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

Very focused on where to find value. Canadian market has lagged badly for many years. Partly because we don't have large-cap tech stocks. As well, we're completely out of favour because of low productivity, and currency's been weak. For him, that's an opportunity. 

He recommends that Canadian investors have a solid weighting to Canada. The bulk of his global stocks are in the US, but he does have a number of stocks in Europe and Japan. He's not in EMs. Always very value focused.

He started in this business in 1989. The US market was about 30% of the MSCI world index. Today it's about 70%. Just goes to show that there are so many good companies elsewhere that have been totally ignored. With so much money flowing into US ETFs, etc., it's leaving some of these companies stranded and trading at crazy valuations.

Pharma can't raise drug prices the way they used to. We're all going to suffer, because if these companies can't spend the money on R&D and get a return, they're going to have less money to spend on R&D. It's hurt the industry.

Always possible that a company will come out with a world-changing drug like Ozempic, but he'd never invest on that basis.

Absolutely. Halfway through the year, so a good time to look at the big picture. TSX is up about 4% YTD, compared to the S&P 500 up 14%. But if you take a look at the equal weight S&P 500, it's up only about 5%, similar to Canada. 

Equal weight S&P 500 is an important barometer of the US market, simply because it's not skewed by 3 or 4 multi-trillion dollar companies.

Not surprising that markets are very volatile right now, lots going on in the world. And we continue to adjust for inflation and higher rates. Biggest disruption and risk seem to be geopolitical -- Middle East (escalating as opposed to abating), Russia's invasion of Ukraine into its 3rd year, US election with a lot riding on the outcome.

A lot of external factors are influencing markets right now, leading to a complicated and fluid situation.

There are pockets of value and opportunity. He still thinks Canada is a great place to invest. We're a very stable country economically and politically, inflation is really coming down, and the TSX valuation (15.3x) is a lot cheaper than the S&P 500 (24x). The TSX also looks better for tapping into a stream of income.

Interesting point. First time in 2024 that's happened, where the numbers were not as expected. But no, the thesis for investing in Canada has not been derailed. 

We saw a BOC interest rate cut recently. Going forward, if there are more cuts, certain sectors should benefit more than others. These include banks, utilities, and telcos. So he's fairly constructive on that area. These companies offer big dividend yields. In a rising interest rate environment, fixed income also offers interesting investment opportunities. Investors tend to sell some of these higher-yielding names and shift into fixed income for the better-perceived risk-adjusted return.

We need to give it some time. Rates are really high right now, higher than they've been for many years. We've only had one small cut. Money will become cheaper, which means more investment and more growth in future. 

Overall, to prosper in this environment, you need to buy high-quality companies with strong balance sheets. Make sure you have a properly diversified portfolio. See his article in the Financial Post or on the blog at goodreid.com.

It's notable, but not cause for concern. Only 25 bps was taken off. Lots of other factors are involved in the fundamentals of these companies, interest rates are simply one small thing. At the end of the day, remember that these companies trade on fundamentals such as profitability, debt, and valuation multiples.

Impossible to predict, but expects it to remain high. Asian economies are continuing to open and grow, which will increase energy demand. Geopolitical conflicts around the world are contributing to a bump in the price.

Performance of S&P 500 vs. TSX:

The impressive performance of the US market

Here is the performance in terms of compounded annual growth rate (CAGR) of the S&P 500 within different time horizons with dividends reinvested:

3-year: 10.2%

5-year: 14.9%

10-year: 12.8%

On the other hand, here is the performance of the TSX index in the same time frame:

3-year: 5.7%

5-year: 9.0%

10-year: 7.1%

The outperformance of the S&P 500 relative to the TSX on three, five and ten-year horizons is quite significant. The S&P 500 performance was predominantly driven by a few large technology companies. These companies have performed so well in the last decade and will likely continue in the near term.

This question of whether investors should ignore the Canadian market becomes a totally legitimate question.

We think investors can think about portfolio allocation in terms of defensive and offensive sectors. The US market which is heavily dominated by large technology names tends to do much better in a bull market.

On the other hand, the Canadian market is heavily dominated by well-established companies in traditional industries like financials and energy. These sectors tend to not perform as well in a rising market but would be resilient during a market downturn due to their durable cash flow and predictable dividends. Similar to the cash allocation of the portfolio, which tends to be a drag on performance during a bull market. The defensive portion of the portfolio sometimes feels unnecessary until the next bear market.
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The new capital gains tax starts today. It is egregious and will hurt small businesses and individuals, far more than the 40,000 that Ottawa claims. The TSX lags. Growth in industries is hampered by so much regulations to business. Ordinary folks struggle financially; there's a lot of disquiet in Canada. The new tax will discourage investment in a country which needs more competition.

They just matured. Now at $5.10, but he bought at $5.40 on June 29, 2023. It's hard for retail investors to buy an actual T bill or bond.

Believes US Presidential debate could be the beginning of the end for Joe Biden. Unsure of what a second Donald Trump presidency will mean for the markets. Further (Trump) tax cuts will be difficult given record budget deficits in the USA. Not much room for economic stimulus by the US Federal Reserve anymore. However, markets generally rose during Trump presidency. Generational low interest rates that have been added into mortgages have made the housing markets very fragile. Upcoming inflation numbers are expected to be good. Upcoming FedEx earnings will be indicative of broader markets and inflation in supply chain. 

As a rule of thumb - would recommend investors think about investing in the same way they think about other emotional decisions. It pays to remove feelings, and to focus on facts. When investors are looking at a company, the best way to invest is to value the company on numbers. Factors like "recency bias", and general cognitive dissonance can reduce investment performance. Once an investor has properly valued a business, then - he or she can decide whether the stock market price is above, or below that value. 

Other than tech in the U.S. there's been a lot of downturn globally creating a divergence between tech and the rest of the markets.There's been a huge rally driven by tech stocks over the past 16/17 years and the NASDAQ market has been up by about 20% per year since 2009. AI is now in the same situation as the Internet was in 2000. AI now has to advance to the next level and needs something new to do this. It is not unusual to see low volatility for a long time so this does not concern him.