A Comment -- General Comments From an Expert (A Commentary)

When thinking about whether to add more (such as to decrease cost base), consider current weighting in your portfolio. As a rough guide, his firm doesn't like over a mid-single-digit weighting for any one position.

Owns none, but has a file going on the big money-centre banks. Watched earnings flow in this week. Broadly speaking, results were all pretty good, with investment banking doing better than traditional banking.

Favours Canadian banks instead. Total addressable market is smaller, but it's a de facto oligopoly where 6 banks have 95% market share. Margins are higher, credit cycles are more muted.

Benefits of Direct Indexing:

Direct Indexing can be cheaper 

When you own an ETF or fund, you pay an ongoing annual fee to own that fund. With direct indexing, you in theory do not have to pay anything to hold the index allocation. While we think investors can start to split hairs a little when evaluating a 0.05% fee fund to a 0.1% fund, the reality is that ETFs gained their edge because of low costs and now might be a victim of what they used to succeed in the first place.

Direct Indexing can be more tax efficient

When you own a fund and want to rebalance or do tax-loss selling, you can either sell units of the fund or not and those units are sitting at either a gain or a loss. With direct indexing, you would have an ability to not sell the entire index and sell only individual securities that have under or over performed within the index. So, if energy had a bad year, you could sell all energy stocks in the TSX for tax losses and continue to hold all of the other items within the fund so you don’t trigger gains. Put another way, the index itself could be up on the year but you can still harvest a tax-loss within the index. In the ETF or fund format, you would only be able to trigger a tax gain on the entire fund with this scenario.

It can be a tool to generate alpha 

The potential strategies behind direct indexing could be countless as the technology develops and improves over the years. One can envision simple factor filters where an investor can exclude any company in the index with debt over ‘X’ or any company with a payout ratio over 100%. Again, the opportunities are endless and it has the potential to give even passive investors a lot of power in tweaking their ‘passive’ allocations in a way that makes them more comfortable with their portfolio and even allowing for differentiated returns from the index, for good or bad. Perhaps the ironic thing here is that things might come full circle and direct indexing strategies will lead to investors becoming active investors again and not even realizing it!
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High, but we've never seen companies as profitable as the likes of META and GOOG and MSFT. Economic productivity is being pushed by AI. He believes the growth rate for Q4 productivity in 2024 was 2.7%, so that can compensate for an awful lot.

In the industrial economy, we've made a lot of cars forever and now the population's doubled. We lost a lot of technical people and machinists during the pandemic, and now they're back and getting retrained. Airbus can't make enough planes, and Boeing has its own problems. 

So the industrial economy is still emerging. Simpler things have come on faster, with more complex things being more delayed but they're coming along.

We're going to see lower inflation and higher growth. Wages are going to go up. The depression from the pandemic and inflation will gradually dissipate, the economy will do nicely, and it will be a bit of a boom time.

Thinks they'll lead, but hoping by not as much so that the rest of the economy can pick up and go along with them. The big technology play is still in the early stages of unfolding.

Copper, especially, is going to be needed to fuel the electric world we're moving to and the data centres we keep hearing about. But it's tough to find things to invest in with copper.

That, combined with some really solid earnings from the banks, is giving everybody some optimism. 

We happened to get that last year. When we're talking about markets, we need to specify whether we're talking about Canada or US, large caps or small. Lots of attention right now on valuations for US mega-caps, and they are quite high. If you look at the spread between Canadian and US equities, and the spread between small caps and large caps, investors will find that there are still tremendous opportunities in the Canadian market specifically. 

We're trading at a huge discount to the US, especially in the small- and mid-caps. He's not finding growth stocks at distressed multiples of 5x PE as he was a year ago, as those same stocks are now 8-10x PE. But if you're buying a company growing 30% a year, at 8-10x earnings, that's a very attractive setup. So he's still quite constructive.

Canada should trade at a discount. We're a smaller market, our companies are smaller, and there are fewer eyeballs on us. But in some case we're seeing a 50% discount in valuation multiples compared to the US. That's even more pronounced when we get down to the small- and mid-caps, as there's just less investor attention down there.

For someone like him, who likes to go hunting in that sector of the market, he's still finding very attractive opportunities.

Nice thing about Canadian market structure is that it's an oligopoly with essentially 3 big players -- RCI.B, Telus, and BCE -- and they all compete for market share. Smaller names have not been able to erode market share from the big 3. These names are good for letting you sleep at night.

Lots of technical change happening such as how phones are being used by the younger generation. If you want to get more into the technology side of telecom, there are more interesting places to go than just those big players. For instance, STC for more growth.

What Type of Investor Are You?

Willingness to accept risk

An investor's willingness to accept risk relates to whether they are a risk-seeking individual or not. This piece caters more to the psychological side of things such as how much volatility they can withstand and what kind of returns they expect. It also looks at what an investor wants to get out of their portfolio.

Ability to accept risk

This piece focuses more on the facts of one's financial situation and less on the qualitative side. This looks at items like age, knowledge/experience, portfolio size, employment status and salary. Someone who is more able to accept risk is someone who is young, gainfully employed, understands investing and has a large portfolio to begin with. 

Willing versus Able

Of course, just because someone is able to accept risk does not mean they are willing. You could be a conservative natured person but have a large portfolio. So the two items do not always align and this can cause problems. 

Typically, the more conservative outcome of willingness or ability trumps the other. A lot of investing comes down to psychology and if you are not comfortable with your asset allocation (i.e. willing), you will make the wrong decisions at the wrong time no matter how wealthy or young you are. However, just because you may think you are willing to take on a lot of risk, if your portfolio is too small, you literally might not be able to take those risks that you want to! So again, generally, the more conservative result of risk willingness and ability wins out.

Once an investor has an understanding of these factors, they can then determine what investor type they are (balanced, income, conservative, etc.). From here, you can then determine how to actually structure a portfolio that matches your investment style.

Understanding yourself and your goals should really be the first step when building a portfolio. While we cannot know the ins and outs of your situation like an advisor can, this questionnaire offers a good starting point for an investor to think deeper about their investor type. Finally, if your advisor has not done some kind of questionnaire that is at least as rigorous as the one we provide, they are probably not doing their job!
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Canadian stocks will outperform American ones this year, after being bearish Canadian for the past 10 years. The Dogs of the Dow theory says take the worst-performing stocks one year, but they perform better the next. The same goes with sectors, which were materials, oils and staples last year, and these are the TSX's heaviest sectors. Secondly, it's likely a new federal government this year will better support business, particularly the resource sector (oil). (Alberta oil production hit a record under Trudeau, notes BNN.) Thirdly, one report he read says that US PE valuations are twice as expensive as they normally are compared to Canadian ones. Fourth, the yield is higher than normal here than the US.

Silver: he's bullish metals this year, and he's been holding Wheaton for a while. Silver broke out 12 months ago after basing the year before, and has been consolidating. Not bearish on silver at all, though it may be pausing for a while. Gold has broken out after a very long base, and this suggest multi-year upside. Gold has a different chart from silver. The greater the base, the greater the case. He's bullish gold for the next couple years.