These 4 Quebec Rollups have Crushed the TSX

[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

[00:00:18] Welcome into the show

[00:00:20] My name is Braden Dennis as always joined by my favorite French Canadian, Simon Belanger

[00:00:27] The reason you're getting that today is we're going to talk about Quebec in the first segment today

[00:00:33] But you're also wearing red. You're like in the spirit of the show today, brother

[00:00:37] Looking good

[00:00:39] Yeah, I mean i'm excited for this one

[00:00:41] I think it'll be a fun episode a lot of it for at least what i'm going to be talking about is

[00:00:46] Coming from the listener question. So uh something that I know you'll chime in

[00:00:51] I think we have a similar kind of approach to that. So it'll be fun too after the uh, the whole Quebec, Quebec segment

[00:00:58] Dude, I so you and I are just talking about we got to do our joint tci.com

[00:01:02] Updates go go support the show. We do our monthly portfolio updates on the first of the month

[00:01:07] And i'm sitting on

[00:01:09] way too much cash

[00:01:11] And I don't know like I have a bit of decision paralysis here and I got like

[00:01:16] I gotta figure it out here man. I don't be like me like I let four or five like kind of dca's

[00:01:23] Go into the go into the account with no action

[00:01:26] And now i'm just sitting on all this cash and I I I messed up, dude

[00:01:31] Don't be like me like I've been complacent over the last like

[00:01:35] Three or four months with deploying cash. Luckily, you know

[00:01:38] The things that I do own have been working really well

[00:01:41] But don't be like me. Is it like just because you're too busy or valuations are too high or like, you know not

[00:01:48] And like I know you have a lot of ideas when it comes to investing

[00:01:52] but maybe not like any ideas that like is

[00:01:55] Screaming by right now

[00:01:57] I don't think I've had a slam dunk new idea that I have a lot of conviction in and like

[00:02:03] Four or five months ish and you can and and that shows

[00:02:07] My portfolio like to see which is totally fine

[00:02:11] Like I think last year

[00:02:12] My main my main thing was to just like be even more concentrated than I that I already am and

[00:02:18] And I think I did that quite well and the results

[00:02:21] worked but

[00:02:22] Yeah, man. I think I just got to turn over some more

[00:02:26] More new leafs, but valuations have

[00:02:29] Certainly become less attractive like I was pretty excited about a lot of stuff early last year

[00:02:35] and

[00:02:37] Things are just ripping again and it's not just tech

[00:02:40] Like everything is kind of ripping right now. I just saw a constellation hit

[00:02:45] 80 billion in market cap on the tsx as of today

[00:02:48] Like, you know, holy things are going up and to the right

[00:02:52] Yeah, and you're uh, you posted a tweet. I can't or a necks or whatever

[00:02:57] Whatever we want to call it but you posted something about like a video about a market commentator

[00:03:03] Saying like talking about the high valuation and making up this new kind of way of looking at things

[00:03:09] Yeah, that one I thought was good because

[00:03:12] It definitely feels like things are when you start hearing stuff like that on like cnbc or bnn whatever it is

[00:03:20] it's it feels a lot like stuff when things are extremely bullish and

[00:03:26] Near the top. I mean, I'm not saying it could go on for months

[00:03:30] If not years, we don't know but it's just a way the things you start hearing. It's like, okay

[00:03:35] Everyone seems to be like on this one end of the spectrum

[00:03:39] There was kind of warning bells that go in my head. No, don't take this as I'm not investing

[00:03:43] I'm still dollar cost averaging a lot of it with index funds

[00:03:46] So it's not like I'm not investing is just something I notice as well for context

[00:03:52] I think she was the head of research of

[00:03:54] I think it was morgan stanley. It was it was one of the bold bracket investment banks

[00:03:59] I think it was morgan stanley

[00:04:02] If it wasn't it was one of the other major this wasn't someone, you know, just off the street

[00:04:07] this was one of the head of research of one of the major big investment banks and

[00:04:12] She said you got to pay up for quality and we're actually using a new metric called

[00:04:18] price to innovation

[00:04:20] P.i

[00:04:23] Price to innovation and you know, of course I rolls everywhere because how do you quantify that?

[00:04:30] You can't it is a justification for buying frothy. Shit is what priced innovation is

[00:04:37] You know move over price to earnings

[00:04:40] Uh, this is priced innovation

[00:04:42] You should you should use that when you do another uh funding round with uh finch dad and just say our price to innovation is

[00:04:50] We have the lowest price to innovation of any

[00:04:53] You know venture back startup you can find I I feel like you'll be laughed out of the room if you say

[00:05:00] I mean, I'd hope so. I mean if i'm dealing with that someone knows what they're doing. I'd hope so

[00:05:04] Yeah, kathy wood

[00:05:07] Walked so the morgan stanley person could run. Yeah

[00:05:13] They go on cnbc

[00:05:15] Say some outlandish crap

[00:05:18] Get a lot of assets under management

[00:05:20] profit

[00:05:21] Step one two and three laid out. All right. Let's talk about quabec based rollups today

[00:05:27] So this is my first segment of the day and you were born

[00:05:31] When did you move across to the ontario border to ottawa? You were born in quabec

[00:05:37] Yeah, on a more permanent basis about 10 years ago. Okay. I thought it was longer than that. Okay, so okay got it

[00:05:44] So

[00:05:45] We're gonna play a game called

[00:05:48] Which quabec based rollup? See mom last time we did this was which badard. I don't know if you remember that

[00:05:54] It was a lane badard. Oh, yeah versus the versus connor badard

[00:05:58] This is which canadian based rollup. I got five questions in four companies

