Is BCE’s Dividend at Risk of Being Cut?

[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

[00:00:10] Hosted by Braden Dennis and Simon Belanger

[00:00:14] The Canadian Investor podcast welcome into another show. My name is Braden Dennis as always joined by

[00:00:23] the majestic

[00:00:25] Simon Belanger today we're gonna talk about Canada's concerning job growth in air quotes

[00:00:33] You're gonna talk about Bell

[00:00:35] ECE and Telcos have been under fire and then we got two more amazing segments for you

[00:00:43] Simon before we kick it off. I have a question for you

[00:00:46] That I was asked that recently and I thought it was really great question

[00:00:51] Because everyone has a hot take on this okay

[00:00:55] Would you rather?

[00:00:57] Okay, when you're

[00:01:00] What do you prefer more when you're really really cold?

[00:01:04] Warming up like going into somewhere warm or when you're really really hot going into something cold

[00:01:11] What is your preferred?

[00:01:14] Cold to warm. Yeah, I hate being cold. Yeah. Yeah, okay

[00:01:20] All right, I tolerate heat pretty well like I've been known to go mountain biking when it's like 40 degrees

[00:01:27] Outside like when it feels like 40 so I have a pretty good

[00:01:31] Tolerance for heat. Yeah, I think you're in the minority of people have asked this question

[00:01:35] I think most people the ideal of like jumping into a cold pool when you're hot

[00:01:44] But for sleeping I would say I hate being hot so that is the one exception. Yeah

[00:01:50] Sleeping hot is a deal breaker. I can't I just I don't sleep well. Yeah, exactly

[00:01:55] It just it just won't happen. All right first topic of the day Canada's concerning job

[00:02:00] growth and air quotes on growth I

[00:02:04] Do worry I've been I have many data points and anecdotes to point to but I do believe and do worry

[00:02:11] That Canada has been a post COVID

[00:02:15] Loser on the world stage, but this show is the rules of Thanksgiving

[00:02:19] No politics no religion just data points and today's data points is the concerning gap

[00:02:26] between public private and

[00:02:29] self-employed job growth in Canada

[00:02:32] particularly post 2020

[00:02:35] you had

[00:02:37] Public sector private sector and self-employed job growth in Canada

[00:02:42] tricking

[00:02:43] up on the same trajectory, you know, once some had

[00:02:49] Had seen higher growth in certain years, but since 2014 all three of them grew

[00:02:55] to around five to ten percent above the base of

[00:03:00] 2014 in

[00:03:02] 2020 you had of course a rapid drop in

[00:03:07] private sector jobs

[00:03:09] And public sector jobs and self-employed trickle down as well. I think that makes sense a lot of self-employed people were very

[00:03:16] Disrupted by this what happened in 2020 and the way that Canada treated

[00:03:21] Coven I'm not

[00:03:23] Saying one thing is better than the other. It's just you know, you know how we did things around here and it's just facts

[00:03:31] Since then there has been an alarming gap and I'm sharing the graph on

[00:03:37] It's okay. I'm already sharing it joint ECI you sharing the graph there

[00:03:42] Public sector job growth has

[00:03:46] Exploded so these are government employees has risen risen to nearly

[00:03:51] 30% growth

[00:03:53] private sector to total of 15% and

[00:03:57] Self-employed Canadians is now down to

[00:04:00] Below 2014 level so you had all three of these

[00:04:05] Lines in terms of percentage change since 2014 this source of the data is the Globe and Mail

[00:04:12] Stats Canada and my buddy JVass on X so

[00:04:17] Trickling up very very steadily together

[00:04:19] huge widening post 2020 all of the job

[00:04:24] growth in air quotes in this country is

[00:04:28] largely government employees and giving the

[00:04:32] Disillusion that there's actual real real job growth and I think that that's that's a problem

[00:04:38] It's you know

[00:04:40] These are types of facts and figures that you'll hear like that. There's job growth, but it's it's not real

[00:04:46] In my view and it's and it's wasteful and it's it's paid for by the taxpayers so

[00:04:51] This is the widening gap team public private and self-employment right now in this country

[00:04:55] Yeah, self-employment is definitely the one that I was surprised

[00:04:59] I thought it would it was actually a bit higher

[00:05:01] But private like you're saying private actually increase

[00:05:05] Decent amount, but it's kind of flattening out right now where public sector is still increasing

[00:05:10] And I mean I think it's also good to just remind people that public sector is more than the federal government includes provincial

[00:05:17] Includes municipal as well and they probably include crown corporations in that

[00:05:22] So I've worked in the municipal public sector and I work for crown corporation like part-time

[00:05:29] I like to keep things separate with the podcast, but you know from experience

[00:05:33] I mean

[00:05:35] Municipalities what I seen and that's probably similar to the federal government like kind of the what people think about like

[00:05:43] You know, you know the federal government in terms of you know the public sector

[00:05:48] There's some and we were texting on this from what I've seen you'll have like and these are just general things

[00:05:54] I've noticed but you have like 20 25% that are really really good worker that are pulling their weight and then some

[00:06:01] Even like working extra hours. I mean I see it with my wife

[00:06:04] I mean she like literally does not get paid the amount of hours

[00:06:08] She should be paid. She's in management, which is fine, but she works nights and weekends

[00:06:13] I think oftentimes too much, but that's beside the point

[00:06:18] And then you have people that you know do an okay work

[00:06:21] That's probably 30 to 40 percent maybe 50 percent that I don't know if they would make in the private sector

[00:06:27] But that's beside the point and then you probably have a quarter that are you know

[00:06:33] They would not last like a month in the private sector because they're not doing anything or barely anything

[00:06:38] and I think that's where

[00:06:40] That's the part that I really hate because I've seen it and the reality is and without I don't want to get political here

[00:06:47] But just the unions are extremely strong and I've seen people from experience that did stuff that they should have been fired and

[00:06:56] The union protected them and they went on a leave a paid leave of absence

[00:07:01] for a few weeks while an investigation was being made and then came back to their job and I believe it's like a year I

[00:07:10] Once the year or so like there's it depends on the Union

[00:07:14] Year or two afterwards if you're good then it's wiped off from your like your employee file

[00:07:19] So that's the kind of stuff I've seen both you and I have experience in the public sector

[00:07:24] The private sector and self-employment

[00:07:28] You and I have experience in all three. I share your sentiment around that 25 percent

