Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is a sweltering Stu's days here in Toronto. Stu, how are you doing in the hot weather?

Not bad. As long as the air condition is going, I'm okay. I can't complain about my hair getting puffy because I think you might feel the same every so often. But the humidity, not my favorite.

Yeah, I am struggling with the longer hair in the summer. It does make it challenging. But let me tell you about who was putting on the real heat. Last week, I was at a conference with Stu. Stu is up on stage. You didn't even know this. He's interviewing a really senior person in the firm. It was like Mike Wallace, like vintage 60 Minutes. Stu is just drilling this senior person with all these tough questions. And then I believe you referred to his background as deep and dense. Did you get away with that? I'm glad to see you're still employed.

Yeah. Well, I learned from the best, Dave.

Oh, yeah, that's right. So on this episode of The Download, we're going to put Stu Kedwell, head of Global Equities at RBC Global Asset Management, we're going to put his head in a vice, and we're going to hit him with all the hard questions. Actually, I mean, there are some hard questions coming up. I guess that's a good way to position it. A lot of hard questions for companies across the whole spectrum in terms of their earnings. So we moved into July now. We've had a fantastic run up in markets since the bottom of the tariff scare. And now we're sitting at all-time highs almost across the board in major markets around the world. But now it's put-up- or shut-up-time for companies because they got to come through with the earnings that markets are expecting, or else?

The guillotine? No, you're bang on. I think we've talked about it in the past where markets that are in motion often tend to stay in motion until they're given something to think about. We've seen a lot of headline noise—tariffs and what have you—but generally speaking, markets have just continued to gravitate higher. And now, when you get into the actual earnings season, the risk is the good earnings aren't met with further share price reaction because that, in fact, has been the expectation that has been put in place. We're just very early into that, but we've had a couple of US financial companies today where the numbers were reasonable. In many cases, because some were quite good, but the reaction has been a little more sanguine in response to it. When you buy a stock, you're buying a set of assumptions about the future. If the share price is going up, the assumptions about the future are better, and then you have to live up to those assumptions when you actually report your earnings. This is all a bit more short term than we normally discuss. Earnings have done almost a rhythmic job over long periods of time, growing at 6 or 7% throughout time. But in the short periods, you can get earnings that are growing above that, yet the stock market seems unimpressed at the time. And when we've had a big run like we've had right now where markets are back to highs, valuations are back near levels that were also consistent with past highs, you just have to worry about that a little bit more in the short term than you otherwise would.

Yeah, it's like your kids getting a report card. You're watching them through the school year and they seem to be having a little bit too much fun. Maybe they're not doing enough homework, but you're not sure. You check in with them. How are things going? You trust your kids. They say, oh yeah, things are going great. You bump into someone. Oh, you have such nice kids. They're so smart. Everything's good. So your expectations are high. And then boom, right there on a piece of paper, you see. This is what actually happened. And then you go, oh, wait a minute. Maybe I was a little bit too loose on things. Maybe I need to tighten some things up. Maybe I've given them a little bit too much credit, or maybe not enough. But when the expectations are super high, whenever I don't see As across the board with that report card, and that's where my expectations are, it's not hard for companies to disappoint. And that's when we have a run up like this, where you've got to be somewhat cautious as an investor. And yet we're seeing a lot of investor behavior in some parts of the market that seems to be throwing all caution to the wind.

Yeah. It's one thing to see a good quality company that maybe has a slightly elevated valuation and it's a little bit ahead of itself, and you look at those companies, you say, well, the earnings are going to grow over time, and they can more than compensate for maybe a short-term elevation in that valuation. When you start to see other things flying 20 to 30% in a day. We've seen some new issuance activity where you get very strong responses. We're seeing some action in some of the crypto markets that have been rebirth. And it's not like bitcoin has been strong. It's not just bitcoin. It's some of the other aspects to it. When you see price movement like that, it is unlikely to be just fundamentals. It's a function of money flow. Speculation sounds like it's a dangerous activity, but when you're buying something with the idea of selling it quickly at a profit or participating in something, that's what that behavior is. And it speaks to a risk on mood everywhere. And when you see it, whether or not you're participating in it directly, you have to take note of it and say, investors are getting a little amped up. They're a little excited at the current moment. And it doesn't really get in the way of a long-term plan, but it is the type of thing where you definitely want to take note of it.

So, Stu, do you ever get involved in that? Do you just say, I see some stuff, I've got some cash in the portfolio, and hey, I can't explain why, but the thing keeps going up every day. I've got my FOMO just like anybody else. And maybe I'll just throw some cash in there for a little 20% run for the day and then pull it back out. All caution to the wind, and I'll just add a little bit on the edges for my portfolio. Is that anything that you or your colleagues would do?

