do depending on the industry supplemental financial information so this is specially useful there's two sectors that come to mind for me that I will look at that very closely is for financial companies and then real estate investment trust because that's supplementary.

[00:12:07] So if you have supplemental financial information you'll usually find very like for banks for example you'll find a lot of very useful information like their net interest margin is just an easy example there but also the breakdown like provisions for credit losses even more so.

[00:12:25] So I think you know being aware of those depending on the type of companies you own but there are companies that have no like Apple doesn't have supplemental financial information like they just don't right so keep that in mind but it can be very useful and the second thing is.

[00:12:40] We talk about adjusted metrics quite a bit and if it's a company that uses adjusted metrics a lot although in the 10k they will use gap metrics so they will use generally accepted accounting principle and in Canada will be IFRS so same kind of you know these are the official accounting.

[00:13:01] Rules that companies have to publish with a lot of companies will also provide their adjusted metrics and if you notice that I can't say it enough make sure you read what the adjustment is and how they arrive to those numbers because you may think.

[00:13:17] You know one that comes to mind is funds from operation well funds from operation can vary quite a bit from company A to company B depending on how they calculated because it's not an official metric it's not a generally accepted metric so that would probably be the the last thing I'll mention here just to keep that in mind and making sure you know what you're looking at.

[00:13:38] I think I've been pretty vocal around not being particularly keen to own companies where I have to do mental backflips to understand the adjustments they make every quarter or I feel like I have to relearn their financials every quarter because their adjustments are so off the beaten path and it's not that there's anything wrong with adjustment adjusted numbers and sometimes gap or IFRS doesn't make sense for me.

[00:14:08] That's for a lot of the companies you need to use adjusted numbers and non standard metrics for that for that particular business assessment to make sense but the alarm bells go off when they're so far from gap profitable and all these adjustments need to be made and I have to relearn it every single quarter.

[00:14:28] Yeah, I'm not trying to look for homework you know no no.

[00:14:31] You and I finished school a while ago now we're not looking to give ourselves a new new homework every single quarter so that's not to say that adjusted metrics are not good in fact they they are and for some sectors you absolutely require them and need them but the more they stray from the norm of industry adjusted metrics the more I have some red flags alarm bells go off or at least further

[00:15:01] expectations required. Yeah, I totally agree with that and just an example on how adjusted metric can be useful and I totally agree with what Braden said and an example of how useful it can be but that's why it's important to understand why they're doing it is I'm just going to take a Cpkc right so see or Cpks where

[00:15:22] the Canadian Pacific acquired Kansas City Southern so they actually provided adjusted numbers to back out the acquisition because without those are just adjusted numbers I mean it would look like their revenues were up like 30% which was yes they were but clearly you know if they had not

[00:15:42] adjusted Kansas City Southern the numbers would not be up 30% so in cases like that I think it makes a whole lot of sense because it gives you a much better perspective on how the business is actually doing then being completely skewed by an acquisition kind of a one time

[00:15:57] acquisition right so that's the importance of understanding what the adjustments are but like Braden said some companies I mean they have a track record of not being profitable but then they are on this fantastic adjusted metric and they constantly adjusted and sometimes I find analysts just kind of feed into that too right.

[00:16:18] Yeah I mean hey I might want to own Bellstock if I just adjust for the interest costs. Yeah exactly. I might just back out you know some core key line items and you know I got quite the business here. You know how to get me started.

[00:16:35] Yeah yeah. Vane's about to pop out of your forehead. Thank you for the question Amanda. Chris Blumstranz tweet and I'm going to segue that into are we in an AI bubble so Chris Blumstranz is a fairly well known investor definitely well known on Twitter he's been you know in the Buffett Berkshire Hathaway shareholder group in a long time so he's the chief investment officer of

[00:17:06] Semper Augustus and I wanted to read some pieces of his tweet because some of the facts in here some of the numbers are quite staggering and it kind of resembles where we are in the market right now so this tweet was from June 19th of course some of the details may be off by a percent or two but don't

[00:17:25] sweat the small stuff the guts of this remain very relevant quote stunning Nvidia passes Microsoft and Apple as largest market cap combined the three are valued at 9.9 trillion 21 and a half percent of the entire market capitalization of the S&P 500 the three of those companies are today larger than the