[00:07:34] 50

[00:07:35] 25 percent of you know skew of effort being done in the public sector

[00:07:41] I wholeheartedly agree. I think that's directionally correct if I look back at my days in the public sector

[00:07:48] it's

[00:07:49] everyone knows it's bureaucratic and people even who want to

[00:07:53] Work hard have a lot of ambitions just get really frustrated and realize that a lot of people you beg to lethargic

[00:08:00] To bureaucratic for them to you know move the needle and and they move on so that you end up losing a lot of the

[00:08:06] Good people to you unfortunately. Yeah, definitely. I mean you did that. I kind of did that

[00:08:10] I left you know my former employer the municipality. I mean it was a city of auto. I can say it. It's fine

[00:08:15] I don't mind saying it there's tons of good people good workers there

[00:08:19] but I've seen that as well like people just end up getting frustrated and

[00:08:24] They see the person getting paid the same amount of them and doing like half of the amount of work or if not less and

[00:08:31] They just end up saying okay, I can't change it. I'll just go work somewhere else where I feel like you know

[00:08:38] There's more value. I'm providing more value to people in general, you know, my co-workers are also providing value

[00:08:44] I don't feel like I'm not treated fairly and that's what ends up happening. Unfortunately. I

[00:08:51] Did not fit in

[00:08:54] You know my personality

[00:08:56] I got along with everyone of course like that's that that that's who I am too

[00:09:01] But like I didn't fit in career wise to

[00:09:04] That might be the understatement of the year the largest growing departments are

[00:09:09] Canada Revenue Agency the CRA grew 34% in workforce since 2019

[00:09:14] The employment and social development Canada

[00:09:18] Ironically grew 56% since 2019 so to boost their own numbers. They have hired

[00:09:25] Brilliant brilliant move that is the reality is this Canada produces a lot of great entrepreneurs and tech talent

[00:09:32] But unfortunately we're exporting a lot of that talent the University of Toronto and Waterloo

[00:09:37] And there's lots of great universities and institutions here in Canada. I went to the University of Guelph

[00:09:43] But Toronto and Waterloo are two of the top ten feeder schools in the world for us big tech and

[00:09:51] US unicorn startups with Stanford leading that list

[00:09:55] It's hard to compete with big tech salaries in USD. It's just it just is what it is if I'm

[00:10:02] 22 years old and I by the way, I'm not making these numbers up. I have friends

[00:10:06] I am an engineer. I have friends that went off to go do this after they graduated software engineering

[00:10:11] 22 years old go make

[00:10:14] $300,000. Yes, that is correct

[00:10:17] $300,000 US at a pretty safe blue chip tech company get paid some stock and yes

[00:10:25] plus 52

[00:10:27] $70,000 signing bonuses in

[00:10:29] us

[00:10:30] Yes, please check, please right like that's that's gonna be pretty hard for us to compete with

[00:10:36] And now I know I don't think that that's ruining our tech talent

[00:10:39] There's still lots of great tech talent here

[00:10:41] But there are forces at play that are just not ideal

[00:10:45] Yeah, and I think we have to have a discussion as a society

[00:10:49] Right because we're looking and the federal budget comes out today when we're recording this so it'll be interesting to see

[00:10:55] You know the level of spending so it comes out

[00:10:58] I think at 4 p.m. Tonight, but I think for me the biggest issue when I'm going to vote is just

[00:11:05] You know, I'm thinking of my daughter and the sustainability of you know public finances and the toss

[00:11:11] It's going to have on those future generations

[00:11:14] And that's some point we're going to have to make some tough decision as a society

[00:11:19] I don't think we're there yet because I don't think there is really a willingness

[00:11:22] For people to you know make those tough decisions, but it is something for me. It's the biggest issue

[00:11:28] I think it's really important that we try and as the very least balance the budget

[00:11:33] I mean, I remember you were too young for this

[00:11:35] But in the late 1990s I was like following this kind of stuff pretty often and we were like I think it was under Jean-Claire

[00:11:41] It's a we were in a surplus position like that sounds like another world completely

[00:11:48] Surplus wow. Yeah, it that is a completely different world

[00:11:52] It certainly is and this is this is the track. This is the path that Canada is on right now

[00:11:58] I do think that it is concerning, you know, it is Thanksgiving dinner here

[00:12:02] So we're not gonna comment on on politics. Nope. No, but you know that that's just that's just what the show is

[00:12:08] That being said I do believe Canada is a post COVID loser and

[00:12:13] That's not a track that you want to go on

[00:12:17] There's been a clean a clear line in the sand when it comes to

[00:12:21] statistics in this country post 2020 that are not the right trend and

[00:12:26] We got a bucket fast while we still can

[00:12:31] All right moving on

[00:12:33] more more Canada here with one of our you know

[00:12:37] darlings of companies what's going on. Yeah, so

[00:12:41] BC so bell Canada, I think it's bell Canada Enterprise the full name here and I

[00:12:47] Don't think I mean obviously looking at the numbers

[00:12:50] It's just not looking good for BC and I got inspired by this

[00:12:53] I won't name the name

[00:12:54] But there's a lot of people in the dividend investing community that are just focusing on yield and

[00:13:02] I think that's not the best. Well, I mean, I think that's a terrible approach

[00:13:06] I'll be honest here, you know, you also have like Mike who we've had on the podcast before I didn't interview with him and

[00:13:13] Mike has you know, he likes dividend investing but Mike. I'll give it to him

[00:13:17] He does definitely deep dives into the companies. He really looks at you know dividend growers

[00:13:23] He doesn't really care all that much about the yield

[00:13:26] He looks at sustainability and that the business is growing and that's definitely cares about total return

[00:13:31] I mean he owns constellation soft exactly all you need to know. Yeah, that's it and

[00:13:35] And just to give props to Mike and I don't want to place everyone was investing in dividend like companies in the same bucket

[00:13:42] But I've seen this on Twitter where people you literally ask him questions

[00:13:46] And I think they should know if they own the business and they have no idea

[00:13:50] Like a lot of them don't even know what a payout ratio is they just look at the yield

[00:13:54] Which to me is the first thing you should know if you want to know that if the dividend is sustainable or not

[00:14:00] But going back to BC here, so it's not been a good

[00:14:06] Last few years even if you go back to five year periods on a total return basis in the last year

[00:14:13] BC is down 25% during that time including dividends by the way folks exactly

