The Hidden Risk Most Investors Ignore

[00:00:01] 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 The Canadian Investor Podcast. Welcome into the show. My name is Braden Dennis. As always joined by the sagacious Simon Belanger. It is Friday, March 21st.

[00:00:28] I am in a cheap, crappy hotel room for a conference because over here we just compound investor capital and don't stay in the expensive suggested hotel allotted conference hotels. It's in the sketchy part of town, huh? It's not a sketchy part. It's in Miami. No, it's in a good place in South Beach.

[00:00:55] But, you know, when you go to these conferences, they're like, we have these blocks reserved for the conference. And they are, oh, nine times out of 10 egregiously overpriced. So you just go to one that's like a three minute walk and you pay like literally one fifth of the price. Sometimes they will give a good deal though. Like they'll actually give you a discount, but I guess that's the one out of 10 times.

[00:01:23] They might give you a discount, but they always suggest like the premium hotels. Like, you know, for typically, I mean, it's a wealth, it's a wealth investing conference. Like these companies have a lot of money anyways, but crappy hotel room means old musty carpet, obviously the bed, old drapes on the windows.

[00:01:48] And you know what that means? Unbelievable podcast sound quality. It just eats up all the sound. There's no, there's no hard surfaces. I thought you were going to go a different direction. Like don't bring a blacklight there, but yeah. Yeah. Keep your great podcast studio. Keep the blacklight in the bag. Don't, don't ask any questions and you're off to a good start.

[00:02:15] Oh, that's good. Yeah. We're going to get started. I think we have some fun segments today too. Yep. You got a counterparty risk and then I'm going to talk about how to measure success. Oh, you got, you got drunk. Yeah. If we get there, if we get there, I feel like they're pretty long segments. So we'll see if not. He's, he's, he's worth studying. So I'm excited for that. All right. You kick us off today. Yeah. So counterparty risk. I don't think we've talked too much about that.

[00:02:42] And of all the risks that are present for investors, I think this has to be one that is the least talked about for specifically retail investor, because it is definitely on the radar and you deal with a lot of institutional investors, institutional investors dealing with large sums of monies.

[00:03:00] They will definitely be aware of counterparty risk much more than retail investors, but it's an important risk to be able to understand and just be aware of. And it's not to send panic or anything, but we've seen over the last, you know, even five years, we've seen how that counterparty risk has actually materialized and creating some significant issues and even loss of investment for investors.

[00:03:29] Yeah. There's been actually some really big examples, especially in the U S yeah. Yeah, exactly. So there's different examples. So I explain, I think it'll be easiest to explain with giving some examples to people on what type of counterparty risk you can face with different types of investments.

[00:03:50] Now the first one, and it's not in order of importance. I'm just starting off with this year. So a brokerage, for example, would have some counterparty risk. So if the brokerage goes bankrupt and they were not properly segregating funds from their clients and their operations, you could lose your investment. The good news, however, so people don't panic is that this is extremely unlikely.

[00:04:14] And in Canada, it's very well regulated. And we also have the Canadian investor protection fund. So this provides investor with $1 million in protection based on account type. So general accounts combined. So TFSA, margin, cash, FHSA, you have registered retirement accounts and then RESP. So those are the main categories and you can get that protection there.

[00:04:40] Obviously, when you stay with more reputable brokerage, the risk is is very low that you would encounter these type of issues. But it's still worthwhile to to know that it's it's a nonzero risk derivative contract. So depending on who the counterparty is, there could be some counterparty risk if they default.

[00:05:02] So derivatives could be like something like options, for example, or there is some very complex derivatives that people can purchase. I think it's a bit more on the institutional side. But nonetheless, when that risk is actually very well highlighted in the big short. So for people who have seen the movie, if you have not, what are you waiting for? But regardless, Michael Burry, the main guy who's played what's sorry, who's who plays Michael Burry?

[00:05:31] Keep forgetting. He's well known. Anyways, Michael, the main guy. Why am I forgetting? Yeah, I don't know why I'm getting a point, but it's OK. He played Batman, too. You know, people will know what I'm talking about. But Michael Burry in that movie was extremely concerned that the big banks he had purchased. The contract was credited default swaps from would go bankrupt and not honor his contract.

[00:05:57] And it's very it's a great scene in the movie where he's making these deals with these bankers. I think it's Goldman Sachs who it's with, if I remember correctly. It's Christian Bale. Oh, Christian Bale. There you go. That wasn't like that. The listeners are probably like, dude, Christian Bale. Yeah, screaming out there. Yeah, screaming at their podcast player right now. I was just sitting on the tip of my tongue and I'm just picturing American Psycho.

[00:06:23] Like when he looks at the at the business card, I'm just like, oh, yeah. How I blended that one. Anyways, carry on. Yeah, exactly. And it's a great scene where he says, like, what's my guarantee? Like, I need to know that you guys will pay me when these contracts kick in. And you have this classic meeting table, conference table where, you know, it's way too big for him and the four or five other people that are there.

[00:06:48] I think if I remember the scene and they just start laughing in his face and it's like, no, no, I'm actually serious. Like, I want some guarantees that I'll be the first one to pay because I'm not sure if you'll be solvent. So that's an example of counterparty risk. And he makes it blatantly obvious. The third one, another example. This one we've seen retail investors unfortunately being very impacted by this. So crypto exchanges. So this is probably the most obvious one that people can probably think of.

[00:07:18] We have plenty of example for this. The one that is the most obvious is FTX with SBF, Sam Benkman Freed. There was also BlockFi, Celsius, some other exchanges or central lending platforms. Investors using those platforms saw significant losses as a result of the counterparty risk because the counterparty were these exchanges holding their cryptocurrencies and they all filed for bankruptcy.

[00:07:45] Thankfully, some of them actually were able to recoup some of the funds that they had, but not as much as they would have if they just held on to the cryptocurrencies that they had. The fourth one here. Can I ask a question? Yeah, go for it. I don't know if you know the answer to this. How is Sam Benkman Freed doing podcasts from jail? I don't know. This is not like a question of ethics.