Well, it's certainly not anything that's happening inside of the funds. And at a personal level, unfortunately, I've got more scars than successes. So I tend to not really get involved, although there certainly was a time in my life when I was trying to harness those gains. And we've talked a lot about that before, if you're going to size the positions properly, have it as a percentage of your portfolio that if something negative takes place, you live to see another day, all those types of things. That's just good financial planning and construction. Then the other thing, too, is when you get into these situations, I scroll through Twitter. There's a tremendous amount of technical analysis commentary on Twitter, and it normally drives a lot of the movement in some of these assets. Technical analysis is going through moving averages or trading through certain levels. If it trades through this level, it might go to this next level. That type of commentary. That's certainly not fundamentally driven but I'm often reminded, people will bet on horses, so people are going to bet, they're going to behave in all certain ways, and some are very good at it. So no harm, no foul. But once you get into those types of positions, you're using a very different toolkit than attaching yourself to long-term earnings growth and long-term compounding.

Yeah. And I think one of the reasons we bring it up. Both of us were young at one point, you referenced that. You referenced that you were younger, more recently than me. And it's almost part of an education to some extent to go in and try some different things, particularly if you're interested in this area. I learned a lot from what I did as an investor in the younger days. And as you suggest, quite a bit of it was how to deal with loss as opposed to any great success—we're both still working today—but for the many young listeners that we have, also for listeners who have kids or grandchildren who are dabbling in some of this, it's really important to recognize that these are very unusual periods when you see this level of speculation in markets in certain areas. And it is something that can do some real damage if you don't know what you're doing. As you say, it almost is betting when you get to this point, if you're not sizing your bets properly.

Yeah, I think that's bang on. There's participating in daily price movement. There's an investing mentality where you sit there and say, I think that there's a reasonable likelihood that something is going to take place, that investment is going to switch, and these sectors are going to start to receive more attention, but I don't know exactly when that might happen. Buying that and waiting where you're making something that you have a high degree of confidence in, that is a tried-and-true way of making money over long periods of time. Waking up and looking at something and saying, well, it went up quite a bit yesterday, so I think that will persist, that is always possible. And momentum does tend to run for a while, but it also can be more consequential when that momentum ends.

Yeah. Investing is a long-term process. Speculating and gambling are shorter term. And there's people who are very good at it. They're few and far between, and they're generally paid a lot of money because of that particular expertise. Oftentimes, people who are trying this without that specific expertise are more or less on the surfboard riding the wave until the wave crashes. And if they don't know what they're doing, they fall down and hit their head. But it's really something where at some point that momentum shifts, and if you're caught, it can do some real damage. If you own something that's quality and you know it, even if it does suffer through a correction with the rest of the market, you know that there's something there that you understand. And that's what you and your team do. You work to understand, and you know in detail on many different levels what you're actually investing in. If there's quality there, you know it's going to be back at some point. If it's just a product of speculation or rumor, and at some point there is really nothing there, that's when you see investors really get hurt.

It's also a matter of saying, how wide is the path required for my success? And in any investment, no matter how expensive, no matter what the asset class is, there is always a pathway to success. So you don't want to rob people of that notion. But really, what you're looking for is how wide is that pathway for success? How many ways can I win? And when assets go up a lot in a short period of time and the underlying notion might be in its infancy—with a lot of potential, but in its infancy—then the price reaction is actually narrowing the pathway. It doesn't mean it won't be successful, but it's narrowing the pathway. I think that's what investors need to acknowledge to themselves just as they're entering this. And that's where you get into position sizing and all sorts of things that are all well worth discussion.

So, Stu, we've had a little bit of a tick up again in tariff noise just over the last couple of weeks for Canada, an all-of-a-sudden announcement that a 35% tariff is being applied across the board. We saw the thing with the digital services tax. I think we talked about that. Are you seeing companies do a good job of managing around the tariffs still? Or do you see anything going on around the tariffs that's a reflection of just the challenges that the tariffs cause?

Yeah, it's a great point. Don't worry, we've had a lot of discussions with companies, chief risk officers of banks, all sorts of things. The one positive has been the time since the very first announcement. Businesses are very rational. They got the shot across the bow earlier this year, and they've had some time to adjust things. So whether or not it's bringing down inventory, reworking some of their affairs, etc., that stuff is certainly taking place. The level of uncertainty remains quite high, so that has definitely put a pause on some new investments. The other thing, too, as investors—you might find this analogy interesting—is just how easy it is or how difficult it is to draw an easy conclusion. We were having a meeting with one chief risk officer, and he said, you go see a business, and you're like, oh, this business will be impacted by the tariffs. But then it turns out that their contracts have the clauses that say if there's tariffs, it just gets passed through. So it's on your worry list, but then you end up taking it off versus there's some other domestic businesses where you'd say, well, they're not impacted, but they might have a reference price that dictates how their goods are bought and sold. And that reference price might be in US dollars and might be impacted by tariffs. So there's no one-size-fits-all way to do a broad sweeping analysis across all these industries. Our primary concern on the economic impact, a good reminder is that the Canadian economy is not quite the same as the Canadian stock market. There are different exposures in the stock market than there is in the direct economy. Then the second thing is that you do worry about some of the bank's loan books, but they've also all set aside a fair amount of reserves. So could there be some slightly incremental reserving? Yes. But they've also had to adjust along the way for some of what's in front of us. Those are the two primary things that we're thinking about on that front.

