Portfolio Confidential
Everyone knows that Nvidia is doing really well making chips for Generative AI; depending on the day, it’s the world’s most valuable company. I am trying to find an undiscovered stock that might benefit from Gen AI. I read something about liquid cooling in the data centres…does that make sense?
Welcome to the club. Everyone is looking for some stock that will be lifted by the Gen AI tide but hasn’t been discovered yet. Such a thing might have been possible in the very early days of 2023, but there are literally hundreds of millions of individual investors globally looking for them, and that’s not even counting professional investors.
There are all kinds of companies that have famously been lifted by the mania around Generative AI: chip companies (like Nvidia and AMD), the hyperscalers who are building data centres and AI services (Alphabet, Amazon, and Microsoft), other big players getting into the space (Meta and Oracle), companies that own data centres (Equinix), companies that make connectivity chips for AI data centres, (Broadcom), companies that assemble the various chips into servers (Dell, Super Micro) and even companies that make the power supplies for these data centres (Schneider.)
But surely there must be some overlooked angle, like liquid cooling?
Nvidia has a US$3.35 trillion market cap and is trading at around $140, up from about $14 at the end of 2022, when the Gen AI wave was getting rolling. Meanwhile, Vertiv is often touted as an “undiscovered gem” that makes advanced cooling solutions for data centres. It’s much cheaper than Nvidia, with a market cap of “only” US$50 billion. It was trading at about $14 in late 2022 and is now at $133…meaning that it is roughly as “undiscovered” as Nvidia. [Prices as at time of writing]
It may or may not be a good investment going forward, and it does have a smaller market cap than Nvidia, but it isn’t a hidden gem in any sense of the word. Like almost every other company that has even a whiff of participating in the AI wave, it is now up a lot, and has been for ages.
Generally speaking, in any megatrend investment theme, finding a true undiscovered opportunity isn’t possible after the first few weeks. Unless you are fascinated by the process, I don’t think searching for this (metaphoric) needle in a haystack is a great use of your time.
One of our Guaranteed Investment Certificates (GICs) matured in July, and we have $25K we want to invest. I'm not sure the best way to go about this. When you have a large sum should you do dollar cost averaging or just put it all to work at once?
In the context of your overall portfolio these days, what percentage is $25K? I would start by looking at that. If it is relatively small (5-10%) then I would just go ahead and invest the whole amount. If it is a higher percentage, I would invest in two tranches, maybe one month apart. This is not at all a scientific perspective. It is simply what I would do to keep emotions at bay. I like having a structured approach so if the market behaves badly, I don’t get mad at myself! I can tell myself that I had a rhyme or reason for investing.
What's your take on the withholding taxes in Tax-Free Savings Account (TFSA) on non-Canadian stocks? Some views I've read said only hold Canadian stocks in your TFSA and buy U.S. stocks in your Registered Retirement Savings Plans (RRSP) to avoid the withholding tax. Others say, who cares?
I think it should be decided in the context of your overall portfolio. All else being equal, keep