[00:06:02] So I didn't want to make it too easy

[00:06:05] But didn't want to take too long

[00:06:06] So the companies that we're talking about today are kush tarp ticker atd

[00:06:11] Cgi ticker g i b I think it is tf inter tfi international ticker tf ai and wsp global ticker wsp

[00:06:22] now

[00:06:23] These companies have been monster performers and they all share something in common. They have roots

[00:06:30] Based in quabec

[00:06:32] And they buy a lot of companies. They are rollups. They buy

[00:06:38] this

[00:06:39] Fragmented industry that they operate in kush tarp its convenience stores for cgi. It's tech consulting for tfi international

[00:06:47] It's trucking and for wsp

[00:06:49] It's civil mostly civil engineering firms around the world

[00:06:53] So here you go first ones mom this company aided the european space agency's rosetta mission

[00:07:00] And has been involved in the launch of over 200 satellites

[00:07:03] Gonna go cgi for this one. Correct. The only tech company on the list

[00:07:08] Correct. In fact, they have been involved in space. I didn't know since the 80s. And so that that's been an interesting fun fact

[00:07:17] in

[00:07:19] 1987 this company purchased

[00:07:22] Seven jurors a chain from metro which they have kept that brand intact to this day

[00:07:30] Yeah, that's an imitation kush tarp. I'm pretty sure correct

[00:07:34] They've moved over almost everything to silk okay, but there's a few brands that they've kept in quabac local to their roots

[00:07:42] Yeah, I think I vaguely remember

[00:07:46] Maybe seeing that brand when I was like a kid

[00:07:49] I don't think they have them anymore very rarely and yeah for the most sorry

[00:07:54] Haven't been I haven't like kept an eye on it in terms of what brand they use the most in kebek

[00:07:58] I'll have to let you know next time. I go max

[00:08:01] Yeah, they used to have the

[00:08:03] They used to call it just kush tarp. It's just kush tarp right that's the yeah, yeah kush tarp

[00:08:08] Yeah, they just would call it but the same like I think they had the same owl. Does that is that late night?

[00:08:13] What is that? How does that transit late night? Yeah late night? Yeah, okay

[00:08:17] Apparently the logo or it goes to bed late. Yeah, depending. Okay. God

[00:08:22] Apparently the logo was like I was looking on wikipedia. Good old wikipedia

[00:08:25] And apparently the logo used to be like a like a person who was like sleeping

[00:08:30] Yeah, yeah, you know, that's right. Okay. I've never seen that but you know, okay, you can verify

[00:08:35] Uh since 1988 this company has acquired 195 companies

[00:08:41] And have completed an acquisition on every continent of the earth except for

[00:08:47] Like except for Antarctica, but I had to look because there was every single I found one

[00:08:54] acquisition that filled all seven minus Antarctica continents on earth

[00:08:59] And yeah, if I had to guess probably WSS WSP on that one, correct. Yes, they are probably the most global from

[00:09:08] That make kush tires. They're all global except for tfi

[00:09:12] A management team is

[00:09:14] infamous for showing up unannounced

[00:09:17] To audit the operations of their company on an individual location basis

[00:09:21] Well, I'm gonna go with the last one standing here tfi. No tfi. This is kush. No, this is kush tarp

[00:09:28] They are infamous for going to

[00:09:32] the locations these convenience stores

[00:09:34] and being meticulous

[00:09:37] About the operations meticulous about how they're run meticulous about the optimization

[00:09:43] Of the stores and they still do it today allegedly even after, you know, all these years

[00:09:49] And yes, there's one standing here in 2021 this company did a car val tfi

[00:09:55] Ha ha ha

[00:09:56] 2021 this company did a carve out that literally doubled their top line and ebida in one

[00:10:03] Deal that was to yeah, wasn't that the ups last mile deal? Is that it? That's exactly right. They carved out that things

[00:10:11] Ltl from ups freight and now if you notice you might notice this

[00:10:15] Next time you get a package from ups and they give you that tracking number

[00:10:20] It's still branded ups if you click on the tracking in the footer in the small text

[00:10:26] It'll say ups

[00:10:28] ltl or sbs freight for go to this is

[00:10:31] owned and operated by by tfi international

[00:10:35] So you'll still see, uh, you know

[00:10:37] ups still doing your last mile delivery there in terms of the branding

[00:10:41] But it is owned and operated by tfi which I think is quite interesting

[00:10:45] So see mom here's some some graphs some some visuals and some data on how this group these these four companies have done because it's been

[00:10:54] tremendous since the the time where they've all been public at the same time, which is

[00:11:01] 2006 may 25th 2006 so around 17 and a half years

[00:11:06] Wsp has compounded at 22.8

[00:11:10] Percent for a total return of 3,703 percent

[00:11:15] tfi has compounded at 18.6 percent a total return of

[00:11:21] 1,945

[00:11:23] cgi has compounded at 18.4 percent for you know almost 2000 return kustard almost another 2000 return at 18 and a half percent

[00:11:32] Kaggle so those those have been almost identical

[00:11:35] If you invested that that day a 10 000 into equal weighted 25 25 25 25 portfolio your 10 000 would be worth

[00:11:46] 309,541 dollars today

[00:11:50] since ipo

[00:11:53] these

[00:11:54] companies have compounded in this case of of kustard over 34 years

[00:11:59] for

[00:12:00] 493

[00:12:02] 1000 percent one of the best performing stocks

[00:12:06] Of all time of all time

[00:12:09] Not just in canada of all time around across the entire globe

[00:12:14] absolutely fantastic you've had monster returns yet over 100 000 percent for

[00:12:20] cgi so 10 100 bagger and

[00:12:23] 43 000 percent for tfi

[00:12:26] 3700 percent for wsp it's been public the least the least longest and then

