BUYING WEED (EP.7)

Episode Summary

Executive Summary: The episode tackles investor anxiety around record highs and bull markets, arguing that all-time highs are common and don’t reliably predict declines. It then addresses lump-sum vs. dollar-cost averaging, canopy growth speculation, the shrinking number of U.S. listed stocks, and whether the small-cap premium has disappeared, concluding that global diversification, valuation context, and behavioral discipline matter more than headlines.

Main Topics: Market highs and bull-market anxiety (Priority: 5/5): The hosts discuss whether the U.S. bull market has become the longest in history and whether all-time highs signal an impending crash. They emphasize that market highs are frequent and often continue. Lump sum vs. dollar-cost averaging (Priority: 5/5): A listener question about investing a large cash sum leads to the conclusion that lump-sum investing has the higher expected outcome most of the time, though dollar-cost averaging can help with investor comfort. Canopy Growth and hindsight bias (Priority: 4/5): They use Canopy Growth to illustrate how obvious winners look only in retrospect, stressing that future winners must beat expectations already embedded in prices. Declining U.S. listings vs. global opportunity set (Priority: 4/5): The conversation notes a large drop in the number of U.S.-listed stocks, but a strong increase in non-U.S. listings, arguing that global diversification still offers ample opportunity. Size premium and factor investing (Priority: 5/5): The hosts challenge claims that the small-cap premium has vanished, explaining that poor performance in broad small-cap indexes is misleading unless value and profitability are also considered. Behavioral coaching and evidence-based advice (Priority: 3/5): They frame part of their role as helping clients interpret data correctly and avoid reactionary decisions, not merely providing emotional reassurance. Bonds vs. GICs and return expectations (Priority: 3/5): They briefly compare GICs and fixed income, reinforcing the idea that higher expected return comes with more risk and occasional underperformance.

Key Arguments: All-time highs are common: they occurred in a meaningful share of historical months and were often followed by more all-time highs, so headlines about record levels are not in themselves bearish signals. Investor fear that the market is 'due' for a crash is usually already reflected in prices; sentiment matters because widespread concern can be priced in. The best statistical choice for a cash windfall is usually lump-sum investing, because markets rise more often than they fall, though phased investing may be emotionally easier. Trying to wait for a correction is not a reliable strategy; being invested according to an appropriate risk level matters more than timing entry points. Canopy Growth’s rise was not obviously predictable at the time; success had to exceed market expectations, not merely be a good story. A shrinking count of U.S. public companies does not mean diversification opportunities are disappearing globally, since non-U.S. listings have increased substantially. Small-cap underperformance in standard indexes does not invalidate the size premium, because size, value, and profitability interact; the weakest segment is small-growth, low-profitability stocks. Behavioral coaching in investing is more than hand-holding; it includes helping clients interpret evidence and avoid acting on misleading recent performance. Comparing bonds to GICs mirrors stock-bond tradeoffs: higher expected return typically comes with periods of underperformance and more risk.

Data Points: U.S. market all-time highs since 1871: 16% of months - Historical Shiller price-only U.S. market data; months in which the market was at an all-time high. Next month also an all-time high after a monthly all-time high: 67% - U.S. market historical data; likelihood that an all-time-high month was followed by another all-time-high month. Comparable all-time-high continuation in developed international and Canadian markets: ~63% to 67% - MSCI EAFE and S&P/TSX data showing similar persistence after all-time-high months. Market increases over time: About two-thirds of the time - Used to explain why lump-sum investing has the statistical edge. Lump-sum investing better outcome: About two-thirds of the time - Based on Vanguard research and the fact that markets rise roughly two-thirds of the time. PWL valuation view on U.S. stocks: Overvalued by 22% - Research-based assessment of current relative valuation. PWL valuation view on emerging markets: Undervalued by 18% - Research-based assessment of current relative valuation. U.S. publicly listed stocks in 1997: Around 7,000 - Referenced from media articles and market data. U.S. publicly listed stocks at end of 2017: 3,400 - Shows a decline in the number of listed U.S. companies. Global ex-U.S. public listings in 1990: 9,739 - Worldwide non-U.S. listing count used to contrast with the U.S. decline. Global ex-U.S. public listings at end of 2017: 39,333 - Shows a fourfold increase in non-U.S. listed companies. Canopy Growth market cap: About $13–14 billion - Used to illustrate how large the company became relative to Canadian peers. Canopy Growth daily trading volume: 7 million shares traded - Mentioned to show active market interest. Russell 3000 10-year average annual return: 10.23% - Used as the broad U.S. market benchmark. Russell 2000 10-year average annual return: 10.6% - Broad small-cap benchmark performance over 10 years. Dimensional U.S. small-cap index 10-year average annual return: 12.02% - Small-cap index adjusted for size, value, and profitability tilts. Small-cap premium in Russell comparison: 0.37 percentage points - Difference between Russell 2000 and Russell 3000 over 10 years. Frequency of broad-market price increases: Roughly 67% of the time - Used to support the lump-sum argument. Fixed-income/GIC comparison: GIC outperformed fixed income in only ~23% of periods - Referenced from prior research discussed for a future post.

Pivotal Quotes: "what matters is the riskiness of what you're investing in and not when you're investing in it" — Ken French: Used to support the case for lump-sum investing in an appropriately risked portfolio. "What do I know that the market doesn't?" — Speaker discussing Canopy Growth: Explains why apparent winners are not obvious buys unless the investor has information the market lacks. "Why would you do that? Why would you look at one piece of the research and ignore the rest?" — Benjamin Felix/Cameron Passmore: Critique of analyzing small-cap performance without accounting for value and profitability factors.

Implications: Listeners are encouraged to ignore record-high anxiety, invest based on risk tolerance rather than timing, and stay globally diversified. The episode also reinforces that recent index performance can mislead, so evidence-based factor and behavioral guidance remains valuable.