[00:17:49] capitalization of the entire S&P in September 2011 not a market low including Google Amazon Meta and Tesla the Magnificent seven have a 16 trillion combined market cap 34% of the S&P 500 and larger than the entire S&P as of February 2016 just over eight years ago and most definitely

[00:18:17] nowhere near a market bottom those are crazy I had to look this up the Magnificent seven 16 trillion just barely passes in 2016 if you take it out I forgot what date is in the month it's like 15.9 trillion in market cap even if we are charity picking certain stats who cares that is a staggering

[00:18:44] stat because February of 2016 was not that long ago in the grand scheme of things and for seven of these companies to be larger than the entire market cap it is quite staggering and tells you a little bit of a story about how there's such a disparity between the top big names the top technology

[00:19:04] names a lot of them have an AI spin on them to which is certainly helping their valuations right now against kind of the the rest of the economy you know if we're going to call the S&P 500 a lot of the

[00:19:20] industry a lot of the companies that kind of make the world work a lot of them are not doing that good yet the market is ripping because of these seven companies it's been a really fascinating market to invest in yeah I mean it's hard to say that we're not in a bubble right now at least for a high I like you just sing back

[00:19:41] right I think we're just in the early innings AI to I think we have to and maybe disagree with that but my perception AI has been around for a while it's just the LLM the large language model and more specifically what five six years ago that really deep machine learning really started to pick up and

[00:20:00] lead into open AI launching chat GPT and all the progress we've done but it's not like AI has like just been around for two years since Shad GPT came out like it's been around before that and it feels like we're still in the early innings like a bit like the 1990s for the internet

[00:20:19] it just feels a lot like that like I remember I'm old enough to like you know I was a teenager pretty much and most like you know I most of the 90s like not most but for a decent part of the 90s like I was selling stuff on eBay when I was 13 14 years old from flea markets putting on there with a big

[00:20:39] rectangular scanner scanning the stuff putting on there and things have evolved so much in the companies that we were massive back then are completely different now not all of them but a lot of them are different at least the internet companies so

[00:20:54] it just I don't know it's something just doesn't feel quite right at hard. It's hard for me to put in numbers I mean I've heard a lot of smart people talk and we have before where

[00:21:06] there's so much money being invested in AI and companies are not seeing that much return on their investment at least right now and at some point when do companies say okay well let's just kind of scale these investment back we're still going to invest in

[00:21:21] invest in AI but a whole lot less these Nvidia chips maybe we're looking to buy some to build our own kind of AI in house platform but you know what maybe we wait a year or two and look at what AMD is offering because even if it's not quite as performing

[00:21:37] it'll be more than good enough for what we need and in terms of value and shareholder value it'll be much much better than trying to get our hands on these probably overpriced chips from Nvidia.

[00:21:51] Yeah and look the build out CapEx that's being spent right now cannot be spent in perpetuity it just cannot be justified right and so something's got to give and I think that companies are going to have to start getting a little bit more reward for their efforts in this category.

[00:22:11] I was on a panel at a conference last week and I was asked is it too late to invest in AI and is there a bubble and I said it's certainly not too late to invest in AI I think that that's a crazy notion but what I did say is I'll answer that question with a story about Microsoft.

[00:22:31] It wasn't too late to invest in Microsoft in 1999 after the stock went parabolic for several years there in the late 90s it was not too late to invest in Microsoft of course right now the stocks were three and a half trillion dollars it's been an absolute monster ever since but.

[00:22:53] But if you bought the stock on December 17 of 1999 you did not see a positive return on the stock until September 6, 2016 or September 2, 2016. So you waited there for.

[00:23:16] Largely 20 years with the stock doing with a flat return if you held it during that time and so that's what happens when things are extremely overvalued split adjusted the stock was around 57 bucks and it took you know till mid 2017 to get back to there.

[00:23:37] Now you know if you bought it at various other times and held on to it you made you know exuberant amounts of money you know holding that stock but that is the story around price you pay really matters so I answered the question with it's not too late but it might be too late to buy it at a good price or at least you're going to have to wait.

[00:24:01] I'll round out this this bloomshrank quote quote this is the goofiest and likely most dangerous concentration of overvaluation I've seen in 34 years of investing. The extremes extend beyond the three and seven companies like fellow Nasdaq 100 member Costco with 386 billion a market cap on 254 billion in sales.