[00:12:33] This last graph here that I have here is just on finch out just graphing out their operating income of all of them since they've all been public

[00:12:41] in may

[00:12:42] 2006

[00:12:44] This is why these companies have done well. It's not some magic fairy dust that the investors love these companies

[00:12:52] It's the fact that every single one of them have compounded operating income

[00:12:57] Eps free cash flow per share whatever metric you want to use at double digits for multiple decades

[00:13:04] That's all like the stock has follows the weight of gravity with these companies and the results have been

[00:13:12] Tremendous, so what can we learn from this one quabac based roll-up seem to be very good at capital allocation

[00:13:19] The management team for these companies have been around for a long time a lot of times it's still run by the founder

[00:13:26] and many

[00:13:29] At least two out of the four I'd have to look at least for elaine bidard and

[00:13:34] And I'm forgetting that kush tards guy's name. What's his name?

[00:13:38] Elaine bouchard not to be confused with elaine bidard. That's right. That's that's forgetting

[00:13:44] So they're you know, it's it's management team skin in the game good at capital allocation and patient

[00:13:50] kush tard turned down an deal to buy something for 22 billion. They got outbid by 7 11

[00:13:56] Instead of fomoing and trying to you know cp cpc and rail them. They just said okay

[00:14:01] That's that's too much. We'll move on and so these these companies are very good at capital allocation

[00:14:07] Yeah, I don't know about cgi because i'm not as familiar with their business

[00:14:11] But the other ones I mean, I think one thing that's interesting is they also are sticking to what they know, right?

[00:14:17] Yes, they are roll-ups

[00:14:19] but they're not

[00:14:21] Starting to buy businesses that don't really make sense with their operations. They tend to stick to what they know

[00:14:28] That's right. And they've stuck to their vertical good point

[00:14:32] They've stuck to tucking in stuff. They understand and that they can they can you know find some synergies

[00:14:38] And they've been so patient like this has happened over multiple multiple decades

[00:14:42] And they've been meticulous about the operations when you're buying these kind of distressed fragmented industries

[00:14:49] You're gonna if you're if your value buyers in like trucking or convenience stores

[00:14:54] You're gonna be buying a lot of junky operation sometimes

[00:14:57] mom and pop shops

[00:14:59] Same with the waste consolidators. I didn't include them because I'm not really sure where waste connections is from

[00:15:05] I know gfl is mostly here. So yeah, nothing else to add if you have any comments

[00:15:10] I'm all here for it. No, I think that was uh, that was a fun little one

[00:15:16] So the the next segment here and I know you'll want to chime in a bit

[00:15:20] So, you know, just let me know when you want to chime in

[00:15:23] It's a question for brian that came in

[00:15:26] I reduce a question just to make it a bit shorter for the podcast

[00:15:29] But I kept the essence of it. So I currently his question starts off

[00:15:32] I currently have about 60 of my portfolio managed by an advisor and 40 self-directed

[00:15:39] My advisor has recently suggested to move a significant portion of my holdings from a high growth fidelity global innovators fund

[00:15:48] That heavily tracks the nasdaq to a covered cally tf the horizons nasdaq 100

[00:15:54] He says that it's much less volatile and still reaps a lot of the upside since the nasdaq had huge gains in 2023

[00:16:03] And may experience slower growth and or volatility this year. I don't fully understand what a covered cally tf is

[00:16:09] So i'll give my take i'll explain what a covered cally tf we have in the past none of this is investment advice brian

[00:16:18] Yeah, no exactly well done. I was gonna say that but you beat me to it

[00:16:21] And obviously that this is just our opinion again. We don't know your full financial situation

[00:16:27] We don't know how much, you know, what kind of investor you are what your risk tolerance is

[00:16:32] These are all things that hopefully your advisor if he or she is a good advisor

[00:16:37] They they are well aware of but it's a question the covered call we do get

[00:16:42] Relatively often because they tend to yield quite a bit

[00:16:46] So anything you want to add before I explain the mechanics of that? No, I just

[00:16:51] I don't want to be critical of of any financial advisor and I know a lot of people come in with questions

[00:16:58] And we don't know the entire context of the advice given

[00:17:02] but

[00:17:03] anytime

[00:17:05] You're told

[00:17:07] We got to rotate out of this because it's done too well

[00:17:10] Is some of the most idiotic statements i've ever heard like it truly is if we were to just zoom out

[00:17:19] And every time amazon or apple hit a all-time high as you sold the stock. It's done too well

[00:17:26] You would have missed out on life changing wealth. I'm not saying, you know nazdax in for another 40 rip

[00:17:32] But the constituents inside this company inside this index are doing very well. They dominate our day to day

[00:17:40] so

[00:17:41] You know that is what I call

[00:17:44] trimming the flowers and watering the weeds

[00:17:47] Which is a recipe for underperformance in my humble opinion. So that's that's my only comment so far

[00:17:53] Okay, no, that's good. And that's fair and I'll give my take towards the end here

[00:17:57] I mostly agree with what you're saying, but I'll actually give some

[00:18:00] actual numbers to back that up

[00:18:02] So I think it'll be really interesting

[00:18:04] So first of all, what is a covered call etf if you're new to investing?

[00:18:09] You may have encountered these ETFs and a lot of newer investors get attracted by them because they

[00:18:16] tend to pay

[00:18:17] High single digits even double digit yields. So a covered call etf means that the fund managers

[00:18:23] Sell call options against the stocks that are held in that etf

[00:18:27] So a call option gives the right to the buyer of the option to purchase the stock add in agreed upon price for a set period of time

[00:18:35] When a covered call is sold the buyer pays a premium

[00:18:38] Which then goes to the seller so one call option that that's important to know as well gives the right to purchase 100 shares

[00:18:45] So their contracts of 100 share

[00:18:48] They're always sold in these lots of 100 now. I'll give an easy example

[00:18:52] To make sure that it's easier to understand just a second here. I believe braden is playing with the page

[00:18:58] So it's making a little bit harder. Maybe not. Were you? Oh man, I always forget the classic move

[00:19:04] Yeah, the classic move. What is this episode?

