Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu’s days. Now, the calendar will say that this is not the last Stu’s day of the year, except that it is. There'll be a couple of more Tuesdays, but there will be no more Stu’s days. And there's a big difference between a Stu’s day and a Tuesday, right, Stu?

Yeah, there is. Maybe not to enough people, but to a few people, there's a big difference. And you're looking at two of them.

Well, yeah, I know. And we're working on it. Don't forget to click «subscribe» wherever you're watching this video or listening to this podcast, give us a five-star review. Here's my five-star review question for you, Stu—I think I know the answer to this—but are you a Christmas sweater guy? You like to put on the ugly Christmas sweater, or do you like to stay a little more buttoned down?

I'm a little more buttoned down. I'm a Christmas tie guy. I got a couple with reindeers and candy canes. Definitely a handful of sweaters in my house, but I like to go with the Christmas tie.

But if you got the Christmas tie on, then you have the whole suit?

Well, often there's a few of those parties. Maybe it's just going back to my youth, I was a bit of a gray and blue flannel blazer guy with Sunday dinner, that type of thing. So Christmas tie was the way you did it. Now you can have the whole red candy cane suit. You can have them all ordered up on Amazon in no time, but I've yet to do it.

People go all out now. Any of these parties that you're at over the holidays where that tie ends up tied around your head? I know you wear the sweat band when you're doing your workouts.

Well, when you really get dancing, you do work up a bit of a sweat. So you never know, Dave.

You never know. So if you're out and about in the Toronto area, Stu could be at a party near you and you'll want to get reports on the activity. It's always unexpected as every Stu's days is. And this was a year of pretty good Stu’s days because this market, as we've talked about over and over again, has just been really unbelievable, particularly in the US, and concentrated in those areas that we've talked about, and it was fantastic. And then we had the election, which removed some uncertainty, and then it's just gone off to another level. When you look back at 2024 now—because this will be effectively our Stu’s year in a re-Stu, and we’ll look at 2024—what are your thoughts on the year and what do you remember 2024 as a portfolio manager?

Well, as a good portfolio manager, I’m always looking back on things I did well and things I could have done better. When I look back on the year, it was this rotational market between a heavy concentration around a handful of names that were very artificial intelligence driven, and that would go for a spurt, and then the market would broaden, and people would think the economy is going to get better, and all of a sudden, financials and other things would pick up the ball and run for a while. And we had this back and forth through the year. And it led to strong returns across many asset classes. I think about some of the dominant ones. Technology was quite dominant. I think we'll probably have a lengthy discussion about this one, but I think the thing there that was not so much the earnings growth, which was healthy, it was the valuation expansion. Valuation expansion after valuation expansion that was a little bit harder to have the same degree of confidence versus the financial stocks, which were quite strong, and they started from a very reasonable valuation, and it was the prospects of fundamentals improving that drove those stocks in the stock market. Some volatility, but a relatively benign movement from the fixed income market, and then this back-and-forth between narrow market to broader market. And as we finish the year, we're finishing it a little bit on the narrow market side of things. We'll see as we get into next year, can it broaden again after the year passes?

It's interesting. We'll get into this in terms of risk exposure and what were the big winners versus others. But this is why we do the year in re-Stu because we need to go back and think about what was going on. You're absolutely right, which is no surprise to anyone listening, that there was this back-and-forth wave. Now, overall, the steps are going up each time, but there was that concentration, then it seemed to broaden to a different set of stocks. We're going to go back I think to the best encapsulation of where the market's sitting and how this back and forth is going. We'll try and link it in the details for this podcast of Stu's three buckets of stocks that we talked about quite a bit thematically through the summer and into the fall. You really did have this movement. Again, overall, a fantastic year. There are some bigger winners than losers, but as we always remind people, it's never a straight line up for everything. There was quite a bit of back-and-forth, along with the yields as well, your 10-year bond yield that we like to track. That's been as low as in the 3s. We got to 3.68% at one point, and it's been as high as 4.50% through this year. We're sitting in around 4.40% again after, maybe three weeks ago, it was sitting in around the 4.10 mark. It's been an interesting year on the fixed-income front, and that reflects these movements between these high-flying tech and financials and other stocks that have also done okay.

