Hello, and live from the Stu Stu Studio, it's the Download. I'm your host, Dave Richardson. Of course, it is Stu's days at the Stu Stu Studio. I'm actually not there. But live at the Stu Stu Studio is Stu Kedwell. Stu, welcome back. I think we missed a couple of weeks.

We did. Good to see you, Dave.

Yeah, great to see you. And in the meantime, you up and got named the Global Chief Investment Officer at RBC Global Asset Management. Not coincidentally, it's the biggest investment management company in Canada. So it's a pretty big announcement. So from me and all your colleagues and friends, congratulations. It's well earned.

Thank you. It's a real privilege to be working hard on behalf of lots of unit holders. Dan Chornous, who is retiring, has been here for 30 years. I've worked with him for a long time, and I'm ready to stand on the shoulders of a giant and keep adding wood to the pile, hopefully.

Yeah. What's great about it, we both know Dan. We've had Dan on the podcast. And if you miss Dan's appearances over the years, you can go back in the archive. If you subscribe to the podcast, wherever you get your podcast. I don't think we had Dan on YouTube, although it's probably because he's better looking than most of us. So it's a little intimidating. Smarter and better looking is a bad combination to be on a video. Although I guess I do that with you every week, too. But anyways, all aside, Dan is a legendary investment manager in Canada, which is why we had him on. You and I would both say we've probably learned as much about investing from him as anywhere else. And again, because I know the road that you've followed, it's a perfect fit, I think, to have you sitting in that role. So, again, congratulations. We got a huge fan base of Stu listening to Stu’s days. And I'm sure they're cheering with you at the helm and we’re likely not going to see a whole lot of things change. Just as you say, keep putting wood in the fire and keep it burning, and away we go.

Yeah, I started working with Dan in 1999, and I've been through all sorts of market cycles with him. And I think a couple of things that will be high on the consistency list. Dan is big on «what gets measured gets done». He's big on incremental, just dissecting a problem down to its roots and figuring out how to fix or augment each portion to small improvements in each thing. Big on data, big on curiosity, big on reverse engineering. This is what we think, but what would be required for success? The list of things that I've learned from him would be multiple podcasts on their own. So he's been so good for our unit holders. He's been so good to so many people in our firm. And I just can't say enough about the shoes that I have to fill.

Yeah, I'm hopefully going to be able to get him on to do a last couple of episodes and get him to reflect on markets over—I think it's well over 40 years that he's been managing money for people. That could be a five-hour episode, so we'll warn the fans on that. But we will get him on. But Stu, let's turn to the task at hand because we have been away for a couple of weeks. And if nothing else, we've seen an uptick in volatility. We've seen a lot of stories from a lot of different places with concerns about AI, the way that whole business is structured. And we've talked almost endlessly over the last several months about valuations in that space. And sure enough, we're starting to see a little bit of a pullback in that area and markets in general. What do you make of this uptick volatility and what we've been seeing most recently?