[00:19:08] 450 cmo

[00:19:10] Yeah, 350 350 that's a good that's a good reminder. This is episode 350. I've done this

[00:19:17] 350 times, you know minus a few day and

[00:19:21] appearances

[00:19:22] And I still mess with the dock to cmo's frustration and like, you know

[00:19:29] Dude, I I applaud you for putting up with 350 episodes of that

[00:19:35] It's all good. I you know hadn't started the example so it doesn't break the train of thought

[00:19:39] So it's all right now the example. I'll try to simplify it as much as possible

[00:19:44] It's not the real price. Keep that in mind. I tried to use just some easy numbers

[00:19:49] So it's easier for people to wrap their head around it or rewind if they want to re-listen what uh

[00:19:55] What I'm saying and to that example

[00:19:57] I'm also not going into things like time decay for example when it comes to options feel free to go on

[00:20:05] Investopedia if you want to understand what that is. So I'm really trying to keep it as a a more basic level

[00:20:11] So I have 100 shares of microsoft which are currently trading at $100 each

[00:20:16] I decided to sell one call option because it's 100 shares

[00:20:20] So it's a lot of 100 to braden the call option gives the right to braden to buy 100 dollars

[00:20:28] shares my shares of microsoft

[00:20:31] At a price of 110 dollars for the next six months now

[00:20:36] The reason why it's a bit higher typically that's why like options will be sold

[00:20:40] So the strike price so the 110 dollars will typically be higher than what it's trading at

[00:20:47] Now for that right braden pays me a premium of two dollar for each share

[00:20:52] So 200 since the contract is a hundred share if the price of microsoft stays below 110 dollars

[00:20:59] Then braden won't exercise the option and I'll pocket the 200 dollars and still have my microsoft shares

[00:21:05] That's because if it stays below 110 dollars

[00:21:08] Why would he exercise that because he can get them at a cheaper price on the open market?

[00:21:14] It's that premium that two dollar premium per share that generates the income

[00:21:18] And this is the best potential outcome that I just said if you're doing a covered called strategy

[00:21:24] Is you're essentially looking at

[00:21:27] Either a flat market or a bear market

[00:21:30] So that's typically, you know the best outcomes because you're still getting that premium so it helps your return

[00:21:37] On the other hand say microsoft rips and the price is 150

[00:21:41] So I ended up making 12 dollars a share that's because the initial

[00:21:45] Initially when I sold the call option the shares were 100 dollars and then the option

[00:21:50] A strike price was 110 dollars

[00:21:53] So that means I sold my shares to braden for 110 dollars and made 10 dollars profit plus that two dollar premium for

[00:22:01] Total of 12 dollars per share the issue here is I capped my upside

[00:22:06] Is because if I just held on to the shares and did nothing did not

[00:22:11] Sell options nothing like that. I would have made 50 dollars profit per share during that time period or 38

[00:22:19] More per share compared to the call option. So when it's a covered call etf, it's the same logic

[00:22:25] It's just done on you know

[00:22:28] Hundreds of stocks that are essentially the underlying component of the etf

[00:22:33] And the biggest issue with covered calls is like I said, you're capping your upside

[00:22:38] But you're reducing your downside as well

[00:22:41] Historically and I will go over these numbers. It has not produced good returns compared to their non-covered calls

[00:22:48] Counter parts. So I decided to choose a different etf

[00:22:52] But it's very similar to what brine was referencing just because the one that

[00:22:57] It was referencing just started being traded in mace

[00:23:01] So I looked at the qqq which is the nazdaq 100 etf

[00:23:06] I think it's 20 percent zero point two percent management expense ratio

[00:23:10] So quite low and then the other one I compared it to is the qyld which is the covered call version

[00:23:17] So the returns I'm talking about they are the total returns that includes the distribution or dividends

[00:23:22] So it does factor in those premiums that I was talking about that generate income with this fund

[00:23:27] Anything else you want to add before I go over the numbers. No, you've covered the basis here, right?

[00:23:33] In a basket of etf. It's just them doing this on tons of stocks basically

[00:23:38] Exactly now if you looking back at 10 years

[00:23:43] QQQ has had annual returns of 18.43 percent clearly, you know tech and big tech in particular has done extremely well over the last decade

[00:23:53] So if you had a ten thousand dollars investment, you'd be be worth a bit more than 54,000

[00:23:59] During that same period the covered call version qyld would have returned 7.43 percent annually

[00:24:06] And a ten thousand dollar investment would be worth 20,400 dollars

[00:24:10] So now you're seeing that clearly there's some big differences in return now to be fair

[00:24:17] I tried to look I tried to really find periods where the covered call

[00:24:23] Was actually performing better just to be fair looking at different time periods

[00:24:27] So I decided to do a one-year return from may 2019 to may 2020

[00:24:33] The reason I chose that is because of course we had the kind of market crash that happened in march of 2020 during that

[00:24:40] time period

[00:24:41] So I figured it's probably gonna help out the covered call etf not really so qqq return

[00:24:49] 36.24 percent and qyld return 5.66 percent

[00:24:54] So what what happened here is that the returns

[00:24:58] During that time period for qqq so the lead up to the correction the returns were so much greater than qyld that even the