It's interesting. There's a thematic to it and then the reason. One of the best performing factors in the equity market was estimate revision. And we've often talked about the long nose of the stock market, sniffing things out. And when you get into these types of situations, the moment something was perceived to be getting better, and that was normally through a small upward revision in its estimate. The stock market just went and just pulled that forward like crazy. We saw a Canadian bank go up maybe 8 or 10% in about in 90 minutes as the perception of the provisions for credit peaking became more apparent. This week we saw a large semiconductor stock, which might be more exposed to the next phase of artificial intelligence, and we saw their estimates for 2027 and 2028 go up by 6 or 7%, and the stock went up almost 25 or 30%. The notion that if something gets a little bit better, the stock market says it's going to get a lot better, and you really want to pay forward for it. So as we move between those buckets and they each had pauses in the new forms of performance, it normally came around some site line that that bucket's earnings were about to improve. And then there was a real spurt that followed it as momentum and chasing those periods of time became quite dominant in the stock market. And of course, what we're trying to do is to try and be in front of them when they get there. So right now, we're in this lull for the average stock, not really a negative performance, but we've been through a period in the last three or four weeks where we've narrowed in again around not all of the MAG7, but certainly some of them have been very strong. For the prospects of higher estimate revision, some of them from the prospects of the election, without necessarily estimate revision, and those are going to be very interesting situations as we move into 2025.

Yeah. I forgot about the day after the election, several bank stocks in the US, big and mid-sized, were up 10 to 15%, just on an election result. And there were quite a few of those moves throughout the year. As you say, whenever there was the slightest bit of optimism in that one area, the money just poured that way, and you saw big moves in that area.

Yeah, like the speed with which people wanted to dream the dream, whether or not there was copious amounts of evidence or not, was definitely a big theme for this year. As soon as there was a sniff that the story was going to migrate to something new, the farther away it was and the bigger it could be, it was just like, it's going to be big. Again, without any near-term evidence, people really wanted to migrate to some of those dreams this year.

I was laughing with you. Not everyone is a Monty Python fan. I happen to be a big one. They had a Monty Python film on one of the channels this weekend. I sit the kids down. The kids are actually 18 and 20. They actually laugh at this stuff, which I think is amazing. It tells you when something's good is when generation after generation can appreciate it in their own way. But the one movie scene is they've got this big guy rolls into a restaurant, and he's known for overeating, and he eats everything they have. So here's our food analogy. He's eating up all the risk he can. And then there's one little wafer left that they convince him to eat, and he eats that one little last wafer, and then all of his guts explode all over the place. Sorry to be too vivid, but it was just that one little bit that went from, wow, I've had an unlimited appetite for risk to all of a sudden, I have no appetite for it. We talked to Marcello about this. We had him on Friday. And just the whole idea of it just feels like the market, at least since the election and at different points through the year, it's just, give me more risk, give me more risk, feed me more risk. And if I've done that, I've been successful. I keep getting satiated. Is that maybe the theme for 2025? Or is this just one of those things where there's so much innovation and so much potential as we move into next year in the next three or four years that it's justified?

