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Announcer: 00:00 You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew and Dave to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.
Dave: 00:35 Welcome to Investing for Beginners podcast, this is episode 91. Andrew and I are going to take a moment and answer listener questions. We’ve got some that are some great questions that we’ve had in our bank, and we wanted to take a few moments and answer those for you guys. So Andrew, why don’t you go ahead and read it. The first question?
Andrew: 00:55 Yes sir. So this is a great question from Michael B. we’re going to split it up because there are two different questions here. So let’s tackle this first one. Hi Andrew. I used your VTI every week. I love it. I’m here in Canada. The banks are the most common stock to rise steadily and had decent dividends, but because of their equity, they would never score well in the VTI. I know you aren’t a big fan of financial institutions, but Dave is, and I could care less either way, but based on trends in Canada, most banks are still selling that less than $100 a share which based on their EPS increasing consistently in the dividends increasing regularly.
Andrew: 01:36 I want to jump on the bandwagon now. Braden mentioned the banks and both of his last interviews with you too. I don’t know which valuations I need to focus on with a company that makes the most money. The higher their debt is. Thirteen of Canada’s dividend aristocrats are financial institutions, nine of which are banks. I’m not sure if I’m chasing my tail here, trying to convince myself they’re a good buy or not, but I do rely heavily on your VTI spreadsheet because it does take a lot of guesswork out of the quantitative information. I love to hear any insight if you have any, so anything jp out at you real quick, Dave, before we draw swords and start fighting each other, I guess. No, I want to. I want to have you draw your sword first, and then I’ll give a rebuttal.
Andrew: 02:24 Okay. I’m not going going to make you go first, but I, all I want to say was first when you mentioned $100 a share and I know there’s a. and the second question he’s talking about share price. Again, I think as a podcast that’s focused on beginners, it’s important to always kind of try to tackle this misconception when you’re first starting. I think when people talk about stocks that are cheap, they tend to look at when they don’t understand how the stock market works. They look at how, what the price looks like on the ticker and, and they think that that, $100 stock that’s like less than $100 is cheaper than stock than that’s a thousand dollars. But what we need to understand here is that there’s a certain amount of shares. And so what, when we’re talking about a stock that’s cheap or expensive, we’re talking about the market capitalization. So if you think of ownership of a stock, each share represents ownership of a stock. If you have 100 shares, it’s kind of like that thing where they have this joke with pizza.
Andrew: 03:33 It’s really funny. I wish I could think of the guy’s name, but somebody in the audience listening probably just has the name on the tip of their tongue, but there’s this guy who’s like making fun of his girlfriend because she’s like ordering a pizza and asking something like she doesn’t understand that whether you slice a pizza into six slices or eight slices, you’re going to get the same thing. So it’s, it’s kind of very similar with, with, with a stock, the more slices and the more shares that there are, then, the last that, that share price will probably be. But what you need to do is you need to look at the whole pizza, and that’s going to tell you whether a stock’s cheap or expensive. That’s not how much we sliced it up. , you could slice up a lie, you can slice up a little.
Andrew: 04:19 If you slice it up a little, you might have like a really much more expensive stock, kind of like what, what buffet did on purpose with Berkshire Hathaway where he never splits his shares so you have a stock that trades at over $100,000, and it’s because they’re, they’re, they’re trying to attract those type of people who understand those things, who are in for the long term and, and going to be buying and holding for a long time. So I think that’s first off, when we talk about whether it’s an ETF or a stock, let’s make sure that because just because something’s trading at under $100 a share, it doesn’t mean that’s something we should necessarily look for a, I think the second part I will say is dividend aristocrats are great to define those real quick. A dividend aristocrat is a stock that has been increasing its dividend consistently for, I believe, the definition for aristocrats 25 years or more.