[00:25:07] Fag that qyld would get those premiums and even during the downturn

[00:25:12] It really didn't help the returns and obviously by may of 2020

[00:25:16] We were already back in a bull market. I think at that point now if we drill down even more

[00:25:22] And try to really capture the worst of the pandemic through a six month period

[00:25:26] So I decided to do september 23rd 2019 to march 23rd 2020 march 23rd was actually when the s&p

[00:25:33] 500 and naztac bottom at the onset of the pandemic

[00:25:37] So during that time period qqq return a negative 10 and qyld return a negative 16.5 percent

[00:25:45] so qqq still outperforming

[00:25:49] During the shorter time period and me even trying to find a way to get qyld to outperform

[00:25:57] Now I narrowed down even further and this is the last one here. Let's look at february 23rd to march 2020

[00:26:07] At a one month basis and I don't think it got really much worse than that

[00:26:12] So qqq was down 23.5 percent and qyld was down 20.9 percent

[00:26:18] So it did outperform in that one month period

[00:26:21] But it's the only instance in the last ten very

[00:26:25] Not by a wide margin like it didn't exactly save you from a huge drawdown. You still had a few you still had a massive drawdown

[00:26:33] Yeah, exactly and these are total returns now maybe in the last 10 years or war or some little time periods that

[00:26:41] qyld ended up doing better aside from the one that I just found

[00:26:44] I mean I was trying to look for the most obvious one

[00:26:47] But typically people will also old funds for more than a month period

[00:26:52] So that's the other thing to consider here that it's not super realistic to think about it this way

[00:26:58] Now to be fair to your advisor

[00:27:00] There's definitely a case to be made that maybe the snp 500 nasdaq are currently highly valued

[00:27:07] I mean we talked about it at the beginning of the episode

[00:27:10] It's not impossible that if the nasdaq goes sideways or enters a bear market for an extended period of time

[00:27:16] That the covered call etf will outperform and in theory

[00:27:20] that's when it would outperform is you have an extended

[00:27:25] Like period of time where the market is essentially flat or in a bear market

[00:27:29] We just haven't seen that in the past 10 years

[00:27:32] So in theory it could happen. I have no way of knowing what the future holds neither does braden

[00:27:36] Maybe it will outperform better

[00:27:38] I mean all we can do is look at back and testing this data and that's what I did

[00:27:43] The historical data is clear though and it hasn't performed well versus the qqq now a couple of things I'll finish on here

[00:27:50] So in terms of you these are good question for anyone looking to invest looking to

[00:27:56] Kind of look under investment from a critical standpoint. Just these are questions to ask yourself

[00:28:01] Are you looking to maximize your return over a long period of time 10 plus years?

[00:28:06] Maybe you're closer to retirement you have you'll need the funds in a few years

[00:28:10] So these are all different things you have to factor in and may influence the type of investment you'll be in

[00:28:15] Are you okay with volatility? Would you panic sell in the case of 20 percent 30 percent 40 percent drawdown?

[00:28:22] Maybe having that extra income even though it won't outperform longer term from a psychological basics

[00:28:30] Maybe it will prevent you from doing some mistakes and selling at the bottom for example

[00:28:35] Are you looking to draw income on your investments?

[00:28:38] And even then I mean you can argue that you can just trim your position and get some income from that

[00:28:43] So those are questions that you need to ask yourself bradden and I can't answer that because you know, we have a risk tolerance

[00:28:50] We are young. We still have a lot of time while bradden's young. I'm starting to be middle-aged here, but

[00:28:56] You're a young lad

[00:28:58] I'm a little young lad. Yeah, but I mean

[00:29:02] The reason I think it's important these are all like important questions to ask yourself

[00:29:06] I think also for people just looking at investing in only dividend stocks

[00:29:10] I think the only case that I think the strategy is worthwhile is from a

[00:29:15] psychological benefit because a lot of the time these strategies tend to underperform the index

[00:29:21] And I'll just finish on fees

[00:29:22] So make sure you look at the fees for each of the funds because that will be an important part of maximizing your returns

[00:29:28] Covered call ETFs will generally be higher fees because it requires some active management from the fund managers

[00:29:36] For the covered call of strategy. There's also more trading involved because they're buying

[00:29:40] They're selling options. Sorry. So there is some more fees involved

[00:29:44] For example, just um going on memory the qqq. I think it's 20 basis points

[00:29:48] So 0.2 percent and the qild I think it's three times that so 0.6

[00:29:54] percent

[00:29:55] So keep that in mind because these are all different factors to consider

[00:30:01] If you'd like this strategy personally, it's not one for me

[00:30:05] But again, I know a lot of people we get that question quite often. So I thought it would be

[00:30:12] Good to to bring him back at the forefront here. There has been a gigantic rise in

[00:30:19] Products that these companies are spinning up to sell to investors. They are investment products

[00:30:27] because for the most part

[00:30:30] all of the basic indices have

[00:30:34] Competed down to zero or on fees like you get these broad based like s&p 500 funds for like five basis points

[00:30:42] Like 0.05 percent and then they look out of the universe on things that they can create and generate fees from that is their business

[00:30:51] These types of instruments

[00:30:53] Yes, they can provide income

[00:30:56] Do they

[00:30:58] provide

[00:30:59] A sound investment strategy

[00:31:02] No, not really

[00:31:04] I think

[00:31:06] Most of this stuff I I feel more and more like charlie munger where it's just gone

[00:31:11] We are wasting smart people's talent in the financial industry making this crap

[00:31:19] Because it is it's crap and that's that's

[00:31:22] It just is it's the truth. It's a lot of crap

[00:31:26] There's there's and they're and we're making more of it every single day with these fund providers

