Hello and welcome to The Download. I'm your host, Dave Richardson. And it is an extended Stu’s days. Well, we're not going to be too long in terms of time, but it’s been a long time between Stu’s days because we were stewing it up in London, England last week. Did you enjoy your stay in London, Stu?

My time in the Stu K?

Oh, I got another one for you in a second, but yeah, did you enjoy your Stu K?

It's always great spending some time with our advisors, the phenomenal work that they do with their clients and everything. Yeah, it's great.

And then I carried on to Azerbaijan and Georgia. I got mugged in Georgia, and then I was in Baku. You'll be interested. I know you're going to like this. There's probably more Second Cups in Baku than there are in Toronto. I know you like your Second Cup. So you got the standard Second Cup logo, but then they've got this additional logo on the side that has a Canadian flag in it. And then inside the store, they've got little stands with an Azarbajani and Canadian flag on a little post in every one of the shops. And they're everywhere.

There you go. Drinking your Paradiso medium. That's the Second Cup coffee for me.

Well, there we go. So the only thing is I tried to get them to change the name of the city to BakStu. They're sticking with Baku. So you can get your coffee, but they're not going to rename the city. So all of that catch-up aside, Stu, you're in London last week. And again, we had a group of some of the best financial planners and advisors from all across Canada. You're addressing them and I thought your presentation in light of the circumstances, which is now a week in the past—we'll talk about how a week doesn't seem to be a week in terms of looking at policy coming out of the US that's having an impact on the global economy and the economy here in Canada and the US in particular—but I thought your message was really important around just big picture, where do we sit right now? How do you think of it? So when you're trying to piece together everything for an investor who's sitting there today trying to figure out what to do, what to make out of all of this. What are some of your key messages and what were you saying to the advisors last week?

It's always worth thinking about where we've been, what's changing. This period of, for lack of a better word, American exceptionalism, the combined investment thesis of artificial intelligence and the enthusiasm for some pockets in the market on that front, coupled with the excitement around the election, around deregulation, and getting the economy going at even a more productive rate. The long term of the stock market is always the earnings growth that we get and the dividends we get. Then we get valuation change in the interim. The valuation change is often caused by these thematic excitement or lack of excitement or this type of thing. Coming into the year, both of those theses received a little bit of a blow. The first was around DeepSeek and artificial intelligence. It's not that it throws off the longer-term potential. It causes a discussion around that potential. Anytime there's a discussion, you're going to get a slight valuation change. A valuation is trying to factor in a wide range of outcomes. If the range of outcomes changes a little bit, the valuation has got to change a little bit at the same time, and we've gone through that. And then the uncertainty caused by tariffs on, tariffs off, what will it do to the economy, what will it do to confidence has not been welcome. You can see it in small business surveys, you can see it in big business surveys, the possibility of delaying decisions, things like this. So that creates a little bit of a headwind to the economic forecast that might be in place. And then the third thing, we look at this thing called the Citi Surprise Index, which had already started to decline a little bit, where economic indicators or economic evidence was coming in lower than where economists were expecting. We started the year with bond yields at a bit more elevated levels. They've come screaming downwards. The equity market has had to digest these three types of events. Simultaneously, elsewhere in the world, you started to see some relative strength. You started to see big moves out of Europe and other things related to the possibility of more fiscal policy, more fiscal spending around building the military in Europe and what type of response might be to supporting the Ukraine. And the reason that's important is because every other time that the US had corrected in the last period of time, say, the last couple of years, it was still the only game in town. So when it corrected, it found money wanting to still buy into what we just talked about. This time around, what people want to buy into on the US has been, there's some doubt cast around it. And then there's a new alternative that might be emerging. So you've seen moves that in the past might have been a handful of percentage points bigger because this global capital has started to roil around a little bit. Unfortunately, that might persist for a while because we've talked about «good and getting better», «better and not getting even more better», where we are in the cycle is at a period of time where some of that volatility might stick with us for a while. As investors, what we tend to do is we think about earnings growth over the long haul. I think it's a Howard Marx analogy, but it's a great analogy around the conveyor belt. The speed with it you walk is earnings growth. Sometimes you're on the conveyor belt and it's going in your favor and you get more than earnings growth, and sometimes you're walking the other way and you get less than earnings growth. When you get a period of time where people worry about a slowdown, it creates some uncertainty around not the long-term earnings growth, but how much is going to arrive right now. When that happens, the valuation tends to contract a little bit at the same time. In the S&P 500, we've had, call it a 10% correction, not quite as bad at those levels elsewhere. Maybe they didn't start at quite the same valuation. But when you get correction, you want to be thinking about how would the correction end? How would I put more money to work? Because at the end of the day, if something's corrected, even if it just went back to the old highs, it means there's return to be had. We're always running scenario analysis to try and think through if things are too good, could they get worse? When things start to get worse, as we've seen in the last couple of weeks, for sure, they can persist, but you want to be trying to turn that volatility into your friend as long term investors.