Yeah. I was at a birthday party a couple of weeks ago, and there was a tariff tax and accounting expert. I'm talking to him and I just ask the question that you know the answer to: hey, how's business? He's like, great. It's awesome. It's amazing. It's busy and the plus is the minus of it. I said, oh, that's a really nice jacket you're wearing. Oh, yeah, it's brand new. There's always somebody doing well off of this. And as you say, tariffs are complex. And they're hard, but good management teams figure out a way around it.

100%. We've wrapped a lot into today's discussion, but when you're investing in something with the intent on selling it, you're not focused on a lot of these things. If you invested in something for owning it a long period of time, then you want to marry yourself with management teams that know how to adapt the business and get in there and play with the levers. So if you go back to that runway, you already start with a bunch of businesses where you think the runway is pretty wide. And what management is actually doing is they're widening it even further on your behalf because they're busy in the back adjusting the sales as the wind shift a little bit. And that is an additional lever that the longer-term investor gets in those instances.

And then on the inflation front, which is one of the concerns out of the tariffs, we had the CPI number, the consumer price index number in the US, which is one of the key measures of inflation in the US economy. It came in, it was up from the previous month, but in line with expectations. It didn't seem to have a big impact on markets. So we still really haven't seen, I think, the dramatic upward pressure on inflation that some are anticipating, or was this maybe the first sign that you're starting to see it flow through in the economy?

Maybe a little bit, but a lot of these trade deals have been getting pushed out and deadlines are being pushed out. So it's hard to conclude that this inflation environment is the one that will persist. Although I would note, even if we do get a bump from tariffs, it's often just one time in nature. The tariffs, the CPI, the bond market, there's a whole set of discussion points there around the fiscal deficit, inflation, the Fed. It's almost a podcast in and of itself on those things.

Yeah, we're going to get one of the Erics on to help us out with that. Stu, anything else you're seeing in the market that's of particular note or have we done a pretty good job covering the most significant thing, which is the earnings coming up and then highlighting that expectations are high. Maybe an investment strategy in an environment like this that you could recommend?

Yeah, there's no question. Dollar cost averaging is very worthwhile in this environment. Just before I get to that, though, I'll just step back. I think inside of the market, the bill from the United States gives a lot of benefits to immediate capital investment. The consumer looks to be okay. Those areas are stronger. Some of the traditional areas, like consumer staples, are a little bit weaker as those revenue lines face some pressures. So it's still sector by sector. On the dollar cost averaging front, we tend to power through with a strategy like that. Sometimes you're buying at great prices, sometimes a little bit more elevated. But either way, you're attaching yourself to that longer-term earnings growth. We tend to just power through with things like that.

Do you ever look at that seasonality? Because there's a lot of historical reference points where the summer is a downtime for a lot of people. This is when you go on vacation with the family. But do you see that in markets a little bit?

Yes, you do. Often, seasonal high points come right around the podcast that we're doing right now. They tend to come in the middle or the end of July and August. And then late August and September can sometimes be a little bit tougher on markets. And then as you get into October, you tend to find your footing. And that seasonality has played out enough times that it's noteworthy. We'll see. I think we just would marry that message with some of the elevated expectations that might be presenting themselves at the same time as seasonality has an impact is also probably noteworthy.

Yeah. And so, again, it's not a case of you need to abandon your strategy. The dollar cost averaging is where you can sit there. Particularly if you're putting new money in, it actually allows you to cheer for the market to go down while you're sitting on the deck, casting a fishing line or sun tanning. And then get back to the serious stuff in the fall and hopefully get a rebound. So this is where dollar cost averaging fits in. And if the market keeps going—because it doesn't always work out that way—then you're fine as well.

That's bang on, Dave.

Oh, bang on. Wow, I got a bang on. Well, my experience is deep and dense. Anyway, Stu, thanks for catching up. We covered a lot of ground today. A lot of wisdom. Another thing, Stu and I were doing some career coaching and I was pretty much useless. But Stu was sharing wisdom with these young people. I'm going to have to bring them home and get them to give my kids a hand because I'm probably not doing a good enough job. Stu was 100% wisdom. It was pretty impressive to watch, just listening to you on this podcast.

Well, that's very kind, Dave. Thank you for that.

All right, take the rest of the summer off. But we won't. We'll be back next week. Thanks again. See you on the next episode of Stu’s days.

See you, Dave. Thank you.