[00:31:31] You know, yes, you can get income

[00:31:33] but let's

[00:31:34] Let's just step back logically for a second the same way

[00:31:38] That it is a

[00:31:39] Silly mistake to only buy high yield stocks

[00:31:43] Even if you're looking for income with that out of the way

[00:31:47] Even if you're looking to you know

[00:31:50] Sit on a beach and have a bunch of dividend companies pay you cash

[00:31:53] Nothing wrong with dividends

[00:31:55] Something wrong with that strategy and the main reason for that

[00:31:59] is

[00:32:00] treating a company like an instrument that pays you a yield

[00:32:06] That is its sole purpose. I buy this ticker. It pays me income

[00:32:11] That is a company you are buying equity in it is not some imaginary

[00:32:18] Stock twicker you buy on your discount brokerage and they pay you although it does feel like that

[00:32:22] That is a portion of the profits of that opera that business operation is giving to investors

[00:32:30] And the reason they're giving that money to investors in the form of a dividend

[00:32:34] Is because they don't have a way to spend it all and get a return inside of their business

[00:32:41] So when you get really really high yielding stocks really high yielding companies

[00:32:46] That is a signal that the company has reached maturity

[00:32:49] And that is a signal that the management team is letting investors know

[00:32:54] We don't have a good enough way to invest this within our company

[00:32:59] That we think it's better to sit on your balance sheet instead of ours

[00:33:04] That's what a dividend is and so

[00:33:08] Lot of companies like think of visa for instance

[00:33:11] They produce more more cash than than they can possibly know what to do with same with apple

[00:33:17] And so they pay a conservative and growing dividend as their business grows

[00:33:21] But they make sure since they're able to achieve

[00:33:24] 20 plus percent return on invested capital of dry powder that investors give them and that the cash they generate

[00:33:31] It is in their investors best interest to deploy it

[00:33:36] And be a steward of it at a higher rate of return than you can

[00:33:41] That's why you own the equity, right? Like like let's let's not like outsmart this stuff

[00:33:47] It's just it's just very basic and and

[00:33:52] These products

[00:33:53] Are told to convince investors

[00:33:56] That it you know, there has to be something complicated here to earn income

[00:34:00] If you want to own income just buy good businesses that pay you dividends and hopefully the dividend is growing

[00:34:04] I think all this stuff is crap. I've never owned any of it and I've never will

[00:34:08] Yeah, and buybacks would be similar

[00:34:10] So they're looking to return money to shareholder

[00:34:12] It's just doing it in a slightly different way instead of giving you cashed or

[00:34:17] Giving you essentially a bigger share of the companies. That's what they're that's what they're doing

[00:34:21] So that's why buyback yield one of the metrics we looked at in the last episode

[00:34:26] That's one that we mentioned because it is a good indicator of how they're returning shareholder or money back to shareholder

[00:34:33] When looking at buybacks and I mean when it comes to covered calls

[00:34:37] It just feels especially something as

[00:34:40] You know as high upside as the NASDAQ. I think that's a fair statement to say

[00:34:45] It just feels like

[00:34:47] You're really it's an asymmetric bet

[00:34:50] So there's the upside is way higher than the potential extra safety that you're

[00:34:57] Getting with doing a covered call

[00:34:59] So it's costing you more in the long run. That's a sense. Well, I mean, that's what the theta tells us at least historically

[00:35:06] Is you're capping your upside for a little bit of downside protection

[00:35:10] But that downside protection is really not proportionate to the amount of upside at hot

[00:35:15] investing

[00:35:16] Is

[00:35:17] Simple but not easy

[00:35:20] In essence, the idea is simple. The execution is difficult

[00:35:26] These types of products

[00:35:29] Create complexity

[00:35:32] With a result that doesn't lead to success

[00:35:36] Like I I did

[00:35:38] Hey, do you want to pay more fees and have worse performance? Like

[00:35:43] I don't know. It's not a proposition that I'm willing to go for

[00:35:47] And you said that and the other thing too like I think that to me would be a basic if your advisor's

[00:35:54] suggesting a new investment

[00:35:56] They should be able to explain to you what that investment is

[00:36:00] Yeah, like that to me would be a basic and you know

[00:36:04] It's I think it was a great question from brian

[00:36:06] But that would be the question I'd ask the advisor is

[00:36:10] Why were you not able to explain this to me how a covered call dtf is and if he or she is not able to explain that

[00:36:18] Then there's

[00:36:19] Some warning bells that go on at least for me because you're recommending products that you don't even understand yourself. Yeah, this is

[00:36:27] People yeah, yeah like

[00:36:29] The finance world and I know because I'm in it

[00:36:33] They're my customers at finch act. I talk to them all day

[00:36:39] I

[00:36:40] I know how they operate. I know what they work. I know how they make money

[00:36:44] They're

[00:36:46] incentivized over time

[00:36:48] To complicate things

[00:36:51] It's just it is just built in the incentives

[00:36:54] And you you can't sound smart if you just tell your customer to buy your cosco every month, you know like

[00:37:03] Just buy a cosco every month and sail off into the sunset

[00:37:06] Like has been a way better take than buy complex

[00:37:12] high fee instruments

[00:37:14] But that's too simple

[00:37:16] Right, and then how are you gonna earn your fee if what you're saying?