[00:08:12] Like, for one, I don't think anyone should be platforming him, you know. No. But how is he doing pod... Like, I looked this up and tweeted it out and no one seemed to be, like, asking this question. Like, everyone's like, oh my God, it's so crazy that he's... People are platforming him. I'm like, wait, wait. How is he... Do they let you do podcasts in jail? I didn't... That's a Tucker Carlson one, right? Yeah, yeah. The Tucker Carlson. He's like, yeah, I'm in jail. Like, I share like a...

[00:08:40] I'm like just down the cell street from Diddy. That's what he said. I'm like, is Diddy allowed to do podcasts? Like, he's a predator. I don't know. Like, if anyone has any answers, send me a little email or tweet. Like, are you allowed to podcast from jail? That seems absolutely absurd. I guess it goes into the same category of making phone calls, right? They probably have to put a request in, that would be. And there's, I'm assuming, a special room.

[00:09:08] So, I guess they make sure that you're not sending in from malicious information or criminal information somewhere else. I don't know. Those are just my guess. Yeah. Just the AI overview says, is possible, but requires significant planning and cooperation from prison authorities. Attaining permission. Because remember the Fyre Fest guy? Oh, yeah. He got his... He was doing a podcast, like, for his phone call. You know, you can do phone calls from jail.

[00:09:37] And he did a podcast and they found out and they extended his sentence like another year or something. Because that was, like, not planned. So, I'm just like, how is SPF getting permission to do this crap? Yeah, it must be it. Because they probably allow it, but they probably monitor the conversation where maybe they don't if you don't say it. I don't know. That would be my guess. The next on the list is bank deposits.

[00:10:03] So, banks, as we know them for newer listeners and a lot of people still don't realize that banks operate on a fractional reserve basis. This means that the counterparty to your deposit in the bank, that's them. And they don't necessarily... If everyone wanted to get all their money all at once, they would have trouble meeting those deposit demands. And we saw this happen with Silicon Valley Bank back in March of 2023 in the US.

[00:10:32] But the good news is that there is FDIC in the US and CDIC insurance in Canada for up to $200,000 per bank, per account type as well. So, you can have, if you're a wealthier individual, you can have multiple bank accounts that would benefit from that CDIC insurance. So, there is some measures in place. Bonds, corporate or government. There is always the risk that the issuer of the bond defaults on their bond payment.

[00:11:01] You're relying on that party to pay back the coupon or interest plus the principal. And if they don't, then clearly this is a risk that you ended up... You know, whether it is a credit risk or counterparty, you can probably make the argument. The precious metals. So, this is an interesting one. Whether it's an ETF or private contract with a custodian, you're relying on that counterparty. So, for gold, for example, you're relying on them to ensure that they have the gold that

[00:11:30] they say they do have and to keep it safe. And making sure that, you know, they're not starting to give those gold certificates to other people. So, there is some counterparty risk there. And there's always some issues with verifying the amount of gold that an institution would have on hand. So, that is a counterparty risk as well, where you never know 100% that they have it on hand.

[00:11:57] And if you do require delivery, because some of these ETFs, if you own large enough amounts, you can actually request delivery. So, those are all examples of counterparty risk. There's been a lot of examples in the last few years of how overlooking this can be pretty destructive. No question. Of course, the crypto one, use extra, use extra, just have good judgment with this stuff, right?

[00:12:25] Like, there are, there's more risk with some of that, some of those things. But even in the US, you didn't, no one at Silicon Valley Bank or First Republic thought that there was going to be a bank run on their deposits at any point. And look what happened. So, you can never be so sure. It's always good to spread these things out across different institutions. Yeah. And at the end of the day, counterparty risk is just relying on the third party to honor the investment.

[00:12:55] That's essentially what it is. Now, there's different ways you can mitigate that. So, obviously, you mentioned spread your funds around. That would be one way. Insurance, CDIC, for example. CIPF, the Canadian Investor Protection Fund, is another example. These are insurants that are in place to protect investors. You can use reputable firms when it comes to crypto. You can also buy, I know there is ways to buy Bitcoin where you essentially send some Interaki

[00:13:24] transfers and it sends the Bitcoin automatically to your cold wallet. So, you never really leave the money on the exchange. So, you would avoid an FTX situation, for example. And if you're looking for the reputable one, there's a bunch in Canada. We had ShakePay that was a sponsor in the past. And they've been through the bear market and they're still there. I think they're a very reputable form.

[00:13:52] Coinbase, obviously, it's the most regulated in the US. It's publicly traded. Be careful of high-risk derivative instruments. They can get really complex and way beyond simple call or put options. So, that's more something to be a bit more careful. Self-custody is a way to completely get rid of counterparty risk. You may have some additional risk if you do self-custody.

[00:14:18] So, whether it's physical gold, cash or crypto, you can hold these assets on your own. But, clearly, you have to make sure there's always a trade-off. So, yes, you don't have the counterparty risk if you hold those on your own. But there's more other risks. For example, you could have a fire or you could forget where you put it. Things like that. These are additional risks. And don't overexpose, like you mentioned. Don't overexpose yourself to one single counterparty.

[00:14:47] Is another way to mitigate those risks. And in terms of, I'll just finish this segment with, I don't think I've ever mentioned to you. Maybe I have. I can't recall. So, I avoided a big one in 2022 related to crypto. So, back in 2021, obviously, like in 2021, there was a lot of DeFi. So, decentralized finance.

[00:15:09] But there was also a lot of centralized finance when it came to cryptocurrency where you could lend out some of your crypto and be able to get some money back. Some of the names I mentioned before Celsius, BlockFi did that. And I read up a bit on BlockFi specifically. Listened to their CEO. I read how they protected funds and so on. And it seemed like they had sound risk practices in place.