Well, along the lines of Monty Python, in that little story anyways, you better get me a bucket. Trying to predict exactly when the market meets the bucket is an interesting one. I think there's certainly areas where when asset prices go up so much faster than the earnings and cash flow estimates underneath of them, we have to be a little bit wary. As a longer-term investor, that's really what drives asset pricing over long periods of time. And when we get into these situations where things are very technically driven, there is a lot of enthusiasm for the future. Sometimes the best stories have no evidence in the near term because then there's nothing to interfere with the dream. We have to be careful around those things because we know eventually on many of these stocks, the rubber hits the road. The last time we had a period like this was probably coming out of COVID. We had a lot of enthusiasm for some stocks coming out of that period of time. And valuations, they were consequential in the sense that they were high, but they were inconsequential to the investment decision. And eventually, the delivering of good numbers, but not good enough, resulted in a fairly significant price change. We've talked a lot about all the quotes that are on my wall, and we were joking about a few of them before we began. But one of my favorites is Peter Bernstein, who wrote the great book on risk called Against the Gods, which goes all the way back to the starting of insurance and Tulips and all sorts of things. But what if I'm wrong? Any rational investment plan has to start with that question. That one is right above my monitor. So right now, there's a lot of enthusiasm. There's not a lot of focus on how it could unfold in a number of different ways. There's one here from Howard Marks: the bottom line on the quest for superior investment returns is clear, you shouldn't expect to make money without bearing risk, but you shouldn't expect to make money just for taking risk.

Just for taking risk.

And so there's always pockets of enthusiasm that we have to monitor. Maybe you've participated in which case you have to evaluate your positions in those. For others, you haven't participated, and you say, is it too late? And you have to judge those fundamentally. And we've talked in the past, investing is saying, I want these cash flows to grow over time to support rising asset prices. Speculation, and there's nothing wrong with it, but it's saying, I'm going to buy this to sell it to someone else. Those are two different toolboxes. We shouldn't confuse the two. There are two different skill sets.

Well, I'm going to get people confuse me with the old guy who's yelling at the kids to get off his front lawn. Because I'm out a lot in the fall doing our event program and speaking to thousands of people across the country and talking to people afterwards. I'm always talking to advisors about what their clients are asking. I'm always watching for not just the narrowness in the market, but the narrowness in the questions that I'm getting. When I think about what people are coming and asking me about in terms of maybe what I didn't cover off enough of in a 45-minute speech. It was gold for a while. Now that's tapered off. Now it's cryptocurrencies. And it's certainly around US tech stocks. When the questioning gets that narrow, that's when I start to get concerned because one of the things I know and you know from being around a long time—going back to the '70s, the '87 stock market crash, the tech bubble burst, all these global financial events that have taken place that are significant in markets—but whenever you get away from that principle of diversification, you may be setting yourself up for some really hard times. And then one of the things that really captures a lot of people when these things reverse. We've seen several things like NVIDIA or Bitcoin or Bre-X Gold, if we talk about Canada, we'll throw that one in there. I could just run the list over and over again, all those names through history. A lot of times people get caught in that. It reverses, the momentum is gone, the appeal is gone, and it's amazing how quickly it falls, and it's amazing how often people hang on. Sure, diversification is boring. It's not as exciting as watching an investment go up 10% every day. There are portions of a diversified portfolio that you're sitting there as this risk trade works day after day after day, and you're looking at that piece of your portfolio and going, why is that flat again? I hate that. I'm going to sell that and buy more of the other. And really, in a long-winded way, I'm saying this is the argument for stepping back at times like this, taking a deep breath and falling back to your first investment principles. And I like the thing, too, if you have been out a little bit over your skis and you have taken a little bit more risk than you normally would, hey, great. Maybe extra Christmas for a loved one. But be wary.

Yeah, and it comes down to your financial plan. When you get in these types of situations, the degree to which you want to be involved in some of these things, do you bucket them in your financial plan? You don't let them get above a certain size. The risk exposure is tolerable. These are all pretty important discussions to have with your advisor. When we make investments, there's a couple of things I always think about. The first is, of course, that rule of 72 in terms of doubling. And it's the last doubling where I make all my money. And if I rush the first doubling and I miss the last doubling, that has big consequences on the portfolio. There's nothing wrong with wanting to partake. It's just understanding how it all fits in the grand scheme of things. This year has been a good year for many different investments, but some of them I look at and I think we owned that stock for two or three years and we could see the cash flow it was generating, and we could see the balance sheet improving and we could go talk to management, and we knew we were going to make money. We didn't know exactly when. And some of those stocks then go on to double in six months. And if we continue to fill the portfolio, maybe it's a little bit like the old Maytag man, it doesn't look as exciting on the day that you purchase it. But if we continue to fill the portfolio with these long-term positive options, and we think we bought them at good prices and we've underwritten a degree of risk that provides us some comfort, then when we get rewarded, if it comes sooner, we get a spectacular return. If it comes in time, we get a very good return. Those can be great investments in a portfolio, and they're never the ones that are making the presses around this, that, and the other type of coins and what have you. And as I say, there's nothing wrong with that. But bucketing these experiences in your portfolio is usually pretty important when you get into these types of environments.