Andrew: 05:21 Does that sound correct? Alright. I don’t think this word is in the dictionary. So it’s, it’s more of like a thing that’s generally accepted by, by the community, if you will call it that, but by people online, but obviously a good thing because what you get when you have a stock and you own it, and it grows its dividends every year, you’re getting an income stream and not only are you getting an income stream every single year, you’re getting an income stream that grows, so, , find me a deal where you can put money in, get money out, and then, , you put the money in months and now you’re getting money out every single year and that’s increasing. It can make your total wealth grow very, very quickly. So it’s generally a good idea to kind of look for these types of stocks. However, I don’t think it should be something that’s all in exclusive.
Andrew: 06:17 If you go back and, you, you kind of have to. Unfortunately, there’s not a lot of tools where you can do this quick and easy way. But, there’s a lot of companies that maybe would have fallen on the dividend aristocrat lists that kind of fall out over time. So I just said, Michael, it’s, it’s great that for Canadians right now, it looks like the dividend aristocrats are the big majority of that makeup, the dividend aristocrats, our banks that, that’s cool, but that’s something that’s in the past, and it doesn’t necessarily mean that it’s something for the future. So I guess what I’ll try to say what that is, just because there’s a lot of them now, it doesn’t mean you necessarily need to buy it just because you want a dividend. Aristocrat, I, my ideal situation is obviously every stock I buy becomes a dividend aristocrat.
Andrew: 07:17 I get that, that dividend reinvestment, that compounding from all of that, and it grows and grows and grows. If you look at my actual portfolio, it’s kind of all over the map. I have the rule where I’m going to buy a stock that pays a dividend. That’s the ground rule. I’m not backing down on that ever. But I also have some stocks that may be the, their track records of growing their dividends are not as great as a dividend aristocrat. So sometimes the opportunity that pops up where I have a stock that’s cheap, and it looks like a great deal, and it has a good history of growth happens also to have 25 years of, of dividend increases. And that’s great. And so obviously I buy it, I feel happy about it, but, sometimes I have stocks were like one of my favorite ones right now, only has I think five years, the track record of dividend growth.
Andrew: 08:16 And I’m really happy to buy that and add to it. And it’s had a much longer history of, of earnings growth than it has dividend growth. And that’s fine too. So I think, it’s important to understand dividend aristocrats are excellent, but it is kind of, you don’t want to invest too much by looking in the rear view mirror. You want to look ahead. And so and just buying, like having a portfolio of different, just dividend aristocrats isn’t going to guarantee that you’re going to have a portfolio that gives you that kind of consecutive dividend growth every year and a lot of them do fall and unfortunately there’s not a lot of research to back that up, but you can take it from me from some of these poked around, , and the Archives of history that there are these companies that do fall out of dividend aristocrat status. So don’t make that a reasoning for wanting to buy a stock. And I’m not trying to say that you are. I think those are just some key things before we talk about the bank situation that we can get out of the way first and foremost.
Dave: 09:31 Very cool. That was good advice. So let’s, let’s draw swords, man. Let’s talk about. So, okay. So Andrew is very much an on the not bank investing person. And we know why a, he’s not a fan of debt and neither am I. However, I do invest in banks, and I’ve talked about that before. So some of the things that I think you can look for when you’re talking about banks now, one of the reasons why I like investing a banks is they are a great source of dividends and they partly because they have to, that’s one of the covenants that they have when they form a bank is they have to use some of their money to give it back to their shareholders in order. The way they do that is by paying a dividend, and typically they pay fairly decent dividends and pretty consistently and they have over the years grown the dividends, as well as they, have done better and better as a bank. Then you’ll find that they will do better and better for you as an investor. Now the
Dave: 10:44 Michael kind of references like he’s looking for evaluations and ideas of kind of how to start trying to look at banks. Well, one of the things that you got to realize when you’re thinking about a bank is when. So the bank has kind of a, a twofold way of making money. One is taking in deposits and then using those deposits to loan out to buy cars, homes, whatever it is that they want, credit cards, all those kinds of things. So the the the money that they’re the deposit. So when you and I deposit our paycheck into a bank, it’s a liability, in a sense in that are going to want that money back. Now the bank is using the money also to try to loan out other people. So what kind of goes on and what can be confusing and a little bit concerning for people is they get focused on that liability part.