[00:15:37] However, the one thing that still I was a little bit nervous about was the lack of regulation in the space. And they offered. But one thing that I did like is the yield that they offered was much lower than other centralized lending platforms. So, in my view, it made them more legitimate because it was a bit more realistic in terms of the yield they were providing. So, at the time, I decided, you know what, I'll try it out.

[00:16:03] I had some USDC, which is a US stable coin. And I took about 5% of my total portfolio and I put it on BlockFi. And that was back in 2021. And late 2021, there was no sign of a collapse yet for the crypto industry. That happened later in 2022, about a year after that. But just a lack of regulation and some of these entities offering massive yield that seemed just too good to be true.

[00:16:33] I decided, you know what, I made a bit of money on the yield that I got from that. It wasn't a huge amount, but 5% is not nothing either of my portfolio. So, I decided to take the money out, just put it back in cold storage or take the stable coins out. And little did I know, less than a year later, BlockFi actually went under because it had exposure to Alameda Research amongst other institutions. So, I avoided a pretty big loss there.

[00:17:03] Was it luck? Was it foresight? It's probably me just listening to my intuition and saying, you know what, I'd rather keep control of that, even if it means not having any yield. But I just wanted to show that, yes, I still mitigated that risk because it wasn't a huge part of my portfolio. But I was able to prevent that and losing most of it. And that's an example on top of many of the examples that have been recent.

[00:17:29] I'd say 2022 onwards is a counterparty's counterparty. Yeah. Right? That's where there's been issues. It's like there's contagion among the counterparty risk. Yeah. And you had that happen during the great financial crisis. Correct. It was all that, right?

[00:17:51] It was Bank A had counterparty risk with Bank C and then Bank C had counterparty risk with an insurance provider. And like you had all these things that were interconnected and it ended up creating what we saw in 2008 and 2009. And I know sometimes it's not easy, but when things are regulated, it's a good sign that at least it should be less risky. But sometimes it's not easy. Remember FTX?

[00:18:18] You know, like you had Tom Brady, Larry David, all these celebrities with the ads. And I can see where new people getting into the space would be like, look, they've got Tom Brady and Larry David. Like it must be safe, right? Yeah. There's a lot of trust building they can use with familiar faces. They can borrow the conviction and trust of those people. That's exactly why they pay them big bucks, right?

[00:18:43] You get to live in the future in terms of building trust by spending some money by sponsoring these people. I like to think of this kind of stuff of, here's my engineering brain maybe, but maybe you'd resonate with this too. So if you have an electric circuit, okay, you can have things operate in series. You can have them operate in parallel.

[00:19:05] And if you have a circuit operating in series, basically what happens is if there's something wrong with the circuit and something breaks, everything after it won't work. The electrons actually won't flow to those things in series. It's a hard cutoff. There's a choke point. The electrons can't flow.

[00:19:30] Same way that you can think of electric circuits visually as like a pipe where the voltage is the flow and the current is the velocity or something of the water moving through the pipe. If there's a valve that's shut off, the water doesn't keep flowing.

[00:19:47] But if there's another pipe where the water can flow, aka an electric circuit, it operating in parallel, the water can flow around and have some sort of redundancy built into the circuit.

[00:20:01] And so no matter what your analogy is, you don't want to build one single isolated choke point of risk where if something happens with this part of your stack, if you will, is operating in series, then everything falls apart.

[00:20:21] And I think that's a good way to think about counterparty risk is if there's some tool that you're using and they're built to operate in series with very little redundancy, you now have counterparty risk on counterparty risk. You've multiplied the chances of opportunity of failure.

[00:20:43] And that's why engineering and manufacturing, they operate everything in redundancy so that if a machine goes down, the entire operation of the manufacturing facility doesn't go down. Well, although we saw the opposite of that for the pandemic, right, with supply chains. So everything was just in time with the efficiency and speed being the primary concern, not creating redundancy.

[00:21:10] And we saw what happened in the pandemic when everything closed down and you had these lockdowns and you saw that a lot of the PPE was coming over from China and we had no options in North America. So what happened? We had a shortage. And as you were saying that, I'm like, oh, that's one that would make a whole lot of sense for people. And it's frankly illogical and actually a good way to be opportunistic with individual companies.

[00:21:39] Say that there is some huge concern around Taiwan concerns flare up and Taiwan semiconductor stock goes down 30%. This is just some hypothetical, but, you know, we've seen that in the past couple of years. These types of things happen with semiconductor supply chains. And you'll see something that's really, really close to the sun like Taiwan semiconductor. It's got it in the name, obviously face a drawdown.

[00:22:05] But you'll have designers and other companies that are very closely connected that rely on Taiwan semiconductor. Be in very, very small drawdowns or be unaffected. That is 100% illogical and makes no sense. And that's a good chance for either TSMC is really undervalued or the ones with counterparty risk to TSMC are extremely overvalued.

[00:22:35] One of the two. And it's probably the truth is probably somewhere in the middle. And so it can actually create an opportunity when people overreact to certain risk, when they don't look at second order effects of who's down the line, who gets affected from this. You know, like last time I checked, Apple's not making any of their iPhones if TSMC is not operational. Right? Exactly. And speaking of TSMC, they actually are building more redundancy, right, with having some factories being built in North America.

[00:23:04] So if something does happen. Some geographical diversification. Yeah. Exactly. No, that's a great example. I think we actually talked about it is TSMC was like in massive drawdown because of fears of potential Chinese military operation or attack on Taiwan. But yet you saw like an NVIDIA that was largely unaffected. It was like, okay. It was ripping. Yeah. Yeah, exactly. Like something doesn't make sense here. You're not making any GPUs without TSMC. That's it.

[00:23:34] Exactly. No, that's a great point there. Should we move on? Yeah, let's do it. Okay. So I wanted to do a segment on how to measure success. You know, it's been a volatile start to the year here in 2025. There's been a massive amount of cohorts of new investors post 2020, post great financial crisis, aka 2008. The market's been, equity markets have been extremely nice to own. You know, no secret about that.