[00:24:25] Costco has a 2.8% net margin up 1.7% when I first bought the stock with 7.1 billion in earnings the P.E. multiple is an incredible 54 times.

[00:24:37] How do you make money with an additional your earnings yield of 1.8% Mr. market is very good at rewarding business success but to a fault in the short term stocks and traded extremes relative to fundamentals both on the low and high.

[00:24:51] At 23X 2024 expected earnings the market cap weighted S&P 500 is froth with excess and in my judgment uninvestable.

[00:25:02] Under the hood the stocks are not under are not overvalued the bifurcation between the dear and cheap reminds me of March 2000 from that point the index returns 7% per year spending much of the subsequent decade in the red. That's what I just talked about with Microsoft.

[00:25:21] You can have extremes of over and under valuation in the short intermediate terms but in the long run Mr. market gets it right. That was really hard to read at my 11 point font here on the Google Doc.

[00:25:36] I apologize tripping up on the quotes so many times I was squinting here. So I think the kind of rhetoric or thought around the markets on investable is usually a loser's idea.

[00:25:52] So I'm going to just generally disagree with him on there but the displacement between mid caps small caps and basically anything other than mega caps is the largest mathematical spread in valuation and flow.

[00:26:09] That we've ever seen but we've been saying that for years and years and years it just keeps concentrating and keeps concentrating in a few select names over time.

[00:26:21] And yes you can try to blame it on ETFs but I think it's a lot more than that these companies are earning outstanding amounts of profit and gaining market share and flexing their distribution more and more each day.

[00:26:35] Look at Microsoft each year they just pick a new product to you know throw into their office suite and trounce a competitor. I mean it's a playbook that keeps working.

[00:26:49] Yeah and what I'm pulling up here for our joint TCI subscribers is the difference between the SPY so one probably the most well known S&P 500 index fund market cap weighted

[00:27:02] and comparing it to RSP which is the equal weighted and you can clearly see that it's not the first time where there's a difference between the returns of both right.

[00:27:13] But you can clearly see that by for Cation I would say probably started in 2023 before that it was kind of you know there was some by for Cation I would say between 2020 and 2022 kind of came back to the means a little more but then

[00:27:32] in 2023 it's been picking real up and then since the start of the year I mean it's just like they don't even look like they have the same companies and they do these are the exactly same companies just awaiting that's different.

[00:27:45] It's pretty it's pretty wild to see visually there what you see on the screen right you can see how they tracked each other so significantly till about 2018 and then the spread just starts widening and widening and widening.

[00:27:59] Yeah and that's an example to where you can visually just see okay this isn't just I think this this is actual facts right this is not just vibes and going oh the rich getting richer there is an actual serious spread that starts to widen in around 2018.

[00:28:17] So yeah exactly and then this year obviously if you look at this year it's pretty I mean it's been even more like pronounced since May right so that would probably be around.

[00:28:29] Was it the last time that in Virginia reported and that's around that time right yeah that sounds about right their fiscal super weird date they're reporting like Q1 2025 as there's like the recent one.

[00:28:42] So for those wondering the equal weighted is up a whopping 4% so if you just had US Treasury bills you'd be pretty close behind maybe at like 2.5% returns that year to date year to date so 4.08% equal weighted so you could probably yeah you'd sit in Treasury bills in the US and you'd be just behind a little bit here compared to the regular S&P 500 index fund that's up 16%.

[00:29:10] So it's just it's just massive like I know it may not sound like that much as we're talking but considering that they have the same holdings just different waiting. It's pretty remarkable. Are you liking how you can do all the ETFs and finch right now. Yes, yes.

[00:29:29] Super nice right you know you know I'm I like to look at ETFs and you heard my concerns. So I didn't notice that for sure. Yeah we just launched that a couple days ago so go check that out.

[00:29:42] Well this is a great transition actually into your segment here with just about ETF exposure. Yeah. So go ahead and take us away. Yeah so if you invest so the question comes actually from Gooby 6 on Twitter.

[00:30:00] So if you invest in an ETF with significant US exposure for example VFV which is the Vanguard S&P 500 ETF listed in Canada.