[00:37:20] Is too simple right like the incentives don't make sense, but we could go on and on about this

[00:37:26] Yeah, yeah, I think I think we've gone on long enough. So let's do your next segment here

[00:37:31] Oh

[00:37:32] well, I was I got all riled up here from complexity and investing and

[00:37:38] I'm gonna I'm gonna stay on that same topic. We record here on Tuesday afternoon Simone and I

[00:37:44] And this is hot take Tuesday a new segment

[00:37:48] Hot take Tuesday. This is called why starter positions suck

[00:37:53] I

[00:37:55] I really mean that I was asked on a pretty big podcast. I was on a guest. It's it's not released yet

[00:38:02] So I'll leave it at that, but when it's out, I'll link it. I was asked

[00:38:07] do

[00:38:08] you use starter positions and

[00:38:10] I realized on the spot when I was asked that I actually do have a hard opinion on the concept of

[00:38:18] Of starter positions and because at first it seems like a harmless concept

[00:38:23] A starter position is a term investors use

[00:38:27] For new companies in their portfolio

[00:38:30] For adding a small allocation as they continue to learn more about the business

[00:38:36] Overtime I used to think that this is a good call starter positions. Do you use the the world of starter positions?

[00:38:42] I mean, I would say like I'm not I read your segment. So not in the way you really

[00:38:48] You really mentioned it. I mean, I'll usually have conviction in the company. I know where you're going

[00:38:54] For I mean my I've been kind of I think in our

[00:38:57] New year's resolution, right? That was one thing that I've kind of noticed

[00:39:01] That was a something I wanted to remove from my portfolio is that I had a tendency sometimes to start a position

[00:39:08] I knew the company well, but then I'd get like hung up on the valuation and never add back to it again

[00:39:15] And then it would remain like just a really small position in my portfolio

[00:39:20] So that's what I'm trying to avoid. I know you're you're talking about slightly different

[00:39:25] So I'll I'll let you continue on that. Yeah, because you mentioned just a few words in there that was

[00:39:32] Very different than my issue with starter positions

[00:39:36] Which is you knew the company really well already

[00:39:40] Some investors including professional money managers will often cite that they are

[00:39:45] motivated and have and when they have skin in the game to continue to build

[00:39:50] Conviction in the company once they already have

[00:39:53] A star a quote-unquote starter position

[00:39:56] Now in theory, I'm on board for this idea as you learn about the company

[00:40:01] You gain confidence and conviction and you increase your position size

[00:40:06] I'm in theory totally good with that like that that thought process is very instructive

[00:40:13] And I think matching position sizing with with conviction is actually a wonderful way to manage a portfolio

[00:40:20] And it's how I run my own money is managed conviction with position sizing

[00:40:24] I also believe that a small waiting for a new name

[00:40:29] Is a totally rational and reasonable decision that you can add to over time

[00:40:34] So in theory starter position two thumbs up so far

[00:40:38] However

[00:40:39] With that out of the way

[00:40:42] Did you see that?

[00:40:45] What is with uh

[00:40:47] Google meets is doing this too. I just gave two thumbs up on the on the thing. Oh now there's fireworks

[00:40:51] And then fireworks just happening because we really stuff

[00:40:55] So if if you're on join tci, it'll be a way of happening

[00:40:59] Right now

[00:41:00] With that out of the way

[00:41:02] Here why starter positions are a trap. It's a conceptual and behavioral bias that I see in starter positions

[00:41:09] One they can be and often are used as an excuse to enter position

[00:41:14] That's not well understood which is not what you were describing there

[00:41:18] The hurdle rate or bar for x this is I think what you might have been talking about though

[00:41:23] The hurdle rate or barful bar for excellence in the portfolio is lowered

[00:41:29] Since new positions could just fly in and out of there right like, you know, the bar is lowered

[00:41:35] And shiny object syndrome and over trading become

[00:41:40] Prevalent next thing, you know, you own 58 stocks. You have low conviction low waiting

[00:41:45] See what if you ever see 58 stocks in my portfolio

[00:41:49] You smack me you you come to Toronto you smack me over the head

[00:41:54] You go into my brokerage

[00:41:56] We buy we sell everything we buy low cost index ETF. You buy me a plane ticket with my money. Don't worry

[00:42:03] To a beach where I'm locked out of my brokerage forever

[00:42:07] Like if that ever happens you promise me you will do that because I've seen this so many times

[00:42:13] And I think it can may it can work for some but that is a

[00:42:18] unwieldy proposition for a self-directed investor to own understand

[00:42:24] and

[00:42:25] Be an equity shareholder in 58 individual companies

[00:42:29] like

[00:42:31] That is a gigantic undertaking. So now I've laid out what's theoretically right with starter positions

[00:42:38] And why I think that they're actually a trap and how they're often used

[00:42:42] I'm here to present a better way. Simone. I'm here to present

[00:42:46] A better way any any comments so far on the three issues I've laid out with with starter positions

[00:42:53] Uh, no, I mean for me. I think it would probably be the opposite where

[00:42:57] If my position is too small, I tend to lose interest in it. Yeah

[00:43:03] It's yeah, it's yeah, it's just like it's not needle moving enough

[00:43:07] And that's a reason why I want to just build larger positions in general. So for me, it's a bit of the opposite

[00:43:13] But again, yeah, usually when I've been guilty of doing kind of starter position quote-unquote

[00:43:19] It's just because I found a decent entry point from evaluation perspective from my point of view

[00:43:25] And then valuation went up and I was like, okay, I should

[00:43:29] Should have you know had that

[00:43:31] Bigger starter position whatever you want to call it and that's what I'm focusing on and that's what

[00:43:36] Little kind of teaser for joint TCI for our next update. So

[00:43:40] Started one position in particular. That's already, uh, you know a decent size. So I'm trying to

[00:43:46] To follow what I've been saying at the beginning of the year

[00:43:49] Nice and so we can both agree that in theory we like the idea of a starter position

[00:43:56] But the actual problem is it is around the behavioral biases that come with that because

[00:44:04] A starter position is the idea of I'll figure it out as I go

[00:44:08] and

[00:44:10] Accre's focus fund lays out two types of positions they have in their portfolio

