Hello and welcome to The Download. I'm your host, Dave Richardson. And it is a melancholy Stu's days. I don't know what we'd call it. It's our last Stu's days of 2025, Stu. We're going to take a couple of weeks off and enjoy the holidays. When you look back at 2025, what do you think you're going to remember from this year?

Well, lots of conversations with you, which will be a fond memory. A volatile year. In the heat of the volatility, emotions are up, so you need to always settle those down. How often you get to the end of a year and you say, oh, it was volatile. Then at the same time, you don't necessarily think, well, it will be again. Lots of scenarios run, lots of things to think about, lots of things thought about through the year. It turned out to be a pretty reasonable year, but lots to think about in the past and lots to think about in the future.

I think it was a pretty good year overall. You forget that because, as you say, there was a lot of volatility and there were some particularly tough times, February through April, as the tariff fiasco—or whatever we want to call it—rolled out and then got pulled back. But overall, a pretty good year. And by the way, over the next couple of weeks, we're going to repost what we think are four or five of our «best of» podcasts. Stu, I don't think any of your Stu's days made the cut. No, I'm just kidding. Of course, we've got a couple of the best Stu's days, along with a couple of other podcasts that we think are particularly relevant as you head into 2026. So again, if you're not a subscriber, please subscribe to the podcast wherever you get your podcast. And we're on YouTube. I think we spent about half the year on YouTube. Those YouTube postings will be there as well. Love you to follow there. And always we love to get reviews and comments and things that will make it better. The best thing, Stu, I know a lot of people are out shopping for gifts and stuff. And since you're in charge here, what a discount should we give on subscriptions for 2026 on the podcast?

Pretty large. I think we should give large discounts.

How big?

A 100%.

A 100%. So the podcast, if you subscribe or follow us on YouTube, it is 100% off. Stu's fighting inflation the way that nobody else is. By the way, it's been free all the way along, but we'll keep it free for the new year. I'm pretty excited. I think if I look back over, not just the last year, but the whole five years that we've done this, Stu, I think we've given people some really good advice around managing through what's been happening in the global economy and in markets. And if you have taken Stu's advice—and all joking aside, of course, Stu is the global chief investment officer at RBC Global Asset Management. So this is someone with nearly 30 years of experience managing money. So there's a lot of wisdom in his appearances every week. And I suspect that he's only going to be wiser in 2026 because he'll be older. So, Stu, let's finish off the year with some thoughts around managing portfolios, thinking about how you navigate through a changing environment. And the environment is always changing. And to some degree, I think people think of portfolio management as very rigid, and it's rules-based, and you stick to the rules, and you're always following the rules, and there's an element of that. But there also has to be some flexibility in the way that you take care of a portfolio over time, because, again, conditions change. You always want to adhere to some basic principles, and you've talked a lot about that. But at the same time, the market is going to throw different things your way. So you wanted to talk a little bit about that today.

Well, you started off with kindly highlighting our five years. I'm not suggesting anyone will, but if you listen to all five years, you would see things we got right, things we got wrong. And I think the most important thing when you're setting up your financial plan and you're navigating markets is acknowledging, right off the bat, it's not going to be perfect. We've moved to our fancier studio, so we don't get to see the wall of my office. But there's a couple of great quotes on the wall about it's not making a mistake that kills you as an investor. It's staying wrong. Being very open-minded, understanding all the different ways that something could play out, assigning probabilities, reevaluating your view. My partner has a great line, which is, I'd rather be rich than right. I think that is a very useful axiom for markets. I'd sent you a quote that I'd come across about a week ago, but it was this idea that I form a view, and it might be right, it might be wrong, but I do everything in my power not to be necessarily anchored to it. I need to be open to a new information that might come along and shift things in one direction or the other. It happens in a top-down. It happens in the economy. You think about in the last five years, we've had periods of time where people were very worried about recession, and those concerns didn't come to roost. Then we've had periods, like right now, where there's really no concern about recession. On a top-down basis, when something gets skewed one way or the other, you need to go and worry about the opposite happening, where consensus might lie. It happens for the economy, it happens for stocks. Companies, they appear to be on a certain path. Something changes, management takes an action, it changes things. You may have a long-held view, but you need to be open-minded and willing to evaluate that view. Sometimes it's the gentle release of what you permanently thought was 100% true because markets had discounted that, and now there's been a reaction that is going to change the outcome relative to what you thought. There's a bazillion quotes. There's a Mark Twain one. It's not what you don't know that gets you in trouble. It's what you thought to be so that just wasn't so. That just catches up on you. I think what we've seen through this year, we've seen through the last five years, I suspect that we'll continue to see in the future is, we will form views about things, but we'll be very open-minded as to how they could develop in different manners. I really think that intellectual honesty is going to be the hallmark as we move forward.