[00:30:10] This is the non-hedged ETF or VQT this is I think all country index just so people are aware of this it's not an actual question but our purchasing it in CAD and Canadian dollars.

[00:30:23] So is this a way to hedge against the Canadian market or do you need to be investing with US dollars specifically purchasing US ETFs for example VO which is the US listed Vanguard S&P 500 ETF in order to hedge appropriately.

[00:30:39] So you know I think just to summarize the question are you hedging if you buy ETFs that are listed in Canadian dollars in Canada but have US exposure or do you need to buy ETFs that are denominated in US dollars on US stock exchange.

[00:30:56] So the answer to the question I would say is yes and no just because he provided VFV and VQT as part of the question so because of that I would say yes and no and I'll qualify why.

[00:31:09] VFV is not Canadian hedge like I mentioned and tracks the S&P 500 so yes this will help you hedge against the Canadian dollar because what's going to happen is VFV is that the fund is going to outperform if the Canadian dollar is weak compared to the US dollars.

[00:31:28] That's because all the underlying securities are traded in US dollars in the US whereas the fund is listed in Canada and Canadian dollars.

[00:31:38] So for example say the S&P 500 is flat but during the same period of time the US dollar increased in value by 1% compared to the Canadian dollars so you'll actually be looking at gains of around 1% with VFV even though the actual underlying index the S&P 500 is flat.

[00:31:57] That's because the Canadian dollar actually got weaker which pushed up the price of the Canadian listed one.

[00:32:03] The opposite is also true so if the S&P 500 is flat but the Canadian dollar increases in value by 1% versus the US dollar then you'd be looking at a 1% or around 1% loss. So you are definitely hedging against the Canadian dollar by doing that.

[00:32:20] Now I'm strictly talking about what currency these are traded in obviously there's some more complex factors to come in play because lots of businesses in the S&P 500 do business in other countries so currency fluctuations will also have an impact on the results they report.

[00:32:37] That's why a lot of international companies when they provide their results they'll often provide FX adjusted so they make adjustment to show how their sales were like actually rose if you remove out the impacts of foreign exchange.

[00:32:53] What I just mentioned still applies to VQT but to a lesser extent so that's why I was saying yes and no. That's because VQT has about 28% in Canadian equities so it's varied as a big allocation to Canadian equities especially if they factor in that the investable universe.

[00:33:12] Canada represents about 3-4% so low single digits in terms of the global stock market and in my view that's quite high but again I interviewed Mark McGrath a few months ago who made some compelling arguments that an index funds like VQT might have.

[00:33:30] It might be worth having despite the higher Canadian concentration but I'm just saying this because you will be hedging definitely less than you would with just a VFV because that's straight up the S&P 500 where there are some US equities

[00:33:45] and also equities outside of Canada so the hedging is definitely a bit different in that situation. I personally own some index funds that are traded in Canadian dollars that track predominantly US equities so I think it's a fine approach.

[00:34:00] I also have some that are USD listed on US markets like I taught.

[00:34:05] To date it's more of a personal thing. I like being able to have funds that I can just sell and have US dollars straight up but again I think the impact is probably minimal you'll be able to hedge either way.

[00:34:20] The first thing I do not own is the very popular Canadian hedge ETFs. I know they're very popular in Canada. I have personally zero interest in them for a few reasons because first the fees associated with hedging so you are paying some fees for that hedging.

[00:34:36] It's usually not huge but it is still some additional fees that you'll be embedded in the ETF. They tend to underperform their non-hedged counterparts and it's still I mean I guess the last silver lining here with these Canadian hedging ETFs is that it's still better than not having any US exposure right.

[00:34:56] I think it's definitely I would not do it but I can see why some people would prefer having that lower kind of currency volatility but I would personally prefer just having the one that's not had straight up.

[00:35:10] I don't know if I have any really really bold opinions on this. I think for me if I have US dollars and I'm planning on investing in US dollars and I'm planning on doing it efficiently with something like Norbert's Gambit which I highly recommend looking up.

[00:35:29] We've talked about it on the podcast several times. You can also look up some guides we've done on it that is called Norbert Gambit is to buy those funds directly in US dollars like the VOO equivalent or any very low cost one from some of the major providers is my preferred way to do this.