Dave: 11:43 Well, one of the ways that you can dig into that and start to understand a little bit better how the bank is doing. There’s several; I guess there are three ways that I look at this. So the first is when you’re looking at a bank, whether it’s a bank here in the United States or whether it’s a bank in Canada, they’re all going to operate on the same premise. The first thing you’re going to want to look at is what kind of bank it is? Is it a bank that is primarily working on loans? In other words, they’re looking at borrowing money for people, so whether it’s buying houses, buying cars and so on, so those are more the traditional type of banks. So the United States, for example, a bank that was a couple of banks that would fall into that category would be a US bank and Wells Fargo that both of those are very much in the traditional style of banking.
Dave: 12:39 They do dabble in other aspects of the banking world and the finance world, but their primary goal is to help people buy homes. Their mortgage department is one of the largest in the United States, if not the largest, and they also do quite a bit of personal loans, car loans and so on. So that’s one of the ways that Wells Fargo, for example, and US Bank make their money. Then you look at somebody like JP Morgan for example. Their model is different. Their model is based more on. They work in more of the marketable securities realm and so they’re making their money by helping people buy and sell stocks and using leverage and all those kinds of fun things. So that’s where JP Morgan makes their money, and you can find all this and the balance sheet. When you look into the balance sheet, you can see what kind of different, loans or other items, how they do that.
Dave: 13:35 And so that’s where you’re going to find those kinds of information. So once you have an idea of kind of what the bank does, that gives you a better idea of what next you need to look at. The next thing you’re going to want to think about is what kinds of loans do they have versus their liabilities. So when we talked about liabilities with the bank, the big liability is the deposits. So it’s a bit of a catch 22 because every bank is trying to generate more deposits because that’s the lifeblood of the bank is having money put into the bank so that they can use it to loan out so that they can make money. And the way that they make money is they’re looking at a spread on the credit that they can borrow. So without getting into too many technicalities, there’s a spread between what they loan you versus what they borrow.
Dave: 14:25 So if they borrow money at three percent, and then they loan it to you at three percent or six percent, now they’re making three percent on that loan. And so that’s really where the bank is making their money. So when you’re looking at this type of different bank, and we’re looking at liabilities, they want to generate deposit. So when I worked at Wells Fargo, that was our, that was our goal nber one, was to get people to open accounts with us conventionally. And honestly, that’s the way I worked at. Not everybody at Wells who did. That’s whether in trouble, but, that was the goal was to try to get people to open accounts and deposit their paychecks in there. So that’s one of the things that you look at it, but then you’re also going to want to look at the loans have versus the liabilities.
Dave: 15:12 And you’re going to want to look at the percentage of what, what that is now, during the debt crisis that we had here in the United States and around the world, that number dropped almost five or six percent from normal banks. And so that’s quite a bit. And what you’re looking for in a percentage like that is you’re probably looking at anywhere from 75 to 80 percent depending on the bank. And again, it’s best when you’re working with these things to go farther out, to give you an idea of how the bank has done over the long-term. One year is just not going to be good enough. You’re going to want to do five to 10 years when you’re looking at all these things, and this will help you get a better idea of what the bank is, what it is that the bank does. Now the other thing that you want to dig into is, is the bad loans.
Dave: 16:03 So when the banks got in trouble, that was a big part of it, was that they were loaning money out to people that were not qualified to pay them back. And that has twofold damage to a bank when they when somebody comes in and borrows the money to buy a car, and then they default on that loan that hurts, that hurts the bank at two ways. One, it hurts the bank because it costs them money to try to recover the money from the said person that defaulted on the loan, whether it was legitimate or not. And that cost the bank money. The other aspect of it is it costs the bank money because that loses, they lose that money as a way of using it to borrow again. So if you buy a car for $10,000 and you default on a thousand of it, the Bank of loses that $8,000 as well if they can’t collect it.
