Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a vacation episode of Stu's Days, because, Stu, I'm on vacation. I know you pretty much never take vacation, but I do. I'm quite a bit lazier than you, which explains my career, largely.

I don't know about that, Dave.

Well, I did get up, on vacation here, Stu. I did a seven-mile hike this morning. I don't know what's that. 11 or 12 kilometers? I toured what they call the Terra Devassa here, which is the «depressed terrain». It's like a moonscape on the island here in the Azores. But I can honestly say that it was nowhere near as depressing as Canada losing both the women's and men's gold medal to the US earlier this week. That was truly depressing.

Yeah, well, to watch the three on three, it's a tough way to watch the game end. Even if we'd won. It's just not in the spirit of the game.

Yeah. Back in the day, we played three on three when we couldn't find enough guys to play. But they had plenty of guys to play. But I do think what's interesting is, I imagine if you went through the numbers and you looked at the percentage of time at a high level of hockey, say in the NHL, that one team outshoots the other team two to one, dramatically outplays them through the whole game, but loses the game, would you say that happens 10 or 20% of the time?

Even if.

Yeah, even if. And yet that's what happened. I'm going to flip the switch to the markets here. It just tells you why you don't look at the short term. If we played that game a thousand times, Canada wins 990 or 950 times, somewhere in that area, but there's the odd time here and there where you're going to get a real downer of a day. That was like the market dropping 5% emotionally for me. At least, here I got to sleep. The game was on at noon here. It wasn't on at five in the morning in Vancouver. But that's the way it feels. In the market sense, everything relates if we look at probabilities. And that's just another example of how everything can work in your favor. But long term, the market has tended to go up and to the right, but there's times when it pulls back, and sometimes it's not necessarily irrational.

Yeah, I think the other part of that analogy, too, is that the markets are trying to constantly reestablish the probability of something happening. So the market analogy for the hockey game, like with five minutes left in the third period, the probability of the Canadians winning might be very high because they were dominating. When we look back on it, the Americans won. But the emotional change that took place from five minutes left in the third period to the Americans scoring in the overtime was far more dramatic than if you just woke up and realized that the Americans won. So the stock market goes through similar types of emotions when something that they believe to be true is challenged. We've seen a lot of that so far this year as artificial intelligence and how the implications might play out for a whole variety of businesses come into play. And conversely, businesses that don't appear to have any significant exposure have taken off, even though their immediate prospects might not be any better. We sit here and we all feel, I think, a fair amount of angst around employment, you name it, all sorts of things. Each one of these models, in my mind anyway, don't seem to be getting hugely better than they used to, but they do more things. We sit there and we look back on the first six weeks of the year, and we had a lot of stocks go in a lot of different directions to a far greater degree than they might have. I think almost like 20% of the S&P experienced a decline of something like 8% to 10%, yet the market as a whole is right near its old levels. While some businesses that might have challenges have been penalized, we’ve had other businesses like railways and some older fashioned businesses do very well from a price standpoint. So a portfolio overall, the press is dominated by the concern, but there's other aspects in the portfolio that have picked up. And maybe after a long period of not carrying the ball, so to speak, for the portfolio, they've done some pretty heavy lifting in a very short period of time and been very good members after being very boring members in the portfolio for some time.

Yeah. Team Canada worked fine and was running really well, a great stock, until you go to overtime, you switch the rules, and you make it three on three. Maybe that's that AI world. Then the US seem to have an advantage. Again, it's just that moment in time. Like you say, the game stops after 60 minutes, and then you're into a completely different world. And it seems like markets are trying to feel out what that different world is going to look like. They seem to be pushing money towards some stocks, pulling money away from other stocks in what seems like a premature attempt to, as you say, evaluate what's happening and what might change.

Yeah, it's almost like in the absence of a definitive data or facts, narratives will change quite quickly. And there's lots of analysis and lots of research going on to get to the bottom of things. But we're in a period of time where one of the lines that is written on the wall is «narrative follows price». If the price goes down, something bad must be happening. If the price goes up, something good must be happening. We have to make sure that our investment process encompasses turning that into the vice versa. When price goes down, has it discounted some a degree of bad news? If price goes up, has it discounted too much good news? Try and work our way through that. But on the one hand, you have the long term and human ingenuity and all sorts of things that have delivered all sorts of things that we haven't imagined. I'm not saying this is the first time, but this is a time also where the imagination runs a little wild to the negative about replacement and all sorts of things. So it is likely to be a little bit more of a volatile period as we negotiate and come to terms and realize where will the impacts be? Where will the impacts be overplayed? And surely, we know that both will likely take place. Even like a broader stock market rule, there are some indicators that are very successful at predicting recession. The problem is they predicted twice as many recessions as actually took place. So in a period of time where valuations are elevated, there is a vulnerability to swift changes in things that we otherwise believe to be true. I think that's just going to be par for the course for a little while. And it's a great period of time for analysis and a great time for scenario analysis and thinking through: could that be better? Could that be worse? How would that play out? How does that reflect it in the stock market? And trying to make some adjustments. There are some negative things that maybe aren't fully reflected, but then there's also some maybe positive things that are too reflected. I was looking at a business this morning whose valuation today touched the same valuation that it had when I started my career in 1996. It was a grocery store. We think about that grocery store, and we think about the earnings growth over long periods of time, which really drives most of the share price. It's been strong. It probably compounded its earnings at almost double digits over long periods of time. But in my career, that business has traded at 30 times earnings and has traded at 9 times earnings. There’re periods of time when there's lots of enthusiasm, and there's been periods of time when there was worry about online grocery, and there was worry about new entrance, and there was worry about discount. The one thing that we have to always remember during these periods of time is that businesses change. Some change successfully, some don't, and we'll have to be on the lookout for that. But for every time that there's a concern, management has the same concern, and they can try and adjust their business to your benefit over time. Sometimes those tides are just too strong. But by and large, when we sit there and we have these discussions with management around the different scenarios that they're running, they're very similar to the scenarios that we're running and trying to come to terms with. Where will the earnings growth be in the future? Where is valuation reasonably handicapping that earnings growth?