[00:35:50] In terms of CAD hedging ETFs I align with you. I don't see the rationale. I think the fees are not worth it. There's better ways to do it from my view.

[00:36:03] And last point here is why can't we get a low cost total world ETF that doesn't have 25% Canada. It makes no sense why we would buy a global ETF allocation with exposure to global equities and I get like 30% of my portfolio in Canadian stocks.

[00:36:33] The math doesn't make any sense. If the math doesn't make sense then it's probably a demand thing. Yeah.

[00:36:43] That's what I feel like some asset managers have looked at it and they're like there's no demand for that so that would be my sense. I would love if there'd be an option low cost and less than 10% let's say Canadian exposure.

[00:36:59] I think anything less than 10% is fine even if Canada is more in the low single digits but I think that would be the reason and the graphic I was showing for Joint TCI was simply the difference between VFV and VSP so the difference between the hedge and non-hedge over the last 10 years.

[00:37:18] It's pretty significant so you're looking at about 195% returns for the hedge version and then 315% for the non-hedge version. So it just goes to show that it's performed a little bit better than the hedge version.

[00:37:33] I think there's a few reasons for that obviously the US I think has been appreciating against the Canadian dollar but you have to factor in also all these dividend that you get in US dollars right that then are kind of converted in the total returns that has a pretty decent impact too.

[00:37:49] But I'm kind of the mind you know whether you look at the non-hedge or you buy it it's straight in USD. I think both options are absolutely fine.

[00:38:00] I think where you end up not necessarily getting good bang for your buck and I mean I'm more of a firm believer in the US dollar versus Canadian dollars the hedge version.

[00:38:10] Last on the slate today is talking about high yield investing bracket dividend drunk. We're really on the ETF train today with the show.

[00:38:21] Here we go so from high yield investing perspective this is a strategy that is very common very popular among the Canadian DIY crowd that is no secret.

[00:38:36] It is it definitely sparks confusion from our side from you and I but from young and hungry 20 something zoomers to 70 plus boomers Canadians love their dividends and sometimes to an extreme.

[00:38:52] It's really holding them back. There are scenarios where it makes sense and there are scenarios where it makes very little. I'm going to speak primarily to the long term investors who have long horizons they're investing to maximize their investment returns.

[00:39:06] I'm talking more to the 20 something zoomers in this case if you're in retirement age or strictly investing for income in this specific situation of living off your investing income then carry on.

[00:39:23] The purpose of the segment is not to say that the strategy holds no merit. It's just to look at the facts again so people are very very passionate about this topic.

[00:39:33] So it is not to say the strategy holds no merits and in fact those two cases I just mentioned among others is one where it certainly makes sense. I'm just here to look at the facts and the performance over time.

[00:39:46] Look you we've all been there when I started investing in my personal account and I learned about dividends. I was dividend drunk.

[00:39:54] I see this all the time I see it happen time and time again. It feels like a free money hack for those that are just learning about the idea they throw out prospects for a company moving forward because there is a big old 6% juicy dividend yield staring right at me.

[00:40:13] It's too appetizing right especially this idea is particularly alluring when interest rates were so low in years prior that getting 6% on your money is so attractive.

[00:40:25] High yield fixed income instruments were yielding next to nothing that an equity with potential upside and this huge income yield now that's quite the attractive proposition.

[00:40:38] Now let's just look at the historical performance of a few examples so a very popular Vanguard fund is the high dividend yield index ETF ticker VDY.

[00:40:51] This is about 15% Royal Bank 10% TD 5% Bank Nova Scotia 6% BMO 7.5% Enbridge then you have basically Bell kind of natural resources CIBC manual life these kinds of names are all huge positions. Financials and energy baby.

[00:41:16] Financials and energy and to extreme concentration right you have the Canadian banks Enbridge Bell that makes up more than half of the portfolio. You get the insurance companies TransCanada CNQ you're at nearly 70% of the portfolio right there so that's kind of crazy.

[00:41:40] You do have a nice 10% of other. Yeah other makes up 10% that might be the most attractive part. The share price when you compare that to just the S&P 500 for instance during a five year period S&P 500 did 94% that high yield Canadian dividend ETF only to 28%.

[00:42:05] Now I'm going to play devil's advocate in a couple scenarios. So that's the share price what about the total return you idiots you guys are forgetting about all the dividends I'm going to get. Well let's not forget never forget about the dividend we never forget about the dividend.