Yeah, and you know, we've been talking for many, many months now. So I think for anyone who's been listening to this podcast regularly over the last year in particular, but over the four years that we've been doing it— Stu, it's been almost four years now, I don't know if you realize that—but it's this whole idea, as you started with American exceptionalism, and America has been the game. You're winning because the currency is winning. You're winning because the economy is winning. The individual stocks are winning. The sectors where you're getting the best performance in the stock market or where there's the most enthusiasm around a sector, the best companies are in the United States. So the US is your game. So then you move over time and all of a sudden you're left with a section of the US market that has a very high valuation. And the rest of the world, and including a big chunk of the companies in the US market have pretty reasonable valuations, even though their performance has been pretty good. And there's your treadmill or your moving sidewalk, right? Because if you're walking and you're in Europe or Canada investing, you're walking along on the regular floor, and then the people who are on the moving sidewalk are invested in the US, and they're just moving ahead even though you're walking at the same speed. So there's that connection. But at some point, you get to a place where you're so stretched in the US—and I know I'm repeating a lot of what we've been saying over the last year because we said it over and over again. And this is the thing about the timing on these. You never know exactly what the timing is going to come, but you've got that difference that's getting wider and wider and wider. At some point, it just can't get any further stretched apart. And what do you need? Well, you need some kind of a trigger. And so, as you said, DeepSeek. So that's the whole thing around AI. And maybe AI is not going to need as much infrastructure, as much power, as much of anything that we thought. So it disrupts that. And the US is shifting policy in a way, not only the policy could very well be the right policy. We would have issues with tariffs. I'm sure we talk to Eric or any economist, tariffs are no good. And that's an across-the-board view. But maybe even if the policy is good, right now the policy is being applied in a way that feels really inconsistent and really uncertain for market actors. So all of a sudden you get that shift. And like you said, there was nowhere else to play. And we're sitting over in England—I think we were in the same conference room together listening to a presentation from the Chief Investment Officer at Blue Bay Asset Management in the UK, right at the moment where Germany makes the announcement that they're going to spend hundreds of billions of dollars in terms of fiscal spending. They're going to break a rule that has been in place around their deficit in fiscal spending, government spending, that's been in place for decades. And all of a sudden, like you say, you go, wow. So the US in terms of fiscal is cutting back. We're not getting a whole lot on monetary policy because the Fed seems stuck right now. They're worried about the uncertainty of policy. And, hey, here are the Europeans coming in. They're going to spend a lot of money in markets. And all of a sudden, wow, Europe looks a little bit exciting. And it was already getting some momentum to begin with. So you're starting to see all the things we've been talking about start to play out. Never a guarantee, obviously. Because it could just be brief. But as you said, it's interesting the way this has played out. And for people listening and watching the podcast, I think they're not shocked by what they're seeing, whereas somebody who's not listening to the podcast. And by the way, subscribe, listen, give us a five-star review for all that knowledge that we've imparted to you. People who are listening are not surprised because this is not that unusual a shift in markets, given the backdrop that we've been talking about.

Yeah, I think that's bang on. And then when you get into these environments like you do all the time, when stocks go down, you recheck and redouble your analysis. When you have the math that says this company is going to be fine over time, unfortunately, that math doesn't stop the stock from going down on any given day. When we get into these situations, there's some emotion that picks up, and we've seen that in some of the sentiment surveys. There's some investors that might have used leverage, so they have to adjust their portfolio, and that may not entirely be their choice. But when we get into those situations and we look at the math of what we own and how that business could look two, three, four years from now and a normal valuation that we might apply to the earnings that would arrive then, and we start to see pretty good returns and we see reasonable dividends that are being paid to us today. We always joke about—or not joke, but we talk about—dollar cost averaging. Maybe we joke about the cape I might have. But even when you're collecting dividends, that's another way of dollar cost averaging. If I'm putting money to work and my companies are spitting off a bunch of money to me, the amount of money that I'm putting to work on a regular basis, it really starts to work in my favor in an environment like this.