[00:24:04] But how do you really measure success, especially if you have a short timeframe, right? Like if we have a really long timeframe, like, yeah, I guess we can kind of measure success. Like the proof is in the numbers, right? Like you don't have to question Warren Buffett's credibility when he has been doing it for decades upon decades upon decades. People still do. People still do. It's a good time to sell your stocks when people think that they're smarter than Warren Buffett. Yeah.

[00:24:34] And so those scenarios, right, where it's like, you don't have to think about how to measure success because it's a long enough time horizons and long enough credibility or market data that, okay, we can stop saying that this is being fooled by randomness. And you're like, okay, I'm actually good at this or this person's actually good at that. So how do you measure success? And I had some thoughts to give us a recap of where we are. You know, this is being what?

[00:25:04] Are we 10, more than 10% drawdown? It's bounced around. Hovering right around there. Yeah. Rallied, came back, you know, whatever. Market volatility. I listened to Bill Nygren, who's our head of research at FinChat, Ryan Henderson. We came out with a podcast called AUM and he interviewed Bill Nygren, who's a fantastic investor. It's the second episode. And I would categorize him as like 60% value and 40% quality.

[00:25:31] It's kind of like buying quality stocks, but the price has got to be right. Like you won't just find like growth at a reasonable price. It's like, it's got to be at a good price. I would say in the portfolio, when I look at it, it is mostly SKUs, lower multiple value names. And he had a segment that really resonated with me.

[00:25:54] Quote, we define our mistakes as fundamentals not performing in the pattern that was consistent with our thesis. Again, so the quote is, we define our mistakes as fundamentals not performing in the pattern that was consistent with our thesis. I'll paraphrase the rest of the discussion is, you know, if we bought a stock, revenue's up 20%. The fundamentals are strong and improving.

[00:26:21] The core KPIs are chugging along in line with what we expected, aka our thesis. But the stock is down 20%. That's great. We're happy to accumulate. This is not failure. So how are we measuring success? It's measuring our success as performing in line with what we expected or better. On the other hand, if we go in with expectations of X and Y happens, that is failure.

[00:26:51] Even if the stock is up, right? Like that is failure because you need to be able to measure the goalpost in the short term. Because stock prices can be randomized in short periods of time, but very efficient on long periods of time. Like the Warren Buffett example. If you have a short period of time, even just anything on less than five years, how do you know if you're doing good?

[00:27:19] It's actually a really tricky problem to solve for. And you can kind of be fooled and be convinced that you're doing well when it's a little bit of randomness. And of course, benchmarking yourself to the index definitely does help. Like if you're in a bull run and you're like, oh, this is great. I'm performing 8%, but the market's done 15%. That's, you know, something's not adding up, right?

[00:27:45] Like that, to me, that's not great performance, even though I'm up 8%. Yeah. Longer term, the markets have a way to revert to the means where you do see whether you have overperformance because of momentum a lot of the time or just general sentiment, it'll revert to the means. So whether it overperform will tend to go back to more traditional valuation and vice versa.

[00:28:14] Something that would have completely underperformed because of low valuation. Even though the business has been doing well, it will revert to the means to the upside over time. Yeah. That's the Munger quote. In the short term, it's a voting machine. In the long term, it's a weighing machine. Yeah. Yeah. And a good example of that for those who are into sports, right? If you look at pretty much any sport, I'm most familiar with hockey and baseball.

[00:28:41] But when you start looking at the start of the season, let's take baseball, for example, and you start looking at the first 20 games, you'll oftentimes see players that are hitting over 400, which is very difficult to do in baseball. There's only, I think, one or two that have done it historically for a whole season. And then every year you see, oh, maybe they'll be able to catch the record. And then as the season progresses, the sample size gets bigger.

[00:29:08] Then you see them usually go back to the means. And the other way around, you have someone who has an amazing track record. Maybe they've been an elite player for five years or still in the prime of their career age-wise. And then they start off the 10, 21st games and they look like they've completely lost it. And then you look back at the end of the season and little do you know is that their season was as good as the previous one or even better?

[00:29:35] Baseball has the best analogies for investing overall. And that's a perfect example because in the short term, the 20 game sample size is not enough to make a broad statement about there's just not enough statistical significance. A whole season is great for baseball because there's so many at-bats, so many pitches. The numbers start to revert to the mean, like 162 games, right?

[00:30:05] Like you have statistical significance. I wanted to add that for context for the non-baseball watchers. 162 games. They play, what, nine every 10 days basically for the better part of three quarters of the year? Mm-hmm. Yeah. And I thought, so just thinking about it that way, I think it's easy to compare. And it applies to hockey too, right? Like you can have an amazing goal scorer and he starts off the season where he has no goals and the first five games and everyone's panicking.

[00:30:34] And then again, at the end of the season, he reaches a 35, 40 goals that he usually scores. Like you see that year after year in hockey. You can see it in other sports as well. Yeah. So to round this out, keeping score of public equities in the long term is a good thing to do. You know, if you've been in the markets for five plus years now, I actually think it's

[00:30:58] really important to have some sort of track record, track this efficiently across your different assets and really keep score. And that might be a look in the mirror moment. No, if it's like, oh man, I've been getting waxed by just owning a low cost index, then it might be like, okay, a bit of a reality check when it comes to keeping score.

[00:31:26] But in the short term, you can't overweight price action because it'll give you a lot of uncorrelated data on how things are going. So I think it comes down to, as Nigerin was talking about, having a really clear thesis of the business you're buying. You have to go in with a really clear thesis and expectations because if it's kind of just wishy-wash and write it down. Spreadsheet technology has been around a long time. Use it. Write it down.

[00:31:55] Having a clear thesis is really, really key. I didn't do it for the first five years of being in the markets. And now it's like such a key process if I'm buying, especially if I'm buying a new company. Go back three years, you might forget like, what was the thesis? And if you're not keeping score and you don't have some sort of data point to look back on, that's when things get really, really tricky to manage a basket of companies.