Yeah. I think there's three things. Markets are a scale. On the one hand, you have the narrative, and then on the other hand, you have the valuation associated with that narrative. So the first thing to step back to is, part of where people's heads were at was the Fed or central banks. If things slowed down, could they lower interest rates, which would provide the support for that, the cushion for that slowing, if it took place. Some of the commentary has been a little bit more stern about whether or not interest rates might drop. It doesn't mean that their capacity to lower them has disappeared should things slow down, but they weren't as amenable maybe to markets as some people wanted. So that started to cause a little bit of change in that narrative. The second thing is there has been a handful of US consumer data that hasn't been quite as robust—we've talked about the K-shaped economy, particularly at the lower end, not quite as robust. The next thing that's come along is the massive amounts of capital investment that's going on. In data centers, the shift that has caught people's attention is that for a long time, it was all out of the free cash flow of these big businesses. You look at Microsoft and Meta and what have you, prodigious cash flow generators from their core business. They were taking that cash flow, reinvesting it into data centers to try to make a return over time. And some of those capital expenditure numbers got so large that even the biggest of the big had to start borrowing money. And borrowing money to make capital investment is a slightly different aspect for markets. If you're out and you got $5 in your pocket and you spend it, so be it. If it works out, good. But if you borrow the $5 from me and it doesn't work out, you still have to give it back. As we start to see these massive capital expenditure numbers and you start to see some of the financing of it switch a little bit from just free cash flow to borrowing, people wonder a little bit more about what will the exact timing of these investments be? How will they pay off? That's also been another emerging dynamic as the CapEx surge was, well, now there's a bit more debt involved than there had been in the past. The one thing that also took place at the same time was some circularity or perceived circularity, which if the demand blows the doors off and is as strong— and all these executives think it's going to be extremely strong—if the demand is really strong, then the circularity won't matter. But in the meantime, it gives people some cause for concern. If I'm going to make an investment in you, and then you're going to buy product for me. That's not quite as clean as just like, you're going to buy my product and I don't have to do anything for you. That's been emerging as well. Then just the last part is there has been a couple of companies that have had some issues with their lending, a couple of auto parts companies, and the documentation around whether or not you were factoring receivables or whatever it might be. Some of these loans have gone bad. It's not like anything that's significantly impacting the banking system, but it's just not the type of headlines that you necessarily want to see. We've talked in the past about those scales where you have what the market's focused on in the valuation. If the valuation is a little bit elevated and the market's focus changes, it creates volatility. That's the environment that we're in right now. Maybe it will persist for a little bit. Markets have been extremely strong. When we sit and look along the way, the odds of some type of pullback or modest correction activity, that would just be normal course. You always just look for these different ingredients where the market tends to focus their attention on. There's lots of old market sayings. We've talked about opinions about facts at prices. Another one is: narrative follows price. When things are going up, the stories are all like, well, this is all very positive and nothing else matters. And then the moment you have a wobble, the narrative switches to like, well, look, some of these other things are going on. And like every situation, there's what I think, what you think, and the truth. We have to work our way through getting back to those facts. And that's the environment we're in right now.

Yeah, but I guess the big question then, though, is, Stu, if I think of my marriage, the narrative was when I was dating and proposed and the first few years, the honeymoon and all that, I kept getting better looking. And that was the narrative that just followed. Then all of a sudden, I started to get old and chubby, and the narrative turned, and I've never been able to get it back, the narrative, the other way.

Then you became wise. Then the narrative just switches a little bit. Wise and funny. There's always something that people will focus on.

Well, so that's it. Is this a case where if I'm an investor and I've been sitting and I've been worried that this might happen. The circularity you talk about is what I was referring to as a structural issues in the way everything's financed amongst all these AI companies and data centers. Some people say it’s somewhat akin to what you had in the build out of the Internet in the late 1990s. And then ultimately, what happened was, well, the Internet was going to be big. Obviously, we live on it today. But the numbers weren't there when they needed to be given all the investment that was going to be made. And of course, we had a lot of those stocks fall apart and unwind. Again, if we use my marriage as an analogy, yes, I did find there were other attributes that I was able to bring to the relationship that kept the relationship thriving and strong. So are we in one of these cases, though, where it's it for this sector, or is this a buying opportunity, or is this just one of those cases, again, where this cycle or this movement, and what we've been waiting for, Stu, creates opportunity elsewhere?

Well, I think it's a bit of both, right? So right off the top, dollar cost averaging is a great way to get exposure to all types of these events. That's one thing to think about. But then underneath the surface, to your point, we're starting to see health care, after years of nothing, starting to emerge. Energy in Canada after not even a big movement in the price of crude, but all of a sudden energy breaks out to a new 52-week high. Utilities. People have thought a lot about the data centers, and they said, well, maybe one of the constraints is actually the power side of things. Maybe that's where there's money to be made. In the context of a portfolio, there's always areas where you've been planting seeds because they look interesting and you don't know exactly when they're going to start to turn out, and then they start performing better along the way as well. Overall, the dollar cost-average approach works. Within the portfolio, you're always trying to say, what are some new things that are emerging that aren't maybe receiving the same attention that they had in the past? Often, if someone says, I'm buying that, you're like, why are you doing that? That's crazy. That's probably not a bad place to be going to have a look. You say this all the time: it's a very active time but I don't know when things aren't active. You're always looking through the markets. But just like there's different acts to a play, there's different things that emerge at different times. We're very focused on some of these areas that might be emerging a little bit and starting to do better. The technical view is big bases. If you have good companies that are emerging from a long base, those can be very interesting stocks.