Yeah, Canadians will certainly get that. You're driving along this time of year, it starts to snow, you see some ice on the road. You make an adjustment. It's not 100 km/hr all the way. You make an adjustment. You pull into a neighborhood, you make an adjustment. If school is letting out at that particular time, that's going to be another adjustment in that neighborhood. So these are all things that we're accustomed to do in our day-to-day life. And you want to do that as you're managing and thinking about your portfolio as well. And is it even a case, Stu, you think sometimes professional investment managers get tied down to an approach even more so than people who are managing a portfolio on their own?

I think it does happen because we get the curse of saying things out loud. When you say something out loud, the risk of being anchored to it goes up. As human beings, we don't really like to admit that we're on the wrong side of something. We tend to go away and look for evidence that supports what we thought. I think that's why scenario analysis is so crucial. In that way I can tell you what I think, but then I can also at the same time acknowledge, well, this is how it would unfold differently. It gives you the built-in mechanism to say, well, this is unfolding differently than I thought, so we should do something. Culture inside of investment manager is very key. If you walk around and people say, well, you said this last week and things have changed and someone wants to harborage on that, then that can be a challenge as well.

You've talked a lot about the scenario analysis over the years. It's something that I've learned from you and Dan Chornous and a number of people that I've worked with over the years. That idea that you have that primary view, the way you think things are going to happen, but there's also a chance things could be even better, and there's also risk that it could be worse. And you need to, as you said, acknowledge it and be flexible enough to say, hey, I thought this was the most likely scenario, but you know what? This is not the way it's played out. I need to make that adjustment and not be locked in. And again, I never really thought of it in terms of the idea of saying it out loud. That when you say it out loud and you give the different scenarios, that you can move and say, even to the people you're working with, hey, I know we thought this, but now we've been proving this. Fortunately, we've laid out our bets in a way that acknowledged that that risk was there. And again, that's how you add value as a portfolio manager.

Yeah. 100%. And it just happens time and time again. Well, there's two other comments that are two of my favorites, and I've said them before, but opinions about facts sets prices. That was a Jim Chanos line. Then the other one, which is many technicians’, but narrative follows price. We have to be willing to think through these things and how they might change in advance. Often the greatest price change happens when you get a very small marginal change, but you're now going to rethink what might play out.

Maybe the best example that we've seen over the five years that we've been doing this is just where we'd been towards the end of 2022. We've had a long period where technology stocks have led. We got particularly concentrated into what has been referred to as the Magnificent Seven, and the idea that these stocks continued to move ahead more so than the rest of the market and got to a point where they were very expensive relative to the rest of the market. And at different points in time, you may have thought that that was going to unwind. But if you didn't have some allocation towards those stocks, you fell way behind. And so you had to be adjusting all the time. And then ultimately, we've seen at least some of that trade come apart over the last few months. What are your thoughts around the Magnificent Seven and this rotation that we've been waiting for that has taken so long and how you've had to be flexible around that in managing your portfolios?

So there's a number of tools available to you. The first is the number of names that you might use in the portfolio. The idea of an accordion. It opens and it closes, and it opens and it closes. At different points of time, you might use more stocks in your portfolio because you're spreading risk and return around and you want to make sure that you might have some exposure to certain areas because they have a lot of momentum or a lot of earnings growth, even though you think that valuation eventually might be a little bit of a struggle. Then at other times, you can narrow the portfolio and you can have fewer stocks exposed to different business dynamics at any given point in time. When we look back on the last three or four years, and the Magnificent Seven have been very strong, it has been for good reason. They have dominated the earnings growth profile, they have dominated the margin expansion profile, and as a result, their valuations, in some cases, have expanded in reflecting these strong financial characteristics. But then you get to a point where you sit there and say, well, do the law of large numbers come into play? Because historically, it's been very big for large companies to grow at premium rates. Then you get into the idea of, well, what are they involved in? They're involved with the build out of artificial intelligence. Well, at some point, if all this build-out is going to make money, then someone else is going to have to make money consuming these services. Otherwise, that's not going to happen. While you can be in awe of some of the growth that they might be going through, you can look at those financial characteristics and consider and weigh them relative to some other opportunities that you might see in the market. That's how you get this fluidity within the stock market. You just can't really anchor yourself to just one point of view. You can look at these companies and you can say, in some cases, their margins have expanded significantly. Will they be able to maintain these relatively high levels of margins, particularly versus history? But then on the same company, you can go and look and say, well, wow, in the next 18 months, they've got this new server coming or this new product coming. Then 12 months later, there's another new product. What financial characteristics tell us is the degree of difficulty, but they don't give us the ability to then guarantee that just because something is difficult, that it won't be done. What it just says is that the path is narrower. You're watching the summer Olympics and you look at the gymnast and you know it's going to take 6s across the board to win the gold medal. You and I, Dave, we would be out of luck, but quite often, you're like, wow, 6s, that's a difficult path to be basically perfect, but normally the winner delivers on that. So we look at companies, we look at the valuation, we look at the business metrics, we look at the company profile and what they're doing to deliver on that. You can tell there's lots of variables that come into play. We try and adjust the portfolio as best we can. As I say, the index has been a very powerful competitor. Active managers normally try and keep pace in a roaring bull market like we've seen, and normally make their—quote, unquote—relative money when things are going sideways or they're a little bit tougher, and that can be a little bit of an easier environment for active managers. We've been in a period where for a couple of years, we've had very strong markets, and keeping pace has been the important factor. You take that into consider on your portfolio construction. I think we're probably embarking in an environment where that's going to start changing a little bit. The optionality available to the active manager to accordion their portfolio in and out and do different things in the future, I think that headwind might become a tailwind a little bit more as we move forward.