Yeah, and I'm a little bit surprised that we got to dollar cost averaging as a discussion subject in this particular podcast. It's actually outright shocking to me. But yeah, dividend reinvestment is another way of taking that money and reinvesting. So you get a dividend paid out right now, you're buying stocks at 5 to 10% below where you were just a couple of weeks ago. So that's fantastic. But as you say, all joking aside, we've been talking about this dollar cost averaging approach acknowledging that these things happen in the market with a surprising frequency. Nothing goes straight up. So to have the market pull back 10% or even 20%, it happens pretty much. Well 10%, every year, pretty much, 20%, once every five years. If your dollar cost averaging and you stick with that discipline, then you're buying right now when the market's down 10%, and you're loving it because you're getting 10% off on particular purchase. If the market goes down further or stays down, you're buying at that lower average. And then at some point in the future, as you say, that company may be fantastic. The stock's down just because sentiment has changed, but at some point, sentiment will reappear or those animal spirits will reappear. The company will be judged on its strength and the stock will move up and you've taken advantage of it. Sorry, I walked all over you throwing the cape on and starting to talk about dollar cost averaging in the way that only you can.

Well, I can't even do it justice after this. Because it's perfect. It's the way of turning the inevitable volatility in the stock market. The up period of the stock market tends to come in consistent increments for a period of time. The downside always tends to come in more in an abrupt fashion that tests emotions a little more. As stocks rise, you're not running out every day saying, I need to have a party. It's like over a long period of time and you're like, wow, that's when things get maybe more excitable. On the downside, the emotional change seems to be quite immediate. We've certainly seen that in the last couple of weeks. So having a plan that's not dependent on finding the exact low. We've talked about that on stocks, about how rare the instance would be to get that all correct. Just having a plan that says if this persists, I'm going to carry through. If, in fact, right now is the low, I'll have done something and I'll have better returns as a result of it. It's just a good way to turn the volatility of the market into your friend.

For some reason, I've got the theme to the Mary Tyler Moore Show running through my head. Who can take a crappy day and suddenly make it all seem worthwhile? Well, it's you Stu, and you should know it. With each glance and every little comment, you show it. There we go. We know the demographic on this podcast, Stu. So don't worry, people will know the Mary Tyler Moore Show. Some of the younger viewers internally may not, but the bulk of the audience will. And I mean, that's really what you're trying to do when you're investing. We always try to highlight what is Stu doing versus, say me, who's just an average investor out there? I've been around the business for a bit, but say, an average investor. And the average investor is like, oh, wow, I'm panicking. I'm down 10%. I don't like this. Stu is sitting there going, how do I turn this, what's happening right now, into an opportunity to improve my long-term returns and to take advantage of it. And it's done with just clinical precision and no emotion. You can see that on his face right now. No emotion, just flatlining. It's never, oh, no, the portfolio is down right now. It's okay, there's something happening in the market. I am going to do the analytics to make sure that I understand how I can take advantage of this for people who invest with me. You're doing it, whether the market's up, down, sideways, it's almost an obsession with someone who is a professional investor and particularly someone like you.

Yeah. The farmer analogy is you're out in the fields every day. Some need water, some need a little tending to, but you're always looking for opportunity.

Yeah. And so if you can do that. Say you got a dollar cost averaging plan. One of the things you could do with dollar cost averaging—I'm not suggesting that specifically now—but you can accelerate your dollar cost averaging when the market does correct, right?

Yeah, you can accelerate your dollar cost averaging. The other thing is if you're in a balanced fund, you get multiple layers of putting the odds in your favor. Bonds have rallied, stocks have sold off, you might have rebalancing right off the bat. That helps you in that form over time. Then you could have dollar cost averaging, then you've got dividends coming in. There are multiple ways that the portfolio can take advantage of downturns to better the long term outcome.

Yeah. Then like you say, if you're doing that consistently over the long term, every time you go through each cycle and each correction, the power of all of those pieces that you have in place are expanded. They're compounded, essentially. Because each time you go through it, there's more and more at stake and more and more ways that you're adding money in.

100%.

So, Stu, the only other thing I just wanted to check in on is—and I know this isn't your specific area of expertise, although you can talk about pretty much anything investing—anything going on in the bond market that concerns you? Because we've seen quite a bit of movement in some of the longer-term bond rates and short-term rates moving up in the short term, some talk around inflation. Does anything there concern you at all, or has the reaction in the bond market been a little more muted than what we've seen in some areas of the stock market?