Look, I watched a lot of episodes of the Jetsons and Star Trek. So I know that life ends up being pretty good in the future. Aside from the Klingons and I guess Cogswell’s Cog was a bit of a problem, but other than that, life seemed pretty good.

I think that's likely true. Those are generalities, which is one of the reasons you have a portfolio. Because the majority of your companies will figure this out. And the stocks that do the heavy lifting in the portfolio, they go up way more than anyone that might be a bit of an anchor. And again, we'll probably go full circle, but back to portfolio process, if your Team Canada's management, that game went pretty much bang on with what your investment process would have been. As an investor, we know that if we apply the same process over and over again, we'll have success. The biggest difference between investing, obviously, and a game is the game has a clock that ends, so then you have a very clear outcome versus investing is not the same. It's just this constant iterative approach to negotiating as the future unfolds.

Yeah. I mean, that's exactly that comparison I was trying to make. But as usual, for regular listeners of the podcast, you've articulated it much better than I did. But the whole idea that, yeah, if that game could go on forever, if you outshoot the other team two to one, eventually the pucks are going to start going to the net, no matter who's playing goal, even a robot. Again, what you're trying to do in your investment management process is come up with a process that you know you can trust to deliver results when things are more rational than irrational, and that if you stick to that process—you're always evaluating, you're never just sitting on your hands, but you're always evaluating—but if I have a process that I know works, I stick with it. Even though there's the odd day here and there, even the odd month, or maybe even the odd year where I fall a little bit behind. But if I stick to the right process and I keep putting those pucks on the net, I'm going to score and I'm going to deliver results for the people that I invest for.

That's a great summary, Dave. Putting pucks on the net, getting pucks deep. I listened to the commentators. I heard the successful process required.

That's it. Got to shoot the puck, Stu. One company that's going to shoot the puck and maybe another victim of the same thing we've been talking about, where, again, the results and the way the execution has been fantastic, but it may not be enough to keep the stock going. It may be enough, but it may not. I guess last quarter was more an example of where it didn't. But NVIDIA reports their earnings tomorrow. And this has become one of those bellwethers that the market looks at because it's the plumbing, it's the roots of AI and it gives you a view of everything that's happening around artificial intelligence. Any thoughts on those earnings? Or again, it's a case of you've got different scenarios, but you're more concerned about where the business is going to be 10 years from now, and that's what you're basing your evaluation on?

Yeah, I think for a stock it's like NVIDIA, which is not far from its high, but actually hasn't done a whole lot in the last six or nine months, I don't expect anything overly negative from their results in the short term. We've seen the hyperscalers come out with very large capital expenditure budgets. I assume a lot of that will involve NVIDIA equipment. Whether or not it will be better or worse than where the expectations sit in the short term, time will tell. I think the two big discussions there are the persistence and the length of the growth, the margins that they'll earn on those sales, and some of the activity around the investment and the financing of those sales. Those are the three things that will receive the most discussion. And they've received plenty of discussion already. So I think it will just be a continuation.

I think I had a discussion with another portfolio manager a couple of years back about NVIDIA and just that ultimately, they're making equipment, and it's pretty hard to maintain the margins that they've had over time, regardless of demand. But to this point, margins have held up pretty well. But is that still something that you'd look at with that company and be worried about?

Well, the margin profile is certainly probably the number one discussion point. It dovetails into, there definitely is strong demand for the product. But if I'm investing in your company and you are using some of those proceeds to then buy chips back from me, that's where I said those three things: it's like the outright demand story, the margin on the products, and how some of the business is being financed, and how should we interlay all that together to know the true longer-term earnings power of the company.

Yeah, it's an interesting one, again, because it has such a wide following now. And again, it has been the base of AI and the build out of AI. So it's always interesting. So next week, we're back. Actually, we'll be in London, England together, Stu.

That's right.

At one point you were the head of Canadian equities, then you moved to head of North American equities, and now you're the global chief investment officer. You were cheering for Canada, right? You haven't gone global on us? Anybody wins, it's okay with you?

No, I was definitely cheering for Canada in both of those hockey instances, the curling and everything.

That was a rhetorical question. I know where your heart lies, Stu, but it'll be good to see you in an international city like London. And thanks, as always, for joining us for Stu’s Days.

Great. Thanks, Dave.