[00:44:15] They have a core position

[00:44:18] So you know what that means a core position is

[00:44:22] High-weighting something you know really well. It's probably been in the portfolio for at this point many many years

[00:44:28] You know continue to add to it

[00:44:31] It's in that never sell category right now because the thesis is intact

[00:44:35] And the business is executing and you're happy as a clam as a shareholder

[00:44:40] So that's a core position a workbench position

[00:44:44] It as accre calls it is

[00:44:47] I have full thesis in the business on day one of original purchase

[00:44:51] I have no intention of selling it but the current

[00:44:55] valuation or the current conviction

[00:44:58] Or market forces may not make sense for further accumulation and increasing the weight

[00:45:04] So it doesn't mean you haven't done the work on day one

[00:45:07] It just means that like for me for asml

[00:45:11] Like I bought the stock as I like a workbench position and it like doubled in like the next six months

[00:45:17] I'm like, okay. Well now. I don't think it's as attractive. I love the business

[00:45:21] But I can't underwrite even close to the same irrs over the next five years

[00:45:27] And so now these two things might seem like semantics

[00:45:30] But in practice I find that they're very different and they have a different hurdle for greatness

[00:45:36] It's kind of like the punch card concept, right? You don't you have 20 trained

[00:45:40] Tickets on your part punch card and you don't want to waste them. And so you only

[00:45:47] You only swing when there are pitches

[00:45:50] Coming across the plate of ideas that you've fully kind of fleshed out and fully thought of

[00:45:55] And have full conviction in them. So this is uh, this is my hot take Tuesday on

[00:46:01] Why starter positions?

[00:46:03] In the way that they're used I think suck

[00:46:06] Yeah, no, I mean I I think it's uh, it's a valid point of view

[00:46:10] I mean, I do understand some people that for them it's an extra incentive to keep learning

[00:46:15] Hopefully

[00:46:16] You know for those who do do this they have a decent understanding of the business before doing that

[00:46:22] Starter position. I think that's probably the caveat I would put and then do a bit more

[00:46:27] Kind of further digging. Yeah, but starting just you know, not barely knowing anything about the company

[00:46:33] And then doing a starter position. I'm not sure that would be the way to go at least for me

[00:46:38] Your last segment here. Should we say it for next time? I'm so intrigued of what this is. Should we say it for next time?

[00:46:43] What do you think?

[00:46:44] Yeah, yeah, we can do it for for next time

[00:46:47] Okay, well

[00:46:48] We'll keep both me and the listeners on their toes for this one because I'm very

[00:46:53] I saw tick talk in in here and that got me a little bit uh, a little bit interested here

[00:47:00] Yeah, no, it's more of a personal finance segment, but I think it'll uh, it'll be fine next week

[00:47:06] Have you been sleuthing tick talk on for personal finance tips or what?

[00:47:10] Uh, no just I get entertained most of the time if I go there once in a while

[00:47:14] But I have this like, you know, I don't have really a profile. So it's just this basic like, you know

[00:47:21] KYD

[00:47:22] 75

[00:47:23] WX like that's my username. Yeah, you're just a uh, what do they call that a lurker

[00:47:29] You know when you're not a lurker, you're not a poster. You're a lurker. Yeah

[00:47:33] Yeah, yeah

[00:47:35] Not a boy I

[00:47:37] Don't have the app on my phone because I'm full tinfoil hat

[00:47:41] conspiracy of

[00:47:42] Oh, you think China's gonna oh, yeah

[00:47:44] spy on oh, yeah big time like I saw one youtube video about it

[00:47:48] And I was like, I don't need to do any more research because what if this youtube guy is right?

[00:47:54] you know like

[00:47:55] What if I mean what I could you know find a conflicting opinion, but what if he's right?

[00:48:01] I don't even want to know full tinfoil hat

[00:48:05] Hey, that's uh, you know conspiracy theories sometimes

[00:48:09] They end up not to be conspiracies. So I'm not saying always, but sometimes they're not so yeah

[00:48:15] Whether there's smoke there's fire as they say

[00:48:18] That's that's one thing I tend to live by and it's like don't read everything you see on the internet

[00:48:23] Don't read you know seeing is believing always double check and verify

[00:48:28] But whether smoke there's usually fire or at least like a small like maybe fire

[00:48:35] Or at least questions to be asked

[00:48:38] Thanks for listening to the pod. We appreciate you you can support the show at join tci.com

[00:48:43] You can support the show also by supporting

[00:48:47] our

[00:48:48] podcast advertisers that come on the show, you know you hear you hear me here simon

[00:48:53] You know talking about our advertisers. We appreciate our advertisers the reason we're able to do this still 350

[00:49:00] Episodes in and have motivation to continue to continue to provide awesome content

[00:49:05] So go ahead and support our advertisers and if you've been listening to the show and think

[00:49:10] Hey, maybe I'd like one of the hosts to read an ad about my business

[00:49:16] Especially if it's based in canada the audience is what like 95 percent canadian simon

[00:49:22] Roughly a bit lower 92. I would say yeah, so almost entirely canadian

[00:49:28] Yeah, no, I like high like low 90s of 5 u.s

[00:49:32] And the rest of the world yeah, you have a canadian brand or you work for a large canadian company and you think hey

[00:49:39] This is a good audience to get our our name out there or a good audience to get some conversions

[00:49:45] You can go to our website and fill out a little form to reach us at the canadianinvestorpodcast.com

[00:49:51] We'll see in a few days. Take care. Bye. Bye

[00:49:53] The canadian investor podcast should not be taken as investment or financial advice

[00:49:59] Braden and simon may own securities or assets mentioned on this podcast

[00:50:04] Always make sure to do your own research and do diligence before making investment or financial decisions