Yeah. And it comes into a couple of other concepts that we've talked about over the years. One being recency bias. The recency bias would be that we've had really a secular, long-term bull market that began in March of 2009. The general trend has been up. Every time you've purchased on a pullback, you've been a winner in a long-term uptrend. And that tends, particularly in the last 30 months, to favor an index and works well for indexing. And so then you get the intellectual rigidity of what you hear a lot out in the marketplace, well, index is the only way you want to go. But with the recency bias and with the trend in markets, then, indexes have done very, very well, but markets don't only go in one direction. You have to work through an entire cycle, both cyclical and secular—shorter term and longer term—and when you look at the full picture, you start to really see the advantages of having a professional investment manager or money management supporting what you're doing in terms of building your overall portfolio.

Yeah, that's what I mean by this notion of the accordion. The professional money manager at times is maybe not quite as willing to accept the same degree of risk as the benchmark might at a given point in time. The interesting thing about this is—and thankfully, our investors are with us for a fairly long period of time—but during the periods where the benchmark is very strong, that's when you're making a lot of absolute money. That also can be a little bit more of the difficult time on the active manager. But the absolute result is still pretty good, even if it could have been tweaked just a little bit higher in certain instances. But we all know in the fullness of a cycle, if we thought about all the environments that we've seen in the last five years that surely we'll see in the next five years, the ability to tailor the portfolio for different environments that might present themselves, is still a valuable option to an investor at this juncture.

Yeah. It just highlights not just for the professional investment manager who's managing large multibillion dollar portfolios, but for individual investors to also be intellectually flexible around the way they construct their portfolios. I think you said it right at the start, there is no perfect in this. So if you go with an assumption 100% of the time you need to do this, that's not going to be right because it's not going to work 100% of the time. So you want to have that flexibility because to outperform over the long haul, you're just adding little bits here and there over time, and that's how you ultimately outperform. And if you get locked into one rigid view of how you want to manage your money, you're going to miss some opportunities.

Yeah. I don't really know what else to add. I think that relieving yourself of the notion that it's going to be perfect raises the odds that the outcome is pretty good.

Yeah. Never wanting to draw an association to gambling because that's not what we're doing here, except to say that when you look at a casino—a casino is basically set up with slightly better than 50% odds, and then people come and play the games, and with just a little bit of an edge, they make money over time. So they don't need to be right all the time. The market, of course, the trend over time is going to be in your favor over the long, long term. So if you can just find a way to get a little bit of an edge. And I would say, you're doing well over 50%, much better than that as a professional investment manager. But it's that edge over time. And there'll be periods where you're not winning, but then those periods where you do win really makes a difference and adds value. And as you highlighted, which is so important, it's doing it many times with a lower level of risk, not taking as much risk as there is in the broader market, which in periods of pullbacks in markets is really important.

Yeah. It's like you say, you're hesitant to use the casino analogy, but the people that do well when they go to casinos have a system. So they take advantage of when opportunity presents itself versus just doing something for the sake of it.

Well, I'm bad at casinos and good at the stock market. So I'm going to lean into investing instead of gambling, but it can be fun from time to time. Stu, anything planned for the holidays?

Yeah, we go off to my wife's family's house, and it's great. It's all the grandkids, brothers and sisters-in-law. It's lots of fun.

Excellent. So it sounds like you've got a great plan. And hopefully all of our listeners have a great holiday season, and you get lots of time to spend with your family because there's nothing more important. We're always talking about money and investing, but there are things that are more important in life than those things. You always want to keep that in mind. So, Stu, merry Christmas and happy holidays. Happy New Year to you and your family. Thank you for all your time. We're going to have Stu back on January 6th for his annual Nostudamus yearly forecast for 2026. So you're not going to want to miss that episode. You have anything you want to say to the listeners before we sign off for the year?

Well, I hope everyone has a very happy holiday. I appreciate people tuning us in. Dave, it's always great spending time with you. All the best to you as well. And thanks very much.