Dave: 16:59 And so that’s why bad loans are something you want to keep an eye on. And again, that is something that you can track very easily. There’s a; there are different ways that you can go about doing that. Now I want to go, I don’t want to spend all the time talking about this, but if you really are interested more in the nitty-gritty of this, I wrote a blog post a few months ago talking about analyzing a balance sheet and looking very deeply into all these different ratios that can give you an idea of what’s going on with a bank and it can help you understand quite a bit more about what a bank does, how they do what they do and some ideas and some things you can keep an eye on if you’re concerned about investing in a bank. And those are. I think once you start to kind of dig into it, then I think also that will help you alleviate some of the fear and the negativity that surrounds banks. , they are a necessary evil. Yes, I get it, but they all can be fantastic investments. I mean, the person and Andrew, and I look up to the most and investing world. Warren Buffet, one of his largest investments is Wells Fargo. So I think that says it all.
Andrew: 18:13 Yeah. This, I’m at the very beginning when I didn’t want to be the first one to draw a little bit. What’s it called? Like political grandstanding here. Yes. I know this is your area of expertise and then his not mine, that’s for sure. And you did an excellent job of covering that. I have my reasons for wanting to have a system that can kind of cover everything. And so because you have a financial statement where that’s a huge thing like you said, the liabilities, the way they do business, they’re a complete business model is completely different and unique than any other business model in the world. , as you said in a bank, they want to increase how many people they have banked with them. They want to increase the deposits. , what other business, I guess other than Tesla would want to increase their liabilities as much as I could write a Tesla and Amazon.
Andrew: 19:14 Other than that, I’m normal businesses that want to grow. So yeah, I think it’s very fair to say that when you’re looking at a bank, it’s something that’s completely a unique, different situation there. Accounting. Unique and so did you end that blog post that you put, like you mentioned the ratios, because, the big thing here is the difference in debt to equity. So did you put like standard percentages on what kind of, let’s say long-term debt? I think that’s something you would probably look at, but you would not relate it to total shareholders equity, but you instead relate it to a different metric. So are there like ranges of ratios where it’s like reasonably acceptable?
Dave: 20:08 Yeah, there’s, there is a range, and I do with some of those in there, the things you want to look at as far as more conventional metrics are our book value book a book value per share is a very big one in the banking world — a return on equity and return on assets. Return on assets is a very big one because that gives you a really good idea of what the bank is doing with the assets that they have. And that has a lot to do with the, with the analysis that the Fed does every year. Every bank goes through a stress test and are, are you familiar with what that is?
Andrew: 20:48 What’s the best way to get started in the market? Download Andrew’s free Ebook at stock marketpdf.com. You won’t regret it.
Dave: 21:02 A stress test is what they do is they look at the bank’s balance sheets and they analyzed them in regards to if there was the worst possible financial crisis ever to hit and how would the bank survive and every bank has liquidity that they have to have on hand is so if there is a quote-unquote rush on the bank for all of us to take our money out will be with you, and I’d be able to get it, and in essence there is certainly a lot more technicality, and there’s a lot more gobbly goop that goes into this, but just as a as a generality. That’s what they do, and they do. The Fed does this every year. This is a law that was enacted after the financial crisis that all banks have to meet the subliminal liquidity minim, and if they do not, then they are not allowed to buy back shares, increase the earnings per share or increase their dividends.
Dave: 22:03 And so it’s a big deal for the banks to be able to pass these tests. And last year they did it, and they base it not just like on a one year cycle, they look at like five or six-year cycle. So if they, if we’re going through this horrible crisis in the world to then how Wells Fargo stands up for five years or JP Morgan or US bank or Bank of America, any of those, any of these big banks, they do it for all banks. It’s not just the big, the big boys, they do a for your local banks do. And I’m happy to say that all the big banks in the United States have passed the last six or seven years. Some of the smaller banks have not done as well. And that’s, that’s hurt them for sure, but it’s, it’s another way of I guess the government is trying to reassure us that these banks are doing better and they’re managing things smarter than they were before. I’m not saying that there’s not dishonesty out there or there’s not greed out there, but these stress tests are another way that they’re, again, they’re done annually, and they’re a great way of giving us a guideline of what’s going on with the bank.
Andrew: 23:17 Do if, do if that happens to be like. Because you mentioned the Fed, so is that all you asked? Is that global or.