Yeah. And I want to be clear on this. You can interrupt me if I'm off on this, but I don't think we're saying we're not positive on stocks or positive on bonds. When the Fed goes into a rate cutting cycle, this typically, as long as you don't have a recession, which is driving the rate cutting, it tends to produce pretty decent or even slightly above average returns in the 12 months following the first cut, if we look back at history. However, the importance there is to have that diversification because if one part of the market already takes that year, already advances a year in a few days, you want to have some of these other stocks like Stu's talking about that may be lagging a little bit behind and frustrating in the near term, but as long as things stay positive, they're ultimately going to work out. We're still very pro-stocks and pro-bonds, but we're pro a diversified portfolio and not over-concentrating and getting too much risk and only relying, from your quote, on that risk to drive the return.

I think back, and it's always hard to say exactly where you are in the spots of the cycle. I've been at the Royal Bank for almost 30 years, I’ve been buying the Royal Bank stock every two weeks since I started. In 2000, I did use some of my money to buy Verticalnet. I never forgotten it. It was a business to business going to be a bonanza. I think I lost a third of my money in about an hour. I remember keeping both sides of the transactions, the buy ticket and the sell ticket, as a bit of a reminder to myself. Obviously, I wish it had worked out, but that didn't interfere with my other plans. Keeping it all together in your portfolio is pretty important. The enthusiasm with which you get involved in the here and now, try and be equally as enthusiastic about the long-term compounding that can go on your behalf elsewhere.

And one of the other things that doesn't really exactly tie into this but does tie into buying a bank stock. Just at a retirement party the other day for a colleague that many of us would have described as one of the few indispensable people we've ever seen inside an organization. We were joking with him on his retirement that the stocks gone up 40% since he retired. Again, these are big organizations, and it's the big economy and the growth in the overall economy, human productivity, human innovation, earnings across the board, that's what's driving stock prices higher. This is big picture stuff, and you just got to keep it all in perspective over time.

A 100%, Dave. And it's a great message for this time of year as well, because we're fortunate in what we do and the interactions that we get to have. And so, it's a great way to finish 2024.

And I know not everyone celebrates Christmas here, but Stu and I do. And one of the things I learned this year in particular because of the focus, and so this is a new approach. You can try this at home because I'm going to bet Stu does it, is now I'm giving out gifts. I'm doing what I'm calling dollar Christmas averaging. So this falls in with your dollar cost averaging, Stu. I'm giving out small gifts. Like those advent calendars where you get the chocolate every day.

Every day.

I'm getting a little bit more to my wife. The kids, they've already gotten enough. But dollar Christmas averaging. There you go.

It sounds fantastic.

I do that with the puppies too. One snack a day all through the year for the puppies. It's all good. You got that DCA.

That's priceless.

And again, if you're wondering what gift you got from us this year, well, you got a lot of Stu’s days, and a lot of dollar cost averaging advice. Stu, thanks again for a great year. I know everyone loves listening to you. I was down in the US. I bumped into somebody at a football game in the US who listens to the podcast and said, to be honest with you, Dave, I'm tired of listening to you, but I love that Stu guy, that Stu’s days in my house. Just a random guy at a football game. And I know people really appreciate your wisdom. And so thanks for putting up with me in doing this every week. And I really look forward to seeing you in the new year. All the best to you and your family.

Okay. Thanks, Dave. And all the best to everyone who listens.