[00:32:23] So it comes down to know what you own and know why you own it. 100%. Yeah, and I apply that also to other assets. I apply that to Bitcoin and gold because I know why I own it. So it doesn't have to just be stocks either. You can, when you buy something, know why you own it. Yeah. All right. We got one more segment each. Do you want to go to Druck? I also have this little passage from Jason Zweig, which we do.

[00:32:52] Yeah, we can do Druckenmiller. Yeah. And then finish with here. Okay. So Stan Druckenmiller, he's a billionaire and former hedge fund manager. He's well known in the investment world and founded, I don't know how to pronounce that, Duquesne Capital Management, just because it's a word that could be in French too. So I always have trouble here. He founded that in 1981. He's also known for his pivotal role in George Soros Quantum Fund,

[00:33:19] where he famously profited over $1 billion by shorting the British pound in 1992. The inspiration I got for this segment was when I was listening to, on the All In podcast, they had Scott Besson, an interview that came out last week. He's the U.S. Treasury Secretary under the current administration. Now, obviously, I'm not a fan of a lot of what Trump is doing right now, like most Canadians.

[00:33:45] However, like I've said time and time again, I think it's important to understand all different points of view and then form my own opinion based on that. So I was listening to it. There are some stuff I agreed with Scott Besson, some stuff I didn't, but he's no dummy. So if you listen to him, he's a really smart guy and he clearly knows what he's talking about when it comes to financial market. You may not agree fully with what he says, but he knows what he's talking about.

[00:34:11] One thing that stood out for me was from an investing perspective during the interview was when he said that Drunken Miller's best quality as an investor was his ability to change his mind. And Scott Besson also worked in that fund that I was talking about, the Quantum Fund. I think he was a research analyst back then. And I decided to do a bit of research and I came across from another transcript from a podcast appearance from Drunken Miller back in 2022.

[00:34:40] It was on How Leaders Lead podcast. And I'll just read this portion here. So I learned this way back in the 70s from my mentor. I was a chemical analyst. When should you buy chemical companies was a question. Traditional Wall Street is when earnings are great. Well, you don't want to buy them when earnings are great because what are they doing when their earnings are great? They go out, expand capacity.

[00:35:08] Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they've stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So you always have to sort of imagine the world. And this is the important piece. The way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad, every single moment.

[00:35:36] Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices. And I think this is really important because we and I'm guilty of that as well. It's very easy to just look back at what happened in the last few years or five years and just project that out into the future. I try not to. And I think markets and mainstream media are very guilty of that.

[00:36:02] Even financial, social media, they have a tendency to do and focus solely on that. But I think it's really important to think about how the future, how it's going to go forward, how it could potentially change your investment thesis as well. And apparently Stan Druckenmiller is one of the best at doing that. Say it with me, folks. Cyclicals. That's exactly what he's talking about here with buying cyclicals when the earnings are great.

[00:36:30] Low PE cyclicals. Yeah. You get fooled. You get fooled by them. It happens so often, new and experienced investors alike with the cyclicals. But no, I like this. I mean, there's this kind of constant counterbalance when picking individual companies or just being a participant in financial markets of being some version of living in the past and living in the future.

[00:36:58] There's some sort of balance that needs to be struck. And I think if you're all in on the future, you're not grounded by reality sometimes. And if you're all in the past, then you're going to get smoked by the future. Right? There's some sort of talent and skill and luck around positioning yourself in some sort of

[00:37:26] balance between the reality of the past that we can know, understand, analyze, and then use that for building your thesis in the future. There's some sort of balance to strike. Yeah. Yeah, exactly. And you have to be able to make that balance. And I think it's important to adapt as well and adjust as you get more information that comes up.

[00:37:51] And I think for me, I'm a very different investor than I was five, seven years ago. And in five to 10 years, I'll probably be a much different investor than I am right now. It doesn't mean I'm completely changing my strategy, but I am changing as I think, as I see fit for what I think will happen one, two, three, four, five years down the lines. And I decided to just do, I used a new function, the research function from chat GPT-5, which is really cool. It takes a bit more time.

[00:38:21] You almost have time to go brew a coffee and then come back and it'll actually decide how to analyze it and so on. And I think one of the issues we're seeing right now with markets, because we've saw like so many good years and especially two really good back-to-back years, 20% plus with the S&P 500 is a lot of retail investors are becoming complacent. And you're seeing that more and more is that the allocation to equities are climbing higher and higher for retail investor.

[00:38:50] And I was able to find some US data. It's a bit harder to find some Canadian data here. But in January, 2024, the American Association of Individual Investors reported that investors are more concentrated in equities that they have been historically. An investor had 66.4% to equities versus 61.5% historically. Bonds, it was around the historical average at 16.3%. The historical average is 16.

[00:39:19] And then cash was 17.3% versus the historical average of 22.5%. And given the year that we saw in equities in 2024, because this is from January, I think it's safe to say it's probably closer to 70% because I think a lot of individual investors don't trim and don't reallocate. And I'm not saying it's right to do it or not, but this is all investors.

[00:39:44] So you're getting people that are close to retirement or into retirement that may have 70, 80, 90% equities. And people probably just look at what happened in the last two, five years, right? Since the pandemic or even since a great financial crisis. And they think it's going to be the same going forward. So I just wanted to show that to illustrate it that I think we're seeing a little bit of complacency right now in the markets.

[00:40:10] Maybe it will change now that Trump is there and he's tweeting something and making the markets go up and down with every single tweet. But it's something I thought it would just be interested to mention here. Yeah, this is good. This is good stuff. I tend to agree with basically everything you said. I don't know. I don't think I have anything more to add. There you go. So we'll finish enough time to finish with your last segment here, which actually ties in a little bit. Yeah. Jason Zweig on being 100% in stocks.