Dave: 23:26 It’s all US yeah.
Andrew: 23:28 Yeah, yeah. Cool. Yeah. Because I think that’s one of the big fears too, is this idea of a bank run because. And a hypothetical sense, if everybody ran one of their deposits and those are real liabilities that you have to cover for. But the FDC, I don’t know what’s the case in Canada if, if they have something similar to that, but that, that changes the game a lot too when it comes to these investments. Because when you have the FDC and then now you’re talking about these stress tests, while as long as the system doesn’t collapse, the feds making sure that the system as a whole is going to survive because they have these stress tests that said, well, as a group we’re all going to collectively survive.
Andrew: 24:07 Even if there was a Armageddon type, a bank run, I don’t know how it is with Canada, so maybe we don’t know that answer. Yeah, I don’t know the answer. I would, I would think. But , if you want to buy Canadian bank stocks, that’s something you should investigate. Yeah, for sure. I, I know that, Braden has mentioned banks several times and , the guys from sure dividend have talked about, the banks quite a bit as well. And I know the banks are more highly regarded in Canada than they are in the United States. Okay, cool. Good to know that. That was some really great stuff. Thanks for sharing.
Dave: 24:47 Your welcome.
Dave: 24:49 Alright. So the second part of the question on a side note, as you are aware of marijuana related stocks are all the talk in Canada these days and I’m sure in the US as well, and I know you won’t buy an IPO so I didn’t jp in at any point, but after watching some of these companies fluctuate like crazy, trying to build better facilities, it’s spending money up front. I went in early but there are, there are so many options. I went in early, sorry, but there are so many options. What are your thoughts on we’d stock ETF? There’s one in the Toronto Stock Exchange which has all the heavy contenders with international exposure as well as it’s called a h, m, m, J dot, t dot and it trades for less than $20 per share.At last I checked from [inaudible] perspective. Is it still too early to try and dip a toe in the industry? Andrew, what are your thoughts?
Andrew: 25:39 Yeah, I. So let’s talk about this ETF that that was brought up. It’s called again, ticker HMMJ.TO. So what I did, and this is something you can kind of take and use anytime you want to look at any ETF, , I just took that ticker, putting it into Google and I found the page that has basically the prospectus so they have any ETF or mutual fund will generally have a page online where you can find out everything about it. And so I think it’s a lot of stuff to kind of take in, but if you can pinpoint where you need to go, you can get a good sense of what’s going on with these ETFs are these mutual funds. So for this one, the HMMJ, the name of its horizons, marijuana life sciences index ETF, so they have a product sheet perspectives.
Andrew: 26:33 What I looked for was, the part where you can look at holdings, that’s the generally a place you can find. You’ll get a good idea of what’s in that ETF. So when I look at holdings, this is telling me what stocks they hold and what the way is. So how much of the ETF is comprised of, of this stock and that stock. And so some, some names here or stuff you hear on the news all the time. You have canopy growth corporation, Aurora Cannabis Fronus group. , I scroll down, I see Tilray it’s pretty high. It’s like seven percent. So canopy 12 percent way Aurora, 11 percent, 11 percent. These are all pretty heavily weighted towards these single stocks. So when you think of ETFs, the stereotype on ETFs is that, , they’re, they’re made up of large groups of, of stocks, , you talk about spy is one of the most popular ETFs that just buys that complete S&P 500 index, all 500 stocks.
Andrew: 27:42 So each stock in there, I mean the weightings are less than a percent for a lot of them, most of them. So now we’re talking about situation with, with this ETF where that’s not the case at all. And this is almost like a very concentrated portfolio of a select few stocks. And is that because there’s only a certain amount of a big players in the industry? , maybe, possibly likely. But whatever the case may be, that’s the reality. And that’s something that I think we need to differentiate right off the bat that when you think of ETF, that’s kind of the stereotype, but when we’re looking at this one and probably a lot of different kind of sector ETFs, you have this characteristic and so what you’re going to get, because this is the way it’s comprised, this is the way it’s made up, so how that’s going to affect the total kind of movements in the charts is it’s going to be different than your standard ETF too.