Yeah. I go to your play analogy there. I don't think anyone doubts that the AI story, at least in terms of changing the way the world operates, has a happy ending, unless the robots take over the world and kill everyone, which we'll leave out. But just in terms of actually changing the way business operates, efficiencies, unleashing profitability, I don't think anyone doubts that this is a game changer, just like the Internet was. And then I think the other big thing to remember is—and we've talked about this ad nauseam over the years—is markets do not go straight up. In fact, very few things go straight up. They go up and there's bumps along the way. As I've been saying—and I'm out doing my roadshow with investors right now—coming into October, we generated 60 months of returns in 30 months in a balanced portfolio, stocks and bonds. And not just in AI, not just in tech, a broadly diversified portfolio. And that's fantastic. And it came off, of course, a horrible bond market in 2022, horrible stock market. And you can go back and listen to all the things we were saying back then on previous episodes of the podcast. But that's not sustainable or is not going to continue forever. So we're sitting right now, we've pulled back 5 or 6% on the major indices. It doesn't even qualify as a correction. And you have to expect that because those things happen more than once a year, a 10% pullback. So there's not any real reason to panic, but it does remind you, if you got 60 months of returns in 30 months in a balanced portfolio over the last two and a half years, if you just said, I'm just going to throw any rational measure of risk out the window, and I'm just going to go and buy the craziest riskiest stuff I can find that has a dot Ai in the name of the company or any number of areas, that that was where I was going to maximize my return, well, hey, all of a sudden, as you say, that narrative on the way up, that it's unstoppable. And this is what a chief investment officer I know focuses on much more than people would think, not just the upside return, but managing the risk as well, doing it in a sane and measured way, that it's a good tap on the shoulder to remind people that markets reward the same things over time. They get a little frothy at times but generally come back to what history has taught us. You've seen things like bitcoins down from 124 to 92. You look at some of the names around nuclear power or some of the things at the fringes of data center, also down 40 to 50% just in the last month. And if we look at NVIDIA that we might get into talking about their earnings tomorrow, it's just back where it was in the summer, which is not that big of a pullback. Again, I think we got to put things in perspective, but also point out something that we've been talking about, which is at some point the amount of risk you're taking matters. And if something is going to go straight up, it can fall straight down unless there's a reason for it not to happen. And historically, what you learn is there's not many things that go straight up and get to a hundred times earnings, a thousand times earnings, or infinity, because there are no earnings without taking a pause along the way.

Yeah, it's a function of volatility. There are always very powerful long-term trends around these stories. The enthusiasm is often justified in terms of the actual outcome, but the stock market can move beyond it, then it can check back to it. It's a pathway that involves a lot of human emotion. When you look at the shares that actually trade, the marginal investor might have a very different incentive than the long-term investor, but it still causes a change in price. I think what you always want to be doing—and I'll tie it back to one of the things we started with on Dan—is what is required for my success in this investment? The areas that have shown some emergence—energy, health care, things like this—the bar is lower there because they've been out of favor. You sit there and say, what would it take to make 10, 15% in an energy stock? Well, it might only take 5 dollars on the price of crude because the balance sheets have improved so much. They're out of favor. They're paying dividends. These types of things change. It's just looking through the portfolio. You're always looking for where is the price maybe giving me an undiscounted opportunity? Where in the portfolio is it maybe not discounting the potential for some risk? Moving from one to the other in the portfolio, there's lots of good companies. You need to have a list of good companies, but then understanding where they sit on, how much earnings are they generating? What is the margin that is generating those earnings? What is the value growth required? What is the valuation that we apply to it? And what does that do for the odds of our success? What are we banking in the future? It's a very iterative process and just constant. As soon as you finish with the bullish case, you have to then say, well, what would make it less bullish? Just keeping going around in a circle and trying to apply some judgment around the different outcomes that exist for different businesses.