[00:42:24] VDY if you include the dividends did 60% it's like we forgot that the S&P also pays a dividend you're at 108%.

[00:42:32] So you know you've almost doubled the performance on a total return you've almost you have more than three exit on just a share price but total return you're still lapping it. Okay that's apples to apples you're comparing the US and Canada. All right let's compare US to US.

[00:42:51] The high yield SPY dividend yield ETF did 33% during that timeframe and the regular S&P 500 did around 100%. Now let's talk about a longer time horizon Simone what about historically beyond just okay that was just the past five years.

[00:43:12] All right the results get even more extreme during that 10 year or sorry since 2016 since those two ETFs were both trading so you can compare them. You've had more than double performance on the regular S&P versus the high dividend yield.

[00:43:28] Okay so we've talked about the past those are the results what about the future look dividends are not free money they're simply moving cash from their balance sheet to your share price. That cash and by the way those have that has tax implications a lot of times too.

[00:43:46] The cash on the balance sheet of the company you invest in has a lot of value and it may have a lot of optionality to be reinvested.

[00:43:56] Dividends are awesome don't get me wrong but for very profitable companies it makes sense to pay them and it makes sense to take some of that cash and put it off their balance sheet to yours as a shareholder.

[00:44:08] But at the core companies that are paying very very high dividend yields can mean one thing can mean two things.

[00:44:15] One it's a yield trap runaway or two the company is looking to pay all the earnings out as dividends because it doesn't offer a lot of investment opportunities or three it's doing it as just part of their broader capital allocation strategy which is my favorite.

[00:44:31] Number two is fine but if you're trying to maximize returns historically and I would bet in the future the market is going to continue to reward companies that can reinvest profits back into the business at high ROICs.

[00:44:45] The whole idea of investing in one of these companies is you're betting on they can take that money and reinvest it at a higher rate than you can.

[00:44:57] So next time you see your friend diving into some yield traps send them this it's not to tell them hey your strategy sucks it's to educate on the fundamental gravity of businesses more so than any sort of strategy.

[00:45:11] Dividends are not creating value out of thin air there is simply a method of capital allocation sometimes that method can be fantastic for shareholders sometimes it can destroy value. So the conversation is nuanced and has more to do with the company and less to do with.

[00:45:32] I like them because they're paying a 7% dividend into my bank into my investment account that strategy throws away all logic throws away all prospects about the future of that company it throws all you know idea around their financials who's running the business if that's a good move for the company and just says smell.

[00:45:54] They're paying me 7% you know I want that come over here that is a really good way to lose money and so to round this out it's not to say hey dividend suck or that that strategy sucks because that's absolutely not true.

[00:46:08] It's to say that they are not free money and high yield investors get caught in what are called yield traps time and time again. And it's one of the most common ways that you and I see self direct investors lose money isn't isn't high yield traps.

[00:46:28] Yeah I would yeah that's it rarely ends very well especially when there is high yield if you haven't done a lot of due diligence because there are I can think about examples where if you've done your research.

[00:46:43] You could have done really well by picking you know a few high yield companies but you had to do a lot of research and know that this was more of a temporary thing and the company the fundamentals were good going forward.

[00:46:58] But those are probably the exception to the rule and the rule I would say for the most part is you start getting these I yield there is and my experience looking at these companies is leadership or management tends to feel like they're trapped in.

[00:47:12] Paying that dividend until it's absolutely you know the writings on the wall and they have absolutely no choice but to cut the dividend.

[00:47:21] That's what I've noticed is they and that tends to be way more present in these high yielders where you know we've always paid a dividend so we can't cut it.

[00:47:32] That's why the investors are in this stock is because they want to get paid that dividend even though you know it's not even covered by free cash flow. Even though the business is struggling and could use some fresh capital invested in the business to make earnings grow.

[00:47:47] They decide to not do that and they decide to keep paying the dividend even though medium to long term it's going to destroy shareholder value just because they're afraid of either cutting the dividend or they have too much incentive

[00:48:01] too many shares themselves and they don't want to lose the income that gets with that. That's another issue that you'll tend to see from management.

[00:48:09] So these are all things you should be keeping an eye on and we've harb quite a bit about BCE but I think BCE is in this exact position right now.