Andrew: 28:36 So keep that in mind. Just because we have an ETF doesn’t mean we’re going to be necessarily subject to less volatility than any of these Canadian marijuana stocks. So I pulled up some information on some of these and , thought it’d be useful to talk about them and maybe share some of my thoughts. So canopy growth is the biggest component of this ETF. I looked at some of their financials and I didn’t dive in to the, to the annual reports, but I’m just kind of pulling out some highlights that we can talk about real quickly. So canopy growth doesn’t report a PE ratio, it has a negative earnings per share. So that’s something that long time listeners know I’m puts a big red flags for me right off the bat. And on the PB price-to-book perspective, we’re talking about a stock where it’s eight times price to book, compare it to the average, which is around two.
Andrew: 29:37 So you’re talking about four times more expensive from a balance sheet perspective, that’s, that’s quite a bit that makes up the biggest component of this, of this ETF. The next one’s Aurora cannabis. This one’s actually the most reasonable stock out of the whole group as far as what I saw from a financial perspective. They actually do turn a profit. They have a reasonable price to book ratio around to the still kind of high at 33, but it’s still reasonable. , obviously it’s a situation I would not invest in any of these again because they’re not paying any dividends. So longtime listeners, again know my stance on that. But this one making up 11 percent doesn’t look terrible, just surface level just from a couple of these metrics. But then I go into another one like Cronos. This one has been losing money for awhile. , it looks like they’re only positive year was 2015.
Andrew: 30:40 And ever since then. Oh, okay. Now they did 2017. The most recent year they did make money. , but again I think with Cronos or was it a price to book of 20? That’s, that’s crazy. So we’re looking at a stock where you’re really paying for whatever growth that you perceive is going to happen in the future. The big problem with these and any stock or ETF in a, in an emerging emerging industry, which essentially that’s what the question was about was, , is it too early to get in, you just have so much uncertainty. And this is the case whether we’re talking about one stock or a whole industry and it’s the same case whether I’m talking about marijuana or, or if we’re talking about biotech or for talking about, , social media or , fit, , plug in your flavor of the day for whatever the new stock is.
Andrew: 31:37 What you have is just kind of a difference of philosophy and and basic kind of mindset on how are you going to make investments and how are you going to continue to do so because there’s always going to be something, some new flavor of the week and, and you can certainly drive yourself insane and I see it. So I’m a part of several Facebook groups. I see this. It’s starting to become like a depressing kind of a observation. We will have these, these people look at, , read, , it’s very, very justifiable because the most exciting part of investing is generally stocks that are the high growers. They’re the brand new to the industry. They’re the ones that are perceived to be the biggest industry kind of disruptors. And so along with all the hype and the attention becomes really high stock prices, very high evaluations, everything that we constantly pound the table that you should avoid, avoid, avoid, avoid, be boring, be boring, be reasonable, do not buy into the hype.
Andrew: 32:39 It’s, it’s hard to, to, to take something that’s exciting and then kind of take a reasonable approach. That’s that , is gonna only make you 10 to 12, maybe 15 percent a year if you’re lucky when you see stocks go up 100 percent in a day, , I get it. It’s really hard, but what you, what you see over and over again in these Facebook groups are these people who, , they’ll make a trade or two and then they’ll get lucky and they’ll make let’s say 50 percent gain in a very short time and that’s like the absolute worst thing that could happen to them because now they have the sense that they actually know what’s going on, where in reality it’s the wild wild west out there with a lot of these new stocks that are high growers. It, it’s, it’s, it’s a way of investing where you’re, you’re basically looking at a crap shoot and because there’s so much potential, there’s also so much potential for failure.