[00:40:40] So this is from one of his books. The chapter in the book is called Why Not 100% Stocks? Graham, he's talking about Ben Graham, advise you to have more than 75% of your total assets and stocks. But is putting all your money into the stock market inadvisable for every money? For a tiny minority of investors, 100% stock portfolio may make sense. You are one of them if you, one, have set aside cash to support your family for at least a year.

[00:41:07] Two, will be investing steadily for at least 20 years to come. Three, survive the bear market that began in 2000. 2000. So we can... Or we can say 2008. Yeah. We had that one. Yeah. Yeah. We'll say dealt with extreme drawdown. Had that scar and didn't panic. And not just for like a month. So for, let's say for over a year.

[00:41:37] I think that's when you start feeling it more. Yeah. Correct. Did not sell stocks during the bear market that began in 2000. Okay. So basically did not panic sell during the bear market. Bought more stock in the bear market. So you are adding during the bear market. Have read chapter eight in this book and imported. Okay. Some sort of investing behavior. So a little checklist. Okay. So obviously outdated timeline wise, but so, so relevant. This is timeless. Okay.

[00:42:04] So he's basically saying, should you be a hundred percent in stocks? No, but you might want to consider it if the following makes sense for you, which is you have a lot of cash to support your family for at least a year. We'll be investing steadily for many, many years to come. So you don't have some short time horizon. You're not going to need it in three years. You're not going to need it in two months. You've, you didn't panic sell during a bear market.

[00:42:30] And in fact, when you had a bear market, you kept adding. I honestly can't think of a really a better checklist, right? Like emergency fund, you don't panic. And in fact, you jump on opportunities. That's a great, that's a great formula to be a good investor just generally overall. Yeah. And it's, it's easier said than done. Someone who has not been through a prolonged bear market. It is, it's not easy.

[00:42:59] And like I have sort of, so I started investing my first time, my first go around before, well, right around the great financial crisis. And I actually added some Canadian banks and I did pretty well. I was quite young at the time. But the other one I think I have felt, and it is definitely not easy, is, you know, I've been pretty vocal, is I have a pretty good chunk of my portfolio in Bitcoin.

[00:43:25] And I definitely went through a more than a few months bear market in 2022 and even through a good chunk of 2023 as well. And it's not, it's not easy to even add more to the asset as well. It's easier said than done. If you haven't gone through it, I mean, it's great that you think you'll stay the course and you'll even add, but when you're looking at it and it's been like six plus months, it's

[00:43:55] really not as easy as people might think who have not gone through it and power to you. If you go through it and you do do it, that's great. But I just wanted to mention that. Yeah. Or long periods of flat sometimes can feel even worse. Yeah. Yeah. Because keep in mind too, all the headlines you see are super bearish or negative. So you feel like you feel very stupid if you start adding because everything you start seeing is like to the contrary.

[00:44:23] Why you should be 100% in cash or like stuff like that. Pessimism always sounds smarter. I don't know, especially in financial markets. It can always sound smarter to be negative or pessimistic. And it's really, really, you sound like you're out to lunch when you're overly optimistic, right? And so there's some balance there.

[00:44:50] But if you have a really long time horizon, the really aggressively over-optimist has been the one making all the money. Yeah. Right? And so it's kind of like, what do you want to be good at? Do you want to be good at sounding smart or do you want to be good at making money? I don't know that's an oversimplification. But if you told, if you were an analyst and you saw AWS and you saw Amazon's rise and you said

[00:45:18] that they were going to be a $2 trillion company one day, people would be like, you're such an idiot. There was very few companies that were $100 billion in market cap, right? Like, let alone $2 trillion. So you would just be completely off your rocker by almost anyone's opinion. And so it'd be really smart to just come up with like 50 bear cases on why you'd sound really smart. And the person who's really, really optimistic about the company would sound really, really stupid.

[00:45:48] And there's some sort of balance to strike on like, just like we were talking about before about living in the past and living in the future. I think this is really related. Yeah. You have to somehow be grounded in reality, in fact, which the past gives you reality. And in the future is unknowable. There's no crystal ball. So there's some balance between being grounded in reality, but also optimistic.

[00:46:18] Because the optimists tend to make all the money if they're right. I mean, case in point, and I will throw myself under the bus here. And I thought Tesla was overvalued in 2020 and 2019. In the last five years, Tesla is up 748%. And it's also down 43%. It's still up 750. Yeah, exactly. That's actually remarkable. And I thought it was overvalued.

[00:46:45] I thought at some point in 2018, 2019 could even go bankrupt. I thought like you'd be crazy to put some money in Tesla and look at it now. Like I'm looking pretty stupid not having some money in Tesla. I can't believe the amount of negative sentiment on this company. Oh, right now. And it being on a 40% drawdown. The market cap is still 770 billion. Yeah. Well, I think it's... Wow.

[00:47:10] I think unfortunately people are realizing and shareholders that, you know, Elon's prominence with the Trump administration is rubbing a lot of people the wrong way. And I think shareholders are realizing that especially America is as polarized as ever. And I think that is showing the stock price. I honestly think the stock price is a big reflection of that is that people are...

[00:47:35] You see people like literally burning Teslas and vandalizing them and like throwing shit at them when they're driving down the street. That's not right. I mean... That is so... Like you are such a loser if you do that. And I'm not here to defend the company or defend him. I could care less. But you're such a loser if you're like, oh my God, you're driving a Tesla. Like shut. You're such a wimp. Yeah. I mean, I think that's definitely gone too far.

[00:48:04] I mean, it's a good time to buy a used Tesla. I'll tell you that. Last night I was actually... We didn't know we'd say... I'd say the name Tesla here. I was looking on Autotrader just for fun. You can get some pretty cheap Model 3s with like reasonable mileage on them. Not that old all-wheel drive for reasonable prices because I think a lot of people are like trying to show their anti-Elon Musk support

[00:48:30] and getting rid of their Teslas on and losing probably a lot of money on it because they're selling it at discount and then buying another car more expensively. Mm-hmm. It's emotionally charged too. It's usually when there's good opportunities in secondary markets. Exactly. Well, that's... You know me. I usually when I see opportunities. So just for fun, we're not looking for a car and it wouldn't make sense right now. But I was just curious. I'm like, okay, well, who knows if the price is right one day, I'll get one.