[00:14:18] So toll returns includes dividends during that same time XIC which tracked DTSX 60

[00:14:24] So the 60 largest Canadian companies on the TSX is up 8.77%

[00:14:30] I didn't look at the TSX 60, but I'm gonna assume BC is in there just go on a limb. Yes. Yeah for sure

[00:14:37] That one is up 8.77%

[00:14:39] So you see a discrepancy here of like 34% in difference in return now the SPY which tracked the S&P 500 is up

[00:14:49] 23% so almost a 50% difference in returns here and

[00:14:53] Then the gap is even worse when you start looking at a five-year period with BC being flat on a total return basis

[00:15:00] XIC up 53% and SPY up 88% so it's been really a

[00:15:07] Terrible investment obviously. I know there's some dividend investors that just like focus on the dividend income

[00:15:14] And I guess that's their prerogative

[00:15:16] But this is I mean to me that is a flawed way to look at things

[00:15:21] That's my opinion because my my primary focus is total returns and I know yours is the same

[00:15:28] So what's the issue with BC? Well first they haven't covered the dividend in last three years

[00:15:33] And when I say the dividend, I'm including here the common dividend, but also the preferred dividend

[00:15:39] That's clearly not sustainable

[00:15:41] They announced some cost-cutting measures such as job cuts which will results in savings of around

[00:15:48] 250 million a year with a bit of cost up fronts because of the severance which will be impacted this year

[00:15:54] They also are reducing capital expenditure investments by over a billion in the next two years

[00:16:01] Even despite that they issued really weak guidance for 2024 revenue grow between 0 and 4%

[00:16:08] Free cash will expected to draw between 3% and 11%

[00:16:13] Now this I find very alarming not just a drop but the fact that the range is so wide

[00:16:19] It just tells me that management is not sure exactly. That's why they're giving such a wide range

[00:16:25] They know it's not gonna be good. They just don't know how bad it's gonna be

[00:16:29] Do you have the kind of same thing here?

[00:16:32] I'm looking at the numbers here. I mean I

[00:16:35] Think it's possible. Yeah, I think they don't know I think they really don't I think they know

[00:16:39] It's gonna be bad. They just don't know how bad it's gonna be and

[00:16:43] They wanted to make sure that the markets were too surprised

[00:16:46] But on top of that the fourth item that is bad is they have to refinance over three billion in debt in the next year and

[00:16:54] Spoiler alert despite what management said on the conference call. It's going to increase their interest cause

[00:16:59] They were saying that oh, you know interest rates look like they're gonna be coming down and so on the way things are looking

[00:17:06] I think that was wishful thinking and the more we go forward. It's even more so wishful thinking

[00:17:13] That's definitely a big red flag for management is part of their strategy is hoping that interest rates will come down

[00:17:19] That to me, I don't know it's I I have a big I have a hard time

[00:17:24] You know with kind of statements from management and despite all of this they announced that they will be increasing

[00:17:31] They're dividend by 3.1% like what the hell is management thinking here?

[00:17:36] That is has to be the dumbest thing that they said because they're guiding for free cash flow to be down three to 11%

[00:17:45] Yet they're increasing the dividend by 3.1% and they're already not covering it

[00:17:51] I just don't understand why they would even do that at the very least keep the dividend stable to me

[00:17:57] Well, you know why I mean yeah, I know why but people own the stock because it's a dividend grower and dividend yielder

[00:18:04] And they're on some list of being a you know

[00:18:07] consecutive increase her and

[00:18:09] That's who they are as an investment vehicle

[00:18:12] Yes, that's what they are as an investment vehicle and they know that that's

[00:18:17] That's who they're attached to but I mean we should just have you know a long list of companies that we add to the list of

[00:18:24] you know

[00:18:26] Management teams who do the wrong thing to appeal to their current investors

[00:18:30] this is clearly that and

[00:18:33] Just look at how they're just look at how they're compensated and I'm sure you'll see the answer there

[00:18:38] Yeah, exactly like I have a feeling that management actually benefits from those dividends obviously so yeah

[00:18:44] I'm not surprised to some extent

[00:18:47] but it clearly shows that they're lacking long-term vision here because

[00:18:50] Honestly looking at this the right move for a long-term shareholder would be a cut probably a

[00:18:57] Significant cut to like what's the yield on PC 9%?

[00:19:02] Oh my god. Yeah, exactly. So it's it's not nothing so it's I

[00:19:07] Honestly think they should probably cut the dividend by half and then you use those proceeds to pay down debt

[00:19:14] Pretty rapidly. You don't have to pay it all off

[00:19:17] Obviously, it's a telco. You know their cash flows will be relatively stable

[00:19:21] But you give yourself more room to maneuver if there's some good opportunities that come up you have

[00:19:27] You know ammunition to pounce on those opportunity and on top of that

[00:19:33] You'll probably improve your credit rating and be able to refinance debt at a better rate because you're paying down your debt

[00:19:39] I'm seeing seven

[00:19:42] Oh

[00:19:43] No, it is nearly nine percent. Oh, yeah, yeah smoke

[00:19:47] 8.9% on the dividend tab on finch at yeah

[00:19:50] And I posted something on accent someone said like all the prices down because of interest rate rising and a few other things

[00:19:56] I mean you compare to peers and

[00:19:59] Durs some are yielding more clearly affected by higher rates, but you know, I'm looking here at tell us

[00:20:06] It's like below 7% AT&T in the US below 7% Rogers is around 4%

[00:20:12] Rogers is a tire fire in its own right, so I won't go there too much

[00:20:16] But it just shows like when you start looking at peers and one is really jumping out as an outlier

[00:20:22] That's usually the market trying to tell you something. So I don't think I'm the only one saying that

[00:20:28] You know, there is a chance and over the next few years that BC cuts the dividend

[00:20:32] I'm not saying it's gonna happen for sure, but it's definitely a possibility. I think it'd be

[00:20:38] completely, you know

[00:20:40] Biased if you can't acknowledge that it's at least a possibility that a dividend cut will happen in the next few years

[00:20:47] I just I mean

[00:20:49] for sure, I

[00:20:51] Know no against here for me. It just so questionable that

[00:20:56] The capital allocation is what it is. I mean this the stock is yielding currently nine

[00:21:02] Yeah, 8.9% here on finch at on the trailing

[00:21:07] 12 months of div

[00:21:09] It's like over 10 if they keep this, you know yield growth or the payout growth up