[00:48:19] They are in the position in my view that they should have cut the dividend probably a couple years ago. And I think the more that things go on the more the likelihood of them cutting the dividend increases when will it happen.

[00:48:35] It'll happen when they have really no other choice but to do it. It always happens when it's too late because look at the incentives right.

[00:48:46] Corporates running the company this this company that's been around for a long long time that you know dates far back to when any of them who are working there were even alive at this point.

[00:48:57] And you have this business that spits off a lot of spits off a lot of cash in well well maybe not right. It spits off a lot of operating income.

[00:49:10] OK well we'll leave the accounting nuances for another discussion and there is very little incentive for anyone to kind of rock the boat from a public markets perspective in terms of cutting the dividend because because the investor base there is there for one reason it's to collect that check.

[00:49:31] And as soon as that goes away or there's any you know disruption to that thesis the stock sells off. And so there's no short term incentive for it to be managed correctly.

[00:49:44] Now the long term incentive if it was you know managed properly and by people who you know have a lot of skin in the game and are thinking about you know running the business for the next 30 years or acting more like an owner operator they will do what is needed for the business to succeed long term.

[00:50:03] I'll give you an example. OK. You and I run this business. We have advertisers who pay us money. We have other kind of subscription products that we've introduced to listeners.

[00:50:16] But for the most part right this business is an advertising business and we have you know advertisers come on they'll pay for a few months or a couple or a couple years and that's that's the revenue coming into the business.

[00:50:31] You and I pay ourselves dividends for the for the business. If there is a massive dry up in the DIY Canada market or all these Canadian banks that sponsor the show or the Rassetman's sponsored the show they're not doing podcasting advertising anymore

[00:50:51] and things are looking a little rough. And you and I say let's keep paying out that dividend the same as we always have. Heck let's even increase it. That would be fiscally insane.

[00:51:05] Yeah it would be stupid. It would be straight up insane. Just because these are large public companies does not mean they don't have to defy by the basic common sense laws and logic of business.

[00:51:20] They do. And so you know it's really easy to think about right. It's like what would be the correct thing to do is to get get ahead of it. And so you know slashed to a very conservative amount.

[00:51:34] And if there's a lot of cash in on the balance sheet for investors pay out a big old special dividend. Yeah. I mean that's why I like term align because they have that kind of strategy.

[00:51:46] They pay a small pretty small dividend when you compare it to other oil and gas producers and then they have a lot of cash on the balance sheet or prices of natural gas go up. You know cash will goes way up.

[00:51:58] They'll pay a special dividend Costco does the same thing. They pay a very small dividend. They have a tendency to pay a special dividend every couple years three four years.

[00:52:08] I can't remember exactly but that makes a whole lot sense because then you provide you know you give that income. You it's a very low payout ratio.

[00:52:20] So you have ample flexibility. I mean border. You basically need to have almost the apocalypse for that little dividend to not be payable at that point.

[00:52:29] And then if things keep going well then you pay that special dividend on a basis that you can actually afford it. You don't like hamstring yourself or you know put yourself in this vicious cycle where you have no no flexibility whatsoever.

[00:52:46] And you know I it's hard to not pound on Bell itself because it's so obvious in my view the problem that they're facing and they're just kind of repeating the same thing over and over trying to like do cuts on the margins and they're laying off people.

[00:53:03] And obviously you know it's too bad for the people I got laid off and I'm not saying that it wasn't necessarily you know it was a good or bad thing per se like obviously there was probably some efficiencies that needed to be done but the real thing that could save them a whole lot of money is what's in plain sight.

[00:53:21] And that's the one thing they're afraid of doing. Yeah I like to rely on it's not just up into the right they go based on market dynamics and then you saw you know they're paying around a 26 25 cent dividend every quarter roughly.

[00:53:39] But then there's a couple times where they just launched a dollar a share a dollar and a half a share two bucks a share off their balance sheet is special dividends and they're pretty frequent.

[00:53:50] They're actually really free. They're almost as common as the regular quarterly dividend but the difference is one is a policy and one is you know a decision from management that may make sense at the time.

[00:54:04] But as soon as it's a policy and standard and we're going to do this every quarter with no flexibility now you've just shot yourself in the foot especially if you're a cyclical name like this one to really get it go I like this.