[00:49:00] Yeah, they're fun to drive. I've never owned one. But no, I think that's a good example. Like the stock's up 770% in the past five years, even though it's gotten smoked lately. Yeah. Yeah. Another example of a company that's just always been incredibly hard to justify the valuation. Yeah, exactly. And look, for me, I think you said it best. For me, my style, at least maybe I'll change. But for now, it's just having a balanced approach.

[00:49:25] It's not, you know, not being too bullish, too bearish, just understanding the risks and understanding also the potential upside possibilities as well. And just trying to place myself where I think I'll do well in different kind of scenarios. That's how I try to do it. Because yes, you're right. Like for those who have been incredibly bearish, they've been smoked by just the index over the last 5, 2, 3, 4, 5, 10, 15 years.

[00:49:52] My favorite way to invest, it comes with high prices, unfortunately, is companies where the past is fantastic and the future looks like more of the same. Yeah. You know, like that's the DevCantessaria way where it's just like, I am buying the companies, like I am measuring quality of a certain public company in its predictability to keep growing.

[00:50:23] So yeah, the past looks fantastic. I mean, look at the track record. Look at how the company has grown over time. And the future, I predict to be fairly knowable in it going to continue to be great for this company. And there's always things that change, right? Like, you know, everyone thought GE was going to continue to dominate forever too, right? There's a million examples of how things change. Intel, things change.

[00:50:50] However, if you're diversified and you're not just betting that on one company, there are a lot of businesses today that dominated the last decade and their dominance probably looks pretty similar over the next decade. So it's your job to find out what those things are. Like, I was just looking at Amazon just now because we're talking about it on the podcast. It's now sub 200 a share. It's in a 20% drawdown. Been a dominant few decades for this business.

[00:51:17] And I see a lot of domination continuing for this business, right? Like the AWS business alone, you could assign some egregious price on probably. Yeah. No, exactly. I think... What's it doing in revenue now? AWS is at 107... So in 2024, AWS did 107.5 billion in top line.

[00:51:45] And the operating margin was... I'm still looking at that. The operating income was 40 billion. So call it high 30 operating margins on this. And the margin continues to grow. So you have growth on the top line, growth on the bottom line in terms of margin. It's like, how does this not work, right? Of course, the future is unknowable. But how does this not work?

[00:52:16] No, exactly. I mean, I... We use Amazon multiple times a week just for ordering stuff. And then obviously, I know all the different companies using AWS too. And just talking about the retail business. I mean, you know, if you have... If you have kids... And I know you don't, but I know you use it too. Like if you have kids or even if you don't, but especially if you do, don't have the time sometimes to go in person and shop. Yeah.

[00:52:43] I mean, there's always a better, faster, cheaper always wins in every industry. Yeah. And that's it just working out right here, right? Exactly. We'll round this out with... There's a lot of news and headlines about a partnership with DoorDash and Klarna to... Oh, yeah. ...buy now, pay later on DoorDash food deliveries. Yeah.

[00:53:11] Didn't they also win the contract with Walmart too? Klarna did? I think they... Yeah. I think they took it over from Afterpay. Oh. Or Afterpay or one of the other ones. Klarna lands buy now, pay later. Our firm. Yeah. They took it from a firm. A firm was down pretty sure. Klarna to displace a firm as Walmart's buy now, pay later. Interesting. Yeah. Yeah. Really great company. One of the better European fintechs around. A really great company in terms of execution and leadership. Fantastic.

[00:53:40] But do we really need people buy now, pay latering? They're fucking burritos? Like... Nothing makes, you know... Nothing makes more sense like, you know, doing your Uber or whatever DoorDash order with four installments. Or nothing smells like a really solid economy like people having to order and split that into four. Yeah. No kidding.

[00:54:07] Like, if there's a lot of demand for this, we're in deep doo-doo. The economy is... Yeah. You're just seeing it. You know, I'm here in South Florida right now. There's no better... Better? Better is not the right word. There's no easier way to see wealth inequality than somewhere like where I am right now. Mm-hmm. It is staggering, right? And so I think, you know, top people doing really well, but bottom, not so much.

[00:54:36] And, you know, the buy now, pay later on burrito is a pretty stark example. It's shocking to the system almost a little bit. Yeah. From a financial literacy perspective, if you have to do that, you should not be ordering DoorDash. You should be going to the grocery and making your own food. That's my view on that. But I know people will do it. If they offer it, there's clearly a demand for it. Yeah. No, you're not wrong. There's some harsh realities out there, right? Yeah.

[00:55:06] Mm-hmm. It's a tough pill to swallow. Thanks for listening to the folks. Thanks for listening to the folks. Thanks for listening to the podcast, folks. It is good to know that, you know, if I ever end up behind bars, the show can go on. The show can continue on. Yeah. Regardless, you know, I end up behind bars, just make a couple phone calls, make a couple

[00:55:34] political donations, and we can keep doing the podcast from jail, just like SBF. Yeah. Yeah. That's it. But I guess on the last note, too, this is next week, or when people listen to this on Monday, it'll be the last week where I'm an employed person. Oh, yes. Yeah. That's good. That's bullish for the pod. It's very bullish. Bullish for the podcast. So there's going to be more content. Stay tuned.

[00:56:02] I just got some plan for the spring, summer, and later this year. So you'll be seeing some more stuff coming from the podcast. Is there a polymarket on Canadian election? There's got to be. There must. Yeah, I'm sure there will be. Maybe it'll set it up. Okay, so there is the next prime minister of Canada is one of the top. The top two polymarket ones right now are 2025 NCAA tournament winner. Okay, not surprised. Yeah.