Andrew: 33:36 And you see this in the business world in general, , there’s a reason why the investors other successful in investing in startups and doing the seed capital in the angel investing. They invest in a much different way than somebody like Warren Buffet does. Warren Buffett, , to. He doesn’t need to guess about what’s going to be hot next. , he doesn’t, he doesn’t need to know what’s trending now. All he needs to know is, is, , I understand balance sheets. I’ve seen these big businesses that have been consistent in the Arab and kind of not as exciting, but , they’re consistent. They’re giving me profits. I’m getting income and I’m building my wealth over time. Slowly, consistently, reliably, not, , like I see in these Facebook groups where either they’ll lose all their money very, very quickly and then get completely disenfranchised by the whole thing and give up, be, , find some success, start telling people how to do it.
Andrew: 34:39 And then , feel like they have this. Like they’re that special person who has this intuition that’s better than everybody else. And they know exactly which stocks in which companies in which businesses are going to be the ones to change the world to pick the think you could pick out of a group of five or 10, which one is going to survive out of that chaos and ended up becoming a mature, consistent cash flowing company. It’s the, there’s a lot of Hebrew, but , they might come in, they might find some success and then become frustrated because as you get into the stocks that are crazy, volatile, crazy, exciting at this, as fast as it goes is, , as easy as it comes, as, as easy as it goes. So you’ll have these huge staggering losses and they’re just so horrific that a lot of these people, again, they might complain and bitch about it on their Facebook group and then you never see them again.
Andrew: 35:38 And they just come and go and they come and go and they don’t spend the time to, to try to get educated and try to really learn how to invest in the right way. So I’m not saying that Michael asking this, you’re that you’re that person because you’re obviously asking these very insightful questions. You’re listening to the podcast you’re following along, but that, those are, those are huge reasons to just not even want to get into any sort of industry, whether, whether it’s a weed stocks today or whatever that flavor of the week is in 20 slash 20 slash 20, 21. There’s always going to be one and instead of trying to drive yourself crazy on, , is it too early to get in? Am I going to be too late, , Wednesday to be the right time. Well, which one of these is going to be the one that survives, , something like marijuana, you have, you have a huge tobacco corporations who have.
Andrew: 36:35 It’s not even like not common knowledge that there’s a lot of politics that goes on with these huge, with cigarettes, with the way that, , all these health stuff that they got to deal with and it’s just an unbelievable amount of uncertainty with how and where the industry is going to go. You compare that to even just maybe buying into a cigarette company itself where you can look at their balance sheet and you look at the size of this company and you understand when you look at that industry, , you got Camel, you’ve got Marlboro you got maybe Newport and, and you have just these brands that just over and over and over again are being bought by people, the same people. It’s like a recurring revenue in a way that this brand loyalty with, with the, with a lot of these cigarettes and, and it’s something that’s a lot more certain and stable and it has a lot, lot longer track record then than something like the marijuana stocks you have.
Andrew: 37:32 Again, I go back to the data sheets on some of these have Canopy growth, , market cap of 14 billion, a Auroras at six point nine two pro. This is a, it’s not showing up here real quick. Three, three point five. So these are very, very, very small kind of mid cap, small cap I guess depending on how you didn’t want him to find them. That just, it’s a small industry. There’s small be very baby companies, they’re very much so in the growth stages and you just don’t know which ones are going to separate themselves as the big industry leaders, if you. If you compare that to some other mature industries you have like in fast food. Yeah, Mcdonald’s soft drinks, you have Pepsi and Coke and Dr Pepper. Even even in the new tech now, right? You have Facebook and Google and , I’m sure I’m missing one more, but you’ll tend to see this, this small.
Andrew: 38:36 It tends to consolidate and in a really smaller group and so I think it’s been shown over and over again and with the books that you can read with the way that a lot of these successful investors talk and just common sense really just being observant with how industry kind of functions and how it goes. It’s, it’s, it’s a lot easier to get yourself and become the type of investor who doesn’t need to guess on timing. Who doesn’t need to guess on which one’s going to be right? Or even if this industry is going to get taken out by the government tomorrow or if it’s going to explode into something like we’ve never even seen. You can just choose not to play and instead buy into industries that are very established and, and don’t have these huge headwinds in the future where, where , it’s uncertain that, that these industries will continue, but , just buy into that and buy into the consistency and buy into the idea that I’m just going to take income and I’m going to grow it over time and I’m not going to worry about being the smartest person in the room.