[00:21:16] Just all fine

[00:21:17] You know, you want to you want to own those companies that are if they're paying a dividend

[00:21:21] They're growing it but not like this

[00:21:24] Not not like this

[00:21:26] I think most people who have owned the name traditionally were have been receiving about a 5 to 6% yield

[00:21:33] That's what this name's been known for. So I don't think if they had a third of the cut and

[00:21:39] You know went to go servicing the business correctly that that would be the end of the world for these people

[00:21:44] But you know, that's not gonna happen with the management team. No, it's just not gonna happen

[00:21:50] They'll do it when they have no choice when they have to yes, correct

[00:21:53] When they have no choice which will put them even in a worse position because then they'll have their back against the wall

[00:22:00] They'll have to do it the business, you know now's the time to do it

[00:22:04] This is like Intel 2.0 right here like wait till you really don't have a choice and then you do it

[00:22:10] And usually when these kind of things happen hindsight is 20-20, but if you did it much before

[00:22:17] You know, you would be in a much better place. You just kind of bite the bullet you do it now

[00:22:22] you cut it you have a strong plan in place and

[00:22:26] Shareholders will be happy down the line because they will see better returns. I mean, would you be happy as a shareholder?

[00:22:31] You're like trailing that you're flat over the last five years. No exactly. Of course not. Yeah, that's it

[00:22:37] So I think shareholders will would be fine if they see, you know

[00:22:42] They see results from it and to me it's just a no-brainer

[00:22:45] I mean they would reduce their interest cost by so much just

[00:22:50] Yeah, but you know

[00:22:53] Canadians are dividend blind other they're blinded by the yield and

[00:22:58] You know you lose a bunch of money in the process

[00:23:01] Reminder folks if you are a customer of one of these telcos here in this country, which you probably are

[00:23:09] Give them a call. I was doing my weekend Costco run through on the air pods

[00:23:15] Called my telco provider and said I'm paying way too much for internet

[00:23:21] I ended up getting a better package for

[00:23:24] half of the price without any long-term and commitments half

[00:23:29] Exactly after price very nice. Yeah, and that was one phone call and it's not even like I had to go

[00:23:35] You know be that to the manager. Yeah, I didn't even have to be that guy

[00:23:39] I didn't even have to do that. It was just the whoever answered the phone

[00:23:43] Switched up my back edge in next month. I'm paying half as much so go ahead and do that

[00:23:48] I think that's been it's been tough pressure on the telcos as of late. Yeah, the pricing changes

[00:23:54] Yeah, there's definitely a bit more competition to right with video trombaing public not public mobile, but freedom mobile

[00:24:02] Yeah, there's mint. There's mint. There's public mobile that piggybacks on tell us network

[00:24:08] That's one I've been looking at because I have a two-year contract with one of the big telcos

[00:24:14] That's ending soon and they're sending me text literally the frequencies is getting

[00:24:19] You know more and more frequent as I'm getting closer. It's ending in June

[00:24:24] So I think they really want me to renew with them because they are you know, tell me

[00:24:28] You know upgrade to the iPhone 15 because I have the 13 right now

[00:24:32] I mean, why would I upgrade to the 15? I mean the 13 works

[00:24:35] Just fine, and I don't care if I get a slightly better camera

[00:24:39] But I'll do just that when it finishes I'll be like I'll switch to a competitor if you don't lower my price

[00:24:45] That's that's what I'll do that reminds me of do you remember onion? I think they're still around number onion news

[00:24:50] It's like the the fake. Oh, yeah, I remember that you're cold news

[00:24:55] They had a movie way back in the I don't even know maybe early mid 2000s

[00:25:00] And they have a segment in the movie where they're pretending to be

[00:25:05] This is satirical take on like Microsoft back in the day how does like the new version it's like XP 95

[00:25:12] 7 8 9 like every year there's a new one and

[00:25:16] They're like, you know, oh you're still using the baits 2000 throw it out. That's a piece of shit

[00:25:23] It's like with the iPhones now. I think Apple the reason you're seeing Apple's

[00:25:29] struggles and

[00:25:31] Lack of growth

[00:25:33] The phones they've built are just too damn good man

[00:25:37] They've they've kind of innovated themselves into an issue there

[00:25:40] I I used to think that they would like have your battery just eventually

[00:25:46] Like yeah useless

[00:25:47] It's just be absolutely useless

[00:25:49] And then I think like since 11 onwards the phones have just been so durable as long as you take care of it

[00:25:55] I mean, yeah, I think for me you're not dying to upgrade to 15

[00:25:59] No, no like for me honestly like I'll probably upgrade every four or five years when it really comes like starts to get slow

[00:26:06] When the experience is bad, but I love my 13 it works great

[00:26:10] Why would I like pay, you know 30 bucks a month for financing to get an iPhone 15?

[00:26:16] I don't need it. So that's how I see things. I don't care. I

[00:26:20] As long as it works. I don't need the new fancy thing throw your baits 4,000. It's a piece of shit

[00:26:27] All right my last segment of the day you have one more after this if we have the time

[00:26:34] Question for you. What do these questions have in common? Let's play a game

[00:26:39] Let's play a game see Bob Airbnb

[00:26:43] Uber

[00:26:44] Tik Tok

[00:26:45] Door dash

[00:26:47] Instacart

[00:26:48] Carvana

[00:26:49] Turro

[00:26:50] public storage the reet and Netflix all have in common Wow

[00:26:55] You thought you thought you had me there for a second. I switched it up. Yeah until you got public storage

[00:27:00] I mean, I don't know. They all did well in the pandemic. I don't know. Okay

[00:27:06] Maybe maybe that has something to do with it. Okay, let me take a public storage from the list

[00:27:10] Okay, yeah Airbnb Uber Tik Tok door dash and to cart Carvana Turro Netflix. What are they all having common?

