Take 11 - Random Investing Notes
A collection of insightful investment pieces to broaden and elevate the investing mindset. Includes: Investment Planning, Returns After First-Rate Cut, Investment Accounts in Canada, and Hyperscalers.
Plan to Invest
→ Why a Plan is Essential
Investing without a strategy often leads to losses, stress, and poor decisions like chasing trends or reacting impulsively.
A clear plan allows investors to focus on data and a repeatable process, filtering out weak or overly hyped businesses.
→ Benefits of a Structured Strategy
A plan includes evaluating:
The company's business model and revenue generation.
Growth in revenue or profit.
Balance sheet strength and free cash flow.
Management's goals and track record.
This method reduces stress and helps build confidence in investments.
→ Three Common Mistakes
Chasing Fads: Avoid investing in short-lived trends or unprofitable companies. Focus on businesses with proven profitability and demand.
Over-Diversifying: Holding too many stocks can dilute focus and mirror market indexes. Stick to 10-20 strong, well-researched companies within your expertise.
Investing in Commodities Without Expertise: Commodity prices are volatile and harder to analyze. Beginners should focus on businesses with stable margins and consistent demand.
→ How Discipline Helps
Avoiding these mistakes and following a plan leads to a more disciplined approach, reduced stress, and better long-term returns.
Investment Accounts in Canada
As previously discussed in earlier posts, there are numerous investment accounts that Canadian investors can use to start their investment journey.
Navigating the Canadian Savings Landscape: TFSA, RRSP, and FHSA
In the realm of personal finance, Canadians are presented with a variety of savings vehicles, each with its own set of rules and tax implications. Understanding the differences between a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Plan (RRSP), and the newly introduced First Home Savings Account (FHSA) is crucial for making informed …
Very briefly, we can further provide context in how to best optimize your investments inside these accounts.
Non-Registered Accounts:
Best suited for Canadian dividend-paying stocks due to favourable tax treatment.
Avoid including Real Estate Investment Trusts (REITs) or income funds, as their distributions are taxed differently.
REIT distributions are not taxed as dividends but as a mix of interest income, capital gains, and return of capital.
RRSP (Registered Retirement Savings Plan):
Suitable for any income-generating investments, including U.S. dividend stocks (which would be exempt from withholding taxes in this vehicle).
Avoid holding high-growth, low-dividend stocks like Dollarama, as capital gains inside RRSPs are ultimately taxed as regular income upon withdrawal.
TFSA (Tax-Free Savings Account):
Highly flexible and tax-efficient for most types of investments, including Canadian dividend stocks, high-growth stocks, and REITs.
Avoid U.S. dividend stocks, as the 15% withholding tax on dividends is non-recoverable. However, low-dividend-paying U.S. stocks like Microsoft and Apple may have minimal long-term impact, making their inclusion in your TFSA a reasonable option.
The key is to focus on the big picture and prioritize minimizing tax liabilities and maximizing returns by strategically allocating investments to the appropriate accounts.
Returns After First-Rate Cut
We are all familiar with the saying, “past performance is not indicative of future results.” This is certainly true. However, we should not ignore strong data points and trends that have developed over time. One such trend is the S&P 500 total returns following the Federal Reserve’s initial interest rate cut.
Historical data shows that the average and median returns after this event are positive at the one-year, three-year, and five-year marks. Notably, after five years, the returns have consistently been positive. The Federal Reserve cut interest rates for the first time in four years on September 18, 2024. Keep an eye on this date.
Remember, volatility remains high, which means there is significant uncertainty in the short term. However, if you take a step back and look ahead, long-term investing is to your advantage.
Hyperscalers
In 'Take Six,' I explored the concept of a potential new tech bubble—a market phenomenon marked by a rapid and unsustainable surge in the value of technology-related assets, such as tech company stocks.
I also questioned whether the significant investment in artificial intelligence (AI) infrastructure would ultimately benefit or hinder these hyperscalers.
Hyperscalers are companies that provide large-scale cloud computing and data storage services through their vast networks of data centers. They can quickly "scale up" or "scale down" computing resources to match the needs of businesses or users, hence the term "hyperscale."
The author of this Substack post highlights this point remarkably well, compelling me to share it here. A summary is provided below for convenience.
Shift to Capital-Intensive Models: Hyperscalers like Amazon, Microsoft, and Google are moving from asset-light, high-margin models to asset-heavy ones, spending hundreds of billions on AI infrastructure. This mirrors the telecom bubble of the late 1990s, where overspending led to catastrophic losses.
Competitive Landscape: Massive investments could intensify competition, leading to compressed margins and uncertain returns. Smaller, asset-light companies that leverage this infrastructure might capture more value.
Financial Challenges: The heavy capital expenditure is pressuring free cash flows and could lead to declining returns on capital. There’s concern that this investment may not yield the expected dominance in the AI market.
Historical Parallel with Telecom: The post draws parallels between today’s AI capex surge and the telecom boom-and-bust cycle, where infrastructure overbuild led to significant financial losses.
Winners and Losers: The post suggests that the real winners may be nimble companies using the hyperscalers' infrastructure or industries like power generation and commodities, which supply critical inputs for these investments.
Capital Cycle Theory: The theory warns that overinvestment often destroys value. The post questions whether hyperscalers' AI infrastructure investments will result in sustained competitive advantages or fall into the trap of diminishing returns.
The author emphasizes caution, suggesting that investors consider opportunities outside hyperscalers, in areas likely to benefit indirectly from the AI infrastructure boom.
Past Editions
Includes: 1) Dividend Growth Strategy, 2) Tariff Threats, 3) Importance of 10-Year Yield, & 4) Portfolio Building.
Includes: 1) China's Surplus, 2) Global Valuations, 3) Long-Term Investing, & 4) Trading vs. Investing
Includes: 1) 2024 US Market Review, 2) Concentration Risk, 3) Retail Sales Trajectory, & 4) Earnings vs. S&P500
Includes: 1) S&P 500 Valuation, 2) Canada’s Weak Economy, 3) Investment Vehicles in Canada, & 4) Diversification
Includes: 1) Yield Curve Inversion, 2) Tech Bubbles, 3) Gold vs. Treasuries, and 4) VIX.
Includes: 1) Trade Balances, 2) Deflation from China, 3) Global Reserve Currency, and 4) 2024 US Election Aftermath.
Includes: 1) S&P 500 Historical Growth, 2) Risk Terminology, 3) WFH Case, and 4) CRE Debt Crisis.
Includes: 1) Purchasing Power, 2) Global Liquidity, 3) Currency Debasement, 4) Hurdle Rate, and 5) Liquidity Cycles.
Includes: 1) Tough Industries to Invest In, 2) First Rule of Compounding, 3) CDN Focused Portfolios, and 4) Beta.
Includes: 1) MOATs, 2) Portfolio Recession Crashes, 3) Capital Allocation, and 4) CDN vs US Dividend Growers.
Consider joining DiviStock Chronicles’ Referral Program for more neat rewards!Please refer to the details of the referral program.