[00:54:19] Yeah we should make a bet in the next. When do you think so if I give you let's just say a year and a half over under that bell will cut its dividend B.C.

[00:54:32] Oh God I never look at the stock. I never feel they're nine percent right now. Yeah and they have a lot of debt to refines debt is starting to refine.

[00:54:43] I just want to know what the interest is. What's the interest expense every quarter. It's high every quarter the interest expense is growing.

[00:54:53] It's high. It's 416 million. So yeah they're on pace to spend about two billion in the next four quarters of interest expenses on a six billion a quarter total revenues. Geez. There's the expense. Yeah it's not in the right direction. It's doubled since 2020. It's doubled since 2022.

[00:55:21] Yeah pretty much. Yeah pretty close to it. Yeah look I mean I'd have to do a lot more digging a year and a half just for fun for me.

[00:55:30] Yeah I'll take you know I would say you're going to take the under on a year and a half and they cut the diff. Yeah yeah I think that's a really good line.

[00:55:38] I'm fine. That feels like the Vegas line. Yeah you know it's a good line because that would probably be around my guess but I'm going to go I'm going to take the over it's going to be somewhere between one and a half and two years.

[00:55:52] Yeah or they who knows maybe they were both wrong they never cut it. Who knows. All I know is that shareholders have had a bad time. Total return over the last five years is negative.

[00:56:06] Over the last 10 years you've done you're doing better before that but it's been really rough since 2022. Yeah ever since interest rates started going up but obviously you know we're saying that I know there's a lot of people that own B.C.

[00:56:24] And that I'm sure listening to this podcast and maybe they don't cut the dividend maybe they will it just a lot of warning signs are there and if you dig into the numbers you there's has to be a lot of things that go right for B.C. to being able to cover that dividend on a sustainable basis including much lower interest rates as they are starting to refinance in 2025 because that's when the long term debt is starting to come up.

[00:56:52] And you know none of this is financial advice of course but just to let's throw Bell out of the picture here just throw this is ACME Corp. Okay ACME Corp in this example here the stocks down 27% since 2022.

[00:57:11] Yes this is these are Bell numbers still ACME Corp is down 27% since 2022 to 40 billion in market cap 80 billion in enterprise value. The holy debt load you know it's just very very rate sensitive that's why the stocks getting you know handled the way that it is.

[00:57:31] It has maybe some structural decline issues the government is doing everything they can to destroy their pricing power. There is some growth in the you know domestically of customers they can serve okay that that's good.

[00:57:48] It's easy to just say it's easy to say you have a blue chip that's down 27% that's got to be a good time to buy right that that kind of surface level thinking is very easy to fall into this is a blue chip.

[00:58:05] I'm a customer myself. It's not going anywhere it's down 27% you know bet bet the farm but the reality is that there's a lot of structural issues with the business and maybe it is undervalued I don't know it's just like the facts have changed the

[00:58:29] financials have changed its prospects are changed it's going to have to make some really hard decisions about capital allocation in the next few months.

[00:58:39] Is much more of a nuanced conversation than here's this blue chip down 27% let's buy the stock it's going to pay me 10% a year in income.

[00:58:49] The second one sounds like a really good investment thesis but it sounded like that 27% ago as well so you know it's just a reminder that those kind of first level thinking ideas is a pretty pretty easy way to lose money.

[00:59:06] You know you and I are trying to do this for a really long time and that involves not losing money as much as we can.

[00:59:14] That's yeah and I guess I'll just finish on the numbers don't lie right that's it the numbers don't lie unless the company does lie.

[00:59:24] But you know with the assumption that they're properly audited the numbers don't lie so correct just just remember that when the numbers don't add up you know you draw your own conclusions but the numbers are what they are.

[00:59:40] That's right. Thanks for listening to the podcast folks we really appreciate you tuning in here we are here Mondays and Thursdays Finchhead just launched ETFs so you can go check that out it's really nice.

[00:59:51] All the data we're doing cross comparisons you know we didn't just do that because we just launched it just happens to be really useful and we're like oh let's go let's go dig into some some data here.

[01:00:01] You can get 15% off using code TCI on any subscription. See in a few days take care bye bye. The Canadian investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast.

[01:00:19] Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.