[00:27:16] I mean, I think they're all web based. That would be my first thing. Yeah

[00:27:20] Yep, they're all they are

[00:27:22] Yeah, yeah, and they all have a lot of scale

[00:27:26] they all have

[00:27:29] What I would call the

[00:27:32] Zerp

[00:27:33] Moat oh, yeah the venture capital Zerp moat

[00:27:38] No, I explain what Zerp is. Yeah, all these companies have different effects on this but

[00:27:44] Zerp is a acronym for zero interest rate phenomenon

[00:27:49] It's what people call everything basically

[00:27:54] Growthy post oh wait, I guess is that a fair characteristic post great financial crisis

[00:28:00] Yeah, that's pretty much when it went into overdrive

[00:28:04] Yeah, so post oh eight maybe you can call it comm era had some of this but

[00:28:11] For me I characterize it as post great GFC in

[00:28:15] 2008

[00:28:16] to

[00:28:17] Rates being zero for a long cheap money

[00:28:22] cheap cheap money right and risk on and

[00:28:27] the result of this was

[00:28:30] Venture capital especially in areas of the US like the Bay Area

[00:28:37] Silicon Valley different parts of the world for sure, but those come to mind

[00:28:43] where venture capital investors were willing to

[00:28:47] throw money at business ideas that had in a perfect world infinite scale and

[00:28:55] The more money they're losing the better because it is grow grow grow grow grow grow

[00:29:01] Don't ask me don't tell me about profits because the problem with profits is they're gonna ask how much and it's never gonna be enough

[00:29:08] So more money will get there

[00:29:10] Money

[00:29:13] When eventually

[00:29:15] Eventually and it doesn't matter because if you've raised series C guess what we got series D

[00:29:22] And we got series E and it's always gonna be more and more

[00:29:28] Money as long as I as a me as a venture capitalist. I can mark up my investment

[00:29:33] from we bought at a 50 million now we're joining the round with our

[00:29:39] Our you know our ability to join the next round at a 500 million. Oh

[00:29:45] But now it's a 5 billion we're gonna you know more more money as long as we're able to mark up our investment

[00:29:51] now many of these companies

[00:29:54] didn't care to be profitable at all and

[00:29:57] What you saw in 2022 was

[00:30:01] Many of them had now gone public. They have been around a long long time

[00:30:05] They're out of their VC incubated stage and into the public markets

[00:30:09] like an Airbnb like an Uber and

[00:30:12] That doesn't work

[00:30:13] the same way as VC private markups

[00:30:16] And so they had to figure out how to start making money

[00:30:19] And these are all companies that I wanted to never touch because like you said when's them when's the profit?

[00:30:26] Eventually because they're gonna ask how much and it's never gonna be enough

[00:30:31] But now you have a scenario where these companies have actually reached massive scale

[00:30:37] Like Airbnb like Uber they've reached massive massive scale and recreating them is nearly impossible

[00:30:45] There's no appetite for that anymore. The interest rates are one. They're not zero anymore

[00:30:51] They're a lot. They're materially higher. They're more to a normal type of state and

[00:30:57] Investors now care about making money because

[00:31:00] there's there's competition for capital and

[00:31:04] You know, you can't just be risk-on with you know that Zerp era anymore so

[00:31:09] these companies I think are

[00:31:13] Actually incredibly hard to disrupt

[00:31:17] Incredibly hard to disrupt because there is no appetite from

[00:31:23] smart capital allocators in VC world that are ready to

[00:31:29] Fund and seed the next idea that requires this much capital that requires series F

[00:31:36] before going public and potentially hundreds and hundreds of millions of dollars of capital with no

[00:31:44] path to profits though the the appetite for that just simply doesn't exist anymore and

[00:31:51] Unless they magically go to zero again. Who knows if the if there will be an appetite like that again

[00:31:56] So I do think these companies have been absolute dumpster fires in terms of actual operating businesses until recently and

[00:32:04] Now I'm looking at them and going this mode is incredible

[00:32:08] This this this clown world that we lived in has created these very hard to disrupt businesses

[00:32:15] So what do you think about the Zerp mode? Yeah, I mean I think I think you're right

[00:32:21] Like at the end of the day all a lot of these companies have you know, there's either a

[00:32:26] graveyard of companies that have tried to

[00:32:29] Compete with them or you know, maybe on the way to the graveyard

[00:32:35] I'm just thinking right about Netflix. I mean Disney plus is struggling. You had NBC with their peacock service

[00:32:42] I think that's struggling as well like they're all pretty much struggling except for Netflix

[00:32:48] So either their money losing or they're breaking even at best for the various parent companies

[00:32:54] So I think that's a good example. Obviously you think about you know, you have Uber and you have what's the other one?

[00:33:00] Lift yeah, that's a good example as well. So no, I think you're right the Carvana one

[00:33:06] I don't know. I don't know enough. I know it was a

[00:33:08] Dumpster fire late last year. They were on the verge of going bankrupt

[00:33:12] But I guess they haven't looked at their financial recently

[00:33:15] But I guess they are you know turning things around. I'm not sure that one in particular

[00:33:20] But it's just one that I know that exists because of Zerp. Yeah, and so

[00:33:26] You know what not all of these are alike in terms of quality and moat, but I do think that there's something here

[00:33:33] especially with Airbnb and uber these kind of

[00:33:38] Marketplaces with two-sided network effects these marketplaces with two cyber network effects that require

[00:33:45] Ubers cases the drivers and you know the cars and then it Airbnb's case the listings

[00:33:52] That supply side of the user generated content in case in this case user generated assets

[00:33:59] And then also acquiring customers to stay in those user

[00:34:04] generated marketplace content

[00:34:06] is

[00:34:08] Very expensive

[00:34:09] It costs an unbelievable amount of money to get the snowball rolling once the snowball is rolling

[00:34:15] It's very difficult to stop it but getting it going costs

[00:34:19] You know hundreds of millions of dollars if not in the billions. Yeah, and it's a cautionary tale too for venture investors

[00:34:25] right I think you need to know that space better than I do but

[00:34:29] Even looking i'm thinking of a stripe and I don't know exactly the latest valuations

[00:34:34] But the last I heard about it is that if they were to go public it would be a haircut

[00:34:39] To the the previous funding round. So I think there's probably a lot of venture investors that are a bit

[00:34:46] cautious as to put too much money and I'm sure they're willing to put some money in the right projects

[00:34:52] but they're much more selective and they probably need to have a

[00:34:57] A better idea of when the company will expect to be profitable not just growth at all cost

[00:35:03] Want to know the two dirtiest words in venture capital? You sure go for it

[00:35:08] Down round. Oh, yeah. Yeah, okay. Yeah

[00:35:12] That just what that means is like in this example is raising money again

[00:35:18] At a valuation that was lower than the previous round

[00:35:21] That's a that's a down round and it's the dirtiest two words in venture

[00:35:25] Yeah, yeah, definitely

[00:35:26] Um, I guess we'll have time for my segment that I've been keeping you know pushing back for a few

[00:35:31] It's been on the back for a while

[00:35:33] Yeah, exactly. I think it's a fun one feel free to interject as I'm going through this

[00:35:38] So I wanted to look back at an allocation because I think it's really important for people

[00:35:44] So especially like for investors, especially if you start investing not too long ago

[00:35:49] So allocation is definitely a really powerful tool to help you kind of mitigate risk in your portfolio or increase it

[00:35:57] Right depending on what your risk level is

[00:35:59] With all other things being equal the more concentrated you are the more risk you take on and vice versa

[00:36:05] So say you only invest like a good example to wrap your head around it

[00:36:09] You only invest in stocks and you have four companies that are 25 each

[00:36:13] No matter how good the companies are

[00:36:16] Blue chips, you know, maybe they're best companies in the world

[00:36:19] I think about four companies that you think are you know solid for years to come

[00:36:25] Well, you know, they still have some risk and we talked about that in some recent episode and even if each

[00:36:32] Each holding as a very small probability of going down half in value for example

[00:36:38] The probability of it having a significant impact on your portfolio is magnified because of their large allocation

[00:36:45] Whereas if you have 25 companies at 4% each if one of your holding goes down significantly

[00:36:51] Let's say by half or even to zero it's going to impact your overall returns

[00:36:56] But it's going to have much less of an impact than if you had just four companies at 25% each

[00:37:02] I mean a lot of people. I think the

[00:37:05] Allocation is just not discussed enough and clearly the more concentrated you are the more polarized your potential outcomes become

[00:37:13] Because you know, let's take it to the extreme see you own one company

[00:37:18] And some of the richest people in the world

[00:37:21] That was their case, right? They only had stake in one company

[00:37:26] If it doubles your portfolio doubles if it tumbles 50% your portfolio goes down 50%

[00:37:31] You have nothing else to offset it. So it's a great way to get rich or to go broke

[00:37:36] Anything you want to add to that?

[00:37:38] What the last few words you said there is exactly what I was saying

[00:37:41] It is concentration in terms of portfolio concentration

[00:37:46] position concentration is

[00:37:48] The easiest way to create and destroy wealth

[00:37:53] What I like to do is I obviously run a very concentrated portfolio

[00:37:57] I have a few names that make up well over half the portfolio the top 10 names make up

[00:38:02] I think over 85 percent of the portfolio. So that's that is the game I play

[00:38:07] I let my positions become that big by not selling them

[00:38:11] I don't ever add to a position that it becomes that big

[00:38:15] I look at it as a way it has deserved

[00:38:18] That type of conviction from myself and my capital

[00:38:22] Over time by being a winner in my portfolio that I understand extremely well

[00:38:27] That's how I let positions become massive

[00:38:30] Is because I don't sell and trim rather than okay, simon. I'm really I really like this name

[00:38:35] I'm gonna put 80 percent in tomorrow. That's that's not a

[00:38:39] The way I invest personally, but I am very concentrated

[00:38:43] Yeah, exactly. And I think it's just important for people to understand that right and the

[00:38:48] Allocation, you know, you can have a different strategy. So I've talked about this before but say you have

[00:38:54] You know 90 percent of your portfolio in

[00:38:58] index, you know index fund let's say the s&p 500

[00:39:02] And then you have 10 percent of your portfolio where you tell yourself, okay, I'm gonna take, you know

[00:39:08] 10 bets 1% each

[00:39:11] Into these high growth high risk companies. Well, that's not that risky of like, I mean, obviously it's still equity

[00:39:19] So there is a certain amount of risk, but that's not extremely risky when you think about it because that 1 percent per company

[00:39:26] I mean, it's not gonna impact your portfolio that much and that's where you can also have asymmetrical returns

[00:39:32] Which just means that you know, there's the potential outcome of let's say

[00:39:37] I'll just take a 1% allocation and that might be a bit low. I'm just using it as an example

[00:39:43] Well, you know, let's say there's just two potential outcomes

[00:39:46] Usually there's more than that but let's say just just two

[00:39:49] Either it goes to zero. So you lose 1% it goes to zero or it 10x

[00:39:54] So then it becomes a pretty meaningful part of your portfolio

[00:39:58] so that's when that's how you look at when we will say asymmetrical outcomes is

[00:40:03] There's, you know, the upside really outweighs the downside risk, but

[00:40:08] That's because you allocated

[00:40:11] appropriately because if you had 50 percent of your portfolio clearly then the

[00:40:17] Asymmetrical outcome is different there because

[00:40:20] You're gonna get wrecked if it goes to zero. Yes, you'll probably get rich if it, you know 10x is from that point

[00:40:27] But that's where it comes in terms of asymmetrical outcomes where you can allocate a very small portion

[00:40:32] But the upside is so great compared to the downside

[00:40:36] It's like the kelly criterion

[00:40:38] for for sizing bets in

[00:40:41] gambling

[00:40:42] Yeah, a really good framework for sizing

[00:40:45] Bets in your portfolio sizing positions the way I look at it is match my conviction. So

[00:40:51] You know, it's just like what you're saying there around asymmetric

[00:40:55] size a little bit smaller

[00:40:57] The same the the way I think about it is Simone

[00:40:59] Like if I if I tell you you can double your money if the sun comes up tomorrow

[00:41:04] What do you do with your portfolio?

[00:41:06] Yeah, so

[00:41:07] Like what do you do with that bet? So I say Simone you can give me as much money as you possibly want

[00:41:15] I possibly can if you if you're able

[00:41:18] You get you double it if the sun comes up tomorrow if the sun doesn't come up tomorrow

[00:41:23] I take all of it. What do you do in that situation?