Well, the longer-dated bonds have come down. Shorter-dated bonds have come down a little bit, although not too much. So the total return of bonds has been above the rate that you've been taking coupon in. The next area of the bond market is credit. So on my dashboard of things that I would look at, I would have investment grade credit spreads, and I would have high yield credit spreads. And that is a very good way of saying, is the bond market worried about the economy? If credit spreads start to widen, it could be a little bit of a sign that the bond market is worried about the economy. There's puts and takes here because the absolute level is not bad. If a 10-year bond rallies by 50 basis points and the high-yield bond doesn't move, that means spreads have widened by 50 basis points. But your absolute return is the same as it was. We have seen some minor movement in credit spreads, but we haven't seen the same volatility in credit spreads that we've seen in the equity market volatility or the type of volatility that might come with real concerns. We watch that pretty carefully. Bond yields, it would be great if they stay here. If they go down a lot, it probably means that the economy is slowing a little bit further. That's why even in a portfolio, the bonds still provide that option. This is an interesting stage right here because as you're thinking about dollar cost averaging and maybe thinking about the equity market, the bond market buys you some insurance. If you're going to keep getting equities at a lower price, it probably means that your bonds will be at a higher price.

And we package it all together. This is why I like this discussion, because it just is a back to basics. You need a moment like this in markets after the market, particularly the US, just seems to be going up in a straight line. We know nothing goes up in a straight line, but it's a reaffirmation of the principles that will make you a successful investor. One of the last ones—we touched on some others already through this podcast—is diversification. As you said, if you're in a your balance fund, well, what's the bond portion of your balance fund done? Well, it's actually provided the insurance against this change in equity values.

The bond market is not dissimilar to that conveyor belt as well. You collect the coupon, and if the economy weakens, you get more than the coupon. If people are worried about the economy strengthening, then you might get a little bit less for a period of time. The nice thing about a bond is it also matures. If you hold it right to maturity, you know you're getting the coupon. But yeah, in the last couple of weeks, we've seen that longer-dated bond come down and yield, which is added to the price performance, cushioning a balanced portfolio.

Yeah. And we can close it all up. After my 24 hours of travel yesterday, coming from Azerbaijan through Warsaw. I had a delay in Warsaw. I actually got to go to downtown Warsaw, which, by the way, is beautiful. If you haven't been to downtown Warsaw, fabulous. Then another flight, I think a nine-and-a-half-hour flight to Toronto, so 24 hours of travel. Normally, I go blow and pass the people. I just walk on the regular carpet instead of taking when you come into Toronto, Pearson, and you take all these long moving sidewalks. I just go blowing past people because people get to block you in that. I was so tired after all my steps, like the stock market after all the heavy lifting is doing. I got on the moving sidewalk and just stood there and let it carry me to customs. And the bond market, like you say, is doing that work for you right now while the stock market is adjusting in not that unexpected way. So it all comes together in terms of staying calm through whatever period, making sure you've got the right strategies in place, dollar cost averaging, not being emotional in any way, always looking for opportunities whenever there's volatility, and then that diversification is critical. And you want to keep some powder dry so that when you get a correction like this, you can sit and assess whether you want to put that money to work or maybe wait for even more bad news to come and then deploy it later. But these are fairly simple strategies that we talk about in some form or another, seemingly every week on Stu’s days, and they're all coming together right now. And again, I hope what we've accomplished for people who listen regularly is that no one is surprised by this. This is just, oh, yeah, I knew this was going to happen. So good. I've got this strategy in place that's taking advantage of it, or I can shift this way to take advantage of it. And that's what we're trying to accomplish. We're trying to educate. We're trying to help people do better investing long term, and nobody does it better than you, Stu.

Well, thanks, Dave. And thanks to everyone who's listening.

By the way, did you get that sweater in the Stu K? I haven't seen that sweater. It's lovely on you. Your eyes are just popping here on the screen for everyone watching on YouTube. And you can subscribe to watch us on YouTube, too.

That's a great segue to YouTube, Dave.

Yeah, and a great segue to finish, Stu. We'll see you next week. Thank you. And everyone, all the best investing. All the best. These are the times where you can really take advantage. If you stay calm, make some good decisions, and we're going to be here to help you through it.