[00:56:31] And next prime minister after the election. Where is the, when is the election polymarket? Yeah. There's got to be one. Yeah. I mean, I think that what I've seen polymarket aside, I think it's going to be April 24th is the speculation. End of April for sure. Yeah. There's which is one of the most seats, who will win the more popular vote. I don't see like a date polymarket. I wonder if, yeah, there's no, I don't know if there is one.

[00:56:58] Maybe there's not that much interest for when it will be more like who will win. I'm sure they will have the, you know, the pretty much it'll be between Pierre and Pierre Paulie and Mark Carney. Yeah. They're 59 and 42. Everyone else is less than 1%. But Carney's leading. You know that, right? It's crazy. Yeah. I mean, it's been back and forth. I think they've been pretty close to one to another. So it's going to be a...

[00:57:26] I just mean on polymarket as of recording, Friday, March 21st. I think it's been all... Oh, yeah. And the polls I've seen, it's kind of depending on the polls, like I think they're both within the margin of error. So it's basically like it could be one or the other at this point. But I've seen some poll where Carney's leading, seen some poll where Pierre Pauliev is leading. Some of this kind of degenerate gambling world is kind of crazy to me, but I'm... It's actually amazing. I find that fascinating personally.

[00:57:53] It's pretty amazing as a stats guy to have prediction markets on the future of things like this, right? It's just so much more useful than polling. I mean, you saw with the US election. It's just... It is just better. It's a better system. Yeah. I'll be keeping a close eye on it, especially as we get closer within the week and then the hours after, how quickly they'll have the...

[00:58:18] Basically, the probability will go up to like 90 to 95% for whichever outcome and who will be the prime minister. And who knows at this point? But it's just interesting how quickly it will move versus the official call from either CBC or other main news networks. I wonder if there's going to be a big global event, like a big election or something on these

[00:58:43] Calci, Polymarket prediction markets that the consensus is so wrong. There's going to be eventually like a 95-5 with the five caches. I mean, I hope if we have people from the major news networks in Canada, that some of them will actually look at Polymarket during the election night. So that is one thing I hope to see is that they actually keep an eye on it.

[00:59:11] I think it would be a disservice to Canadians to not have a look on it. Like it's different than it was four years ago. Why not use this new tool that's available to you? I think that is one thing. I don't think they will, but I do hope that some will take notice and say, okay, like this is what we're seeing. But also here's what Polymarket is seeing. Like take note of what happened in the US and why not? Honestly, I think it's a low hanging fruit for the network.

[00:59:41] If there's a network who does it, I think it will be a super low hanging fruit and will give them a lot more credibility for this election. That's my view. But yeah, totally. I mean, look, I mean, there is good reason to follow this data. It's actual capital on the line versus a no risk poll. And we'll see. Maybe we end up seeing and their complete Polymarket is completely off the mark. I don't think so.

[01:00:09] But I would say, you know, learn from the US and from the US election and just show it once in a while during election night. Why not? Yeah, absolutely. Thanks for listening to the podcast, folks. Tomorrow I drive 20 hours. Well, I'm going to stop, but I drive back to Canada. And hopefully we've de-thawed a little bit. Oh, it's almost all gone here at least. Just know. Okay. Yeah. Good. Good. Good.

[01:00:38] Well, I hope I don't get tariffed on the way out. On the way out of here. I'm excited to be back in the country. Did you buy that mic in the US or Canada? What's going on? Yeah. What do you have to do? What do you have to do with that fancy mic you have there? No. Coming back in. So, you know, maybe they'll just slap me with a little 25% tariff. My whole net worth. No. Let me know how it goes.

[01:01:06] I'm just curious to see if the experience is a bit different than you would have seen a year or two ago. Well, I think going into the US. Yeah. But even coming back, I just don't know, right? Like maybe it'll be a bit more intense with the plan that they did to try and control the borders a bit more up north too. But when you come back into Canada, you're talking to Canadian border crossing. Yeah. Yeah. But I'm just curious if it'll have changed. Yeah. I'll let you know.

[01:01:36] I know people have had some really strange border experiences as of late. They're on the news and stuff. I always get stressed at the border even though I have nothing to hide. I don't know why. I'm just like, I feel, I always feel like there's something I'm not saying. There is something very kind of eerie about it. Yeah. Especially, I mean, especially if you get some guy who's real stern or some woman who's real stern. I have this. They just want to see how you react under pressure, honestly. I have a special skill.

[01:02:04] If they are not cool with me, I can just switch to French and ask that I speak to someone in French. That I've done that a few times. And usually they just like, they let you go. Because it's a pain in their... I got it. I've done it. Is that a requirement that they have to like talk to you? If you want. Yeah. It's both languages. So they would have to go if they can't. But again, that's on the way home. I'm not worried about coming on the way back to Canada. That's easy. No, no. Yeah. Oh, the US, I never get stressed. I don't know why.

[01:02:34] It's like coming back. I feel like I'm doing something wrong. I don't know why. What'd you buy? What'd you buy? I'm $5 over the limit. Thanks for listening. Appreciate you guys. We're here Mondays and Thursdays. You can support the podcast at joinTCI.com. That's our Patreon. You get this podcast on video. You can see my shady hotel room and our monthly portfolio updates here. So we're coming through to the end of the month here.

[01:03:03] So we do it every single month. Our monthly portfolio updates, a spreadsheet tracking. If you don't know how am I doing with your portfolio, like when we're talking about measuring your appointments, if you don't know how am I doing, check out that spreadsheet. It makes it really easy for you. It accounts for inflows, outflows. If you have withdrawal, if you had special situations, it'll handle all of that on time-weighted. It uses something called Modified Dietz. You don't have to know how to do the math because I already did it for you.

[01:03:31] So it's available at joinTCI.com. Bye-bye. The Canadian Investor Podcast should not be construed as investment or financial advice. The hosts and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions. The Canadian Investor Podcast should not be supported by the financial or financial aid of the