[00:41:25] 99 in case an alien blows up the alien spaceship blows up this

[00:41:31] Well, and I don't think your money is gonna mean much

[00:41:35] You you take you go, you know, you push in all the chips in the table, right? So

[00:41:40] That's kind of the way to think about

[00:41:42] Sizing bets around conviction and around probabilities. That's something you'd probably want to have in size is like

[00:41:49] I I will double your money if you if the sun comes up tomorrow, but if it's some long shot

[00:41:54] I'm not gonna I'm not gonna be having all the chips pulled pushed in

[00:41:59] Yeah, exactly an allocation too

[00:42:01] I think it's you know, if you listen to any portfolio manager, especially those who manage like

[00:42:07] You know money from wealthier clients. I'm not saying necessarily the people that get you know paraded on bnn

[00:42:13] You know

[00:42:14] Sometimes I I do find that I wonder sometimes if they know what they're doing some of the portfolio managers there

[00:42:21] But I digress but if you look at you know

[00:42:24] People that will manage money from wealthier clients is they'll oftentimes, you know allocate to different type of assets

[00:42:32] So I'll just go over them quickly

[00:42:34] Just a quick overview just because I think it's important

[00:42:37] We do focus a lot on like stocks and you know, I'll interchange stocks and equities here

[00:42:43] Because they're synonyms obviously

[00:42:45] But you know, I own personally a lot of equities is used to be 100 but now it's a lower percentage

[00:42:51] It's still a big part of my portfolio. It's about half and historically u.s

[00:42:56] Equity has been one of the best performing asset classes. I mean canadian equities

[00:43:01] haven't performed

[00:43:02] As well, but they've performed pretty well at least over the last 20 years are pretty close to us in terms of total returns

[00:43:09] If you go back further in time then the us definitely are doing better or if you go more like the last five years

[00:43:16] Clearly u.s equities are doing better

[00:43:18] But there's also fixed income to be fair personally

[00:43:21] I don't own long duration bonds

[00:43:23] But I do own short duration treasury bills which are backed by u.s government or canadian government

[00:43:29] Depending on which one I want to own to me

[00:43:32] It acts as a edge against equity not performing well

[00:43:35] And i'm currently getting five percent plus to hold these without interest rate risk because it's on the short end of the curve

[00:43:41] So if interest rates go up or down

[00:43:44] It's not going to affect the value of the underlying capital

[00:43:47] Obviously, I'm going to be yielding less on it or more

[00:43:50] But there's less risk there than longer duration bonds another option would be gic's

[00:43:56] You know eq banks is a sponsor they offer some great gic's

[00:44:00] products if you're looking to get locking some rates

[00:44:03] And get some fixed income and locking those rate the only downside is you can't cash out until maturity

[00:44:09] Real estate is another asset class that you could allocate um this to me

[00:44:14] I

[00:44:14] I kind of put reeds here although they could be lumped into

[00:44:18] Equities, but they do perform differently than equities as a whole

[00:44:21] I think it's also important to remember that not all real estate is the same

[00:44:25] Some will perform better in certain environment than others and then the next two categories

[00:44:30] I think it to me the way I see it as bitcoin and gold slash precious metals

[00:44:35] The way I view these as just a hedge against government excess or even an insurance policy

[00:44:40] Especially when it comes to spending which we've seen, you know, canada the u.s

[00:44:45] I mean the u.s. I think is increasing their debt by like one trillion every quarter something like something wowed like that

[00:44:52] it's just

[00:44:53] It's just crazy and

[00:44:55] Both are scarce resources, you know, whether you agree or not with bitcoin. I mean

[00:45:01] I think the protocol the way it's set up. I do think it scares

[00:45:05] There's going to be a maximum and it's very difficult to change the protocol

[00:45:09] They may not hold their value short term but can provide a valuable hedge against other asset classes as well

[00:45:15] And you know, if we do come in a situation where there are some problem with sovereign debt

[00:45:21] There could be some asymmetrical results with these type of assets meaning that they could

[00:45:27] perform

[00:45:28] Extremely well against other asset classes

[00:45:30] And I would also place companies that produce precious metals here as a general rule

[00:45:36] I know this is debatable but a company a mining producer

[00:45:39] So a mining company that produces like gold or other precious metal

[00:45:43] It's typically seen as a leverage play on those precious metals

[00:45:46] So it's gonna move more as the price goes up

[00:45:49] But we'll also go downwards as the price goes down more because they are leveraged

[00:45:54] And then the last part here that you know, I don't really own myself

[00:45:58] But it's been more and more popular at least with wall street is alternative investment

[00:46:03] So in there you have private equity private debt hedge funds collectibles slash arts commodities

[00:46:10] Basically tons of non-traditional investments. I know there are some other ones that last part

[00:46:15] I don't really dabble into that. I know I don't think you do unless you have some collectibles

[00:46:20] I'm not aware of but uh, that's kind of the I gambled the whole portfolio into some NFTs last week

[00:46:26] Okay, okay. Yeah, I could be hockey cards or something. Uh, you never know right? I

[00:46:32] pulled out my hockey card collection last year as a kid

[00:46:37] Thinking that I was gonna have some amazing cards because I remember my collection being

[00:46:43] Top-notch like pretty solid for hockey cards. Yeah. Yeah, I still have it is not good

[00:46:48] I didn't have anything valuable at all, dude

[00:46:51] I thought there was gonna be something in there that I'm like, oh, this is this is for something or like this is

[00:46:56] Oh, look at the so glad I held on to this like I didn't have one good one

[00:47:02] My brother-in-law showing me his and it was so good and so many valuable cards

[00:47:07] I whip out by that. I literally had

[00:47:10] zero

[00:47:11] Rare cards

[00:47:12] And as a kid I thought they were like it was an electric collection. It was not good

[00:47:16] So early 2000s so that that would probably be like early mid 2000s that you built up that that uh

[00:47:24] A collection

[00:47:26] Yeah, probably from around

[00:47:28] 2000 to 2005

[00:47:32] Ish, okay. Okay. So

[00:47:34] I think it's thousands

[00:47:36] Yeah

[00:47:37] 878 maybe I don't know

[00:47:39] Okay, so you're I'm just trying to think in terms of like

[00:47:43] Players if you had a a rookie card like a of note or not so

[00:47:48] So let's just say yeah

[00:47:50] Mary I have the I had the the coolest one was I was a Jerome again. I was a really big Jerome again la fan

[00:47:57] He was okay hockey player. Okay, and I have his rookie card. Okay

[00:48:02] So it's not quite worth as much as the Wayne Gretzky rookie card

[00:48:08] That's like the only cool one. I don't know what it's worth

[00:48:11] But that that one to me is sentimental because I I think Jerome again was the man for me it was um

[00:48:17] The one player because like we were kids and we all had one favorite player for me. It was uh,

[00:48:22] Paul korea. I have his rookie card. Oh

[00:48:24] Yeah, I don't think it's worth all that much but still I have the rookie card

[00:48:29] That's badass. Yeah, that's a good one

[00:48:31] Mm-hmm the the rookie card. What a concept. It's just like, you know

[00:48:36] scarcity is everything right? It's printed once and then

[00:48:40] Do you think hockey cards are still like is a mcdavid?

[00:48:44] rookie card worth a lot of money like our hockey cards

[00:48:46] I think it depends. I think you can have different rookie cards based on the different like

[00:48:52] Publishers or whatever they're called right done like tops or whatever like upper deck because there's a rating system

[00:48:58] Yeah, so I think you can have different

[00:49:00] But one of my buddies is dad who's in his late 70s now

[00:49:04] But I was like, you know, we were neighbors when we're a kid and I remember he sold

[00:49:08] His hockey card collection and he was collecting cards in the 50s and 60s. Oh, wow

[00:49:15] So he had like maris chichol like rookie card a gordy howl like stuff like that

[00:49:22] And he made a decent like penny at the time. I think it was late night like mid 1990s when he sold

[00:49:28] But I mean his collection would probably be worth like in the six digits easily now

[00:49:35] Yeah, this ebay a perfect 10 gem rated rookie card of connor mcdavid

[00:49:43] uh psa graded 10 officially is

[00:49:49] 5200 canadian dollars. So just a little over 5 000 canadian dollars

[00:49:53] That looks like to be one of the more expensive ones

[00:49:55] There's a few for the 3000 dish range that are not as rated a perfect 10

[00:50:00] That's a little bit more than I was it would have expected

[00:50:03] I mean at the end of the day, it's like everything right? It's scarcity

[00:50:06] So if there's not much and it can't be produced anymore

[00:50:10] You're going to have a market the market might not be super liquid and we talk about that with stocks all the time, right?

[00:50:16] You know, it might not be very liquid, but if you can get the price

[00:50:21] You can get that one person interested in it

[00:50:24] You'll probably be able to get the decent price for for whatever you have if it's scarce enough

[00:50:30] Yeah, no no doubt

[00:50:32] Dude now I'm gonna go to I know a guy who he runs a software company. I know a guy that knows a guy

[00:50:39] I'm actually pretty close to them because I'm in like a mastermind group with him. Okay, like a bunch of other software founders

[00:50:46] And he runs card grading software

[00:50:50] Oh, yeah, and so he has deals with like some of the gambling sites and some of these

[00:50:56] Like sites that are specifically for

[00:51:01] Buying and selling sports cards

[00:51:04] And they use his his grading system and technology as like an API

[00:51:10] It's pretty it's pretty damn cool. I should ask him more. I mean, I talked to him a lot

[00:51:13] And I know nothing about his business in terms of the actual scoring. So yeah, I know all the financials

[00:51:19] I don't know the that's okay

[00:51:22] I could tell you his I could tell you his financials inside out but not

[00:51:26] The grading system, but this is fascinating. I'm like on

[00:51:30] rookie card

[00:51:31] eBay right people listening are probably like oh, I should have stopped listening five minutes ago

[00:51:37] Hell no, that's what they think they stay for this stuff

[00:51:40] They stay for this stuff

[00:51:41] Yeah

[00:51:41] And they're probably lasting if you're not very well versed and I'm not that well versed on trading cards or a sports card

[00:51:47] but definitely

[00:51:48] The PSA level will impact the value a whole lot

[00:51:53] It's super important if you want if you have something that even is not the rarest but rare enough

[00:51:58] If you don't have a high rating like it just shatters the value, right? It's like

[00:52:04] Selling something like on marketplace. That's not like mint condition versus new versus

[00:52:10] Yeah

[00:52:10] something crappy

[00:52:12] Dude, I sell a lot of stuff on marketplace with some pretty good success

[00:52:17] And by a lot of stuff. I mean like randomly, but I'll sell something

[00:52:21] And I'll occasionally buy stuff on marketplace, but I'm mostly just a seller

[00:52:26] I put on

[00:52:28] So much stuff that I think would never sell like the more I think that no one will buy it

[00:52:34] It flies off the shelf like I get like 30 messages being like hey, I'll come right now

[00:52:40] If I have something that is a slam dunk. I'm like this is such a good price

[00:52:45] I'm basically just listing this so someone will take it off my hands

[00:52:48] It'll sit on the site for

[00:52:50] Months and months until I just take it off. Yeah, I need to go on facebook marketplace

[00:52:54] I I have used it a little bit but not that much recently. We have some stuff to sell so

[00:53:00] You you've inspired me. I think I'll start doing that this weekend

[00:53:04] Put on the things that you don't think will sell

[00:53:07] And you'll be surprised

[00:53:09] It's gonna be the first stuff that I'll sell

[00:53:12] The the stuff that I think will never sell is

[00:53:16] Immediately gone and then you know the contrary so put put some of your uh, your stuff on there and you'll be surprised

[00:53:24] You can charge actually pretty good price

[00:53:26] Whatever I can get rid of that. I'm not using that's how I see it get a little extra money at the same time

[00:53:32] Thanks for listening to the podcast folks

[00:53:34] We appreciate you very much. Thanks for tuning in. We are here Mondays and Thursdays

[00:53:39] You can support the show at join tci.com. That's our patreon and you get our monthly portfolio updates to come out on the first of every month

[00:53:47] myself dan ken simon and

[00:53:50] You also get this podcast on video

[00:53:53] Key for things like that graph at the beginning showing the widening gap between public private and self employment jobs in canada

[00:54:02] So see it's one thing for me to describe the graph

[00:54:04] It's another thing to actually see it and see the data

[00:54:07] Textualize it see the gap says a joint tci.com as well as

[00:54:12] Use code tci for 15 off at finchat.io finchat is

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[00:54:23] Simone we are launching finchat v3

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[00:54:54] So those prompts. I don't think are super impressive right now, but finchat v3 is good looking forward to ask it if

[00:55:01] BC should cut its dividend

[00:55:04] I'm gonna go query that in the testing in the prompt

[00:55:07] I'm wonder if it'll have a hot take on that. Yeah, I do wonder. I was just joking

[00:55:13] Do you want I mean, I think you'll be surprised at the reasoning that it has because it has so much

[00:55:18] Like I don't know if it understands deep capital occasion yet, but we'll see eventually let's work towards that

[00:55:25] Thanks for listening folks. See in a few days. Bye

[00:55:28] The canadian investor podcast should not be construed as investment or financial advice

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