Andrew: 39:45 I think if you talk to, if you talk to like as if I talked to Buffett, but if you, if you hear Buffett and hear him talk over and over again about what it takes to do well in the stock market. He says over and over again, it’s not about being the smartest person in the room. It’s about being rational and being reasonably smart. Where you can know that I’m going to. I’m going to be trying to pursue this in a consistent, reliable, kind of safe way that, that I can do, I can do this over and over again and not have to worry about being right all the time. So that’s really why we preach that you look at an ETF like this and it’s very, very concentrated. It’s huge bets on these select five to 10 companies here that make up a vast majority of the index.
Andrew: 40:32 So I perceive a lot of volatility within investment like this ETF. I think he got a lot of the risks that come with weed stocks and just because it’s in an ETF does not mitigate a lot of these risks, , for that reason, for all the reasons really the industry. It’s in the way it’s weighted and the uncertainty surrounding, , which, which stock kinda takes over. I mean even, , a stock that’s so lowly waited. If it ended up being the one that kind of take over the industry, , and then, , you had like, let’s say, let’s say the stock here at the bottom, green organic. We’re just making a hypothetical situation, let’s say green organic Dutchman Holdings at two percent weight, ended up being the complete domination of this industry and that was the one that eventually became the stock. That was the dominant, reliable, consistent income streams, cash flow machine.
Andrew: 41:37 What will you want to see in a good investment? So that means all the other ones above it, canopy, Aurora, Cronos. These are all stocks that are probably gonna crash, especially when you’re talking about valuations of 10 times book, eight times, 20 times book. There’s so much hype priced into the stocks. So yeah, you have one big winner in the ETF and cool the ETF included it. But when you add up all the other losses that you get, it will inevitably happen if this group of stocks, , if one comes out and the others don’t survive, huge huge losses, huge losses. And so the big winds by saying that if green organic was the ones who win and this ETF held two percent of it, you’d have huge losses that would, that would really take a lot of the profits out of, of that winter.
Andrew: 42:32 And you compare that to maybe a more boring strategy like minor Dave’s where we’re taking a group of five stocks. Maybe I’m taking a one that’s big on something boring like chicken. Maybe I have another one that’s big on boring, like a networking in the tech space. Maybe we have another one that’s big and boring because a, it’s so big and boring, but that has one of the most popular brands in the world, , but it’s not growing anymore. It’s been around for decades. So people don’t care about it in the stock market anymore. , I, I don’t have those same risks that some of you who would buy an ETF with, with all of these huge valuations that the chances of a stock that is so expensive, we priced crashing versus one, one of my, , pick any in my portfolio that’s already at a reasonable valuation.
Andrew: 43:23 Okay, well when this, when this low, how much lower can it go? what I mean? That’s kind of the logic that you need to think about when you’re approaching valuations. , yeah, that’s a skyscraper valuation. When that thing falls, it’s going to fall apart and it’s not speculation. We see it all the time and that’s why unfortunately a lot of beginning investors, they really get burned and they don’t come back and and that’s a shame and we’ll keep talking until our mouths fall off and then try to get people to kind of turn around on that, but unfortunately some people just have to touch the stove. I think that’s. That’s something that’s inevitable. I think it’s pretty clear where I stand on this and hopefully be when it comes to this industry or any other growth industry that you’re really taking heat and understanding what you’re getting yourself into because that’s what happens when you buy into really expensive valuations. Really expensive. A high price to book ratios. There’s a ton of risks and so I would be very, very, very, very, very, very careful.
Dave: 44:23 Going to wrap up our call, enjoyed the thought to Indra and I had. It was a lot of fun talking about this question a took that question and kind of dove deep into it. So I hope you guys got some great information out of that and if you have any questions and I don’t know, thoughts, please let us know. We love talking about this stuff. Love answering your questions so any way we can help, we’re here to help. So without any further ado, I’m going to go and sign us off. You guys. Have a great week. Go out there and invest with a margin of safety. Emphasis on the safe and we’ll talk to you next week.
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