You think of it as the high jump and the limbo. You've got some of these stocks, they're doing the high jump, and they're doing really well. They're getting up and over that bar higher and higher. Wow, this company is going to be able to jump. It doesn't matter how high we raise the bar. But of course, at some point the bar is too high and they knock the bar down. Versus there's some other companies that are limboing, and they get down, they get real low, get flexibly down. The bar gets down to a point where you just can't get under it anymore. You got to go over it. And that's that reversal that you see. You need some of those high jumpers, but you want to be careful when the expectations are so high that they can't be met. Sometimes you want to go look over at the limbo area and see if there's some good companies that, for whatever reason, have been ignored and have much easier roads ahead to create a narrative.

And it happens at the company level. It happens at the country level. It happens between asset classes. And we do our best to navigate the opportunities and risks that exist in all of them.

That happens in careers, too, Stu. You're jumping a big high bar. And I'm limboing. And as we said, I'm coming up on 60. I'm just not as flexible as I used to be. So that bar is getting awfully low on me. But interesting. Just before we finish, let's just talk about NVIDIA earnings, and you'll see headlines. NVIDIA earnings, one company's earnings will set the stage for everything that happens in the market over the next year or the next month. Do you buy into that at all?

Well, it's important. It's a very large weight in the index. When you're 7 or 8% of the S&P 500, the outcome is going to matter. You've had a tremendous amount of news flow around data centers, how much is going to be invested, and that will all flow through to their revenue line. You've had some question about the returns that all these data center operators are going to end up earning. The money that's been announced, that will likely get spent. That's going to be good for their revenue in the next little while. The question is, does the market begin to see the apex of the growth? We've talked about, the second derivative is definitely slowing just because of the law of large numbers, what will receive the maximum attention is more of a challenging one. I think the one thing that we spend a lot of time thinking, the outright valuation is one thing, which is not as elevated as other stocks have been during their big bull phases. It's really trying to get into the sustainability of the margin profile because the company's margins are very wide. The margins for many stocks have improved in recent times. Technology, by its nature, is less capital-intensive. There's all sorts of benefits. But this is a margin profile. If we looked at Google's margins or we looked at some of these companies, the margins are, say, plus or minus 4 or 5%, one side or the other. NVIDIA’s have been very strong. I think there's a couple of things to think about. There's no question that technology is very dominant, and it's a very well-run company in terms of being at the cutting edge. But it's this relative to expectations component. It's very hard to predict on just one quarterly event. But even if it's a big boomer of a quarter, given everything that's been announced, I don't know if that will be enough. It might be enough because it's pulled back a little bit. But these discussions that have entered some of these areas, I'm not sure there's a piece of evidence today that can put an end to them, because what's really in the discussion is how much will AI be used and who will pay for it and how much will they pay for it in a couple of years. So one thing that we're more interested in the portfolio is looking at names that are announcing, well, AI is this revenue opportunity for us, or it's this type of efficiency opportunity for us, where you maybe have some more traditional businesses that are saying, we're just figuring out how to use AI as a tool, and maybe that's an opportunity that's not priced into our stock.

I guess we're even going through it in the office. There are tools that are there, and you got to learn to use them. As you do learn to use them, you're always blown away by what they can do for you. Again, you see that this very much is real. It's just going to be interesting to watch it play out and ultimately, all this investment, how it ends up on one company or another's bottom line. And that's what you're there to figure out for investors, you and your big team all around the world. So, Stu, thanks for joining us. And congratulations again. Are you going to continue to be a dollar cost average boy or do we have to change it to dollar cost average man or dollar cost average guy. Maybe you need a new title in your dollar cost average position.

Dollar cost average boy is still not a bad one.

Don't worry. I did notice you sneak it in right there in the middle of the podcast. I'm sure the regular listeners did as well. But once again, all joking aside, dollar cost averaging, you're sitting there watching what's going on in markets and you're going, this is exactly what I've been waiting for. So, Stu again, congratulations. And hopefully you'll continue to join us. I heard Joe Rogan is after you for regular appearances and some of the other podcasters. So you might not want to hang around with me anymore, but we all hope you do.

Okay. Well, Dave, I can't wait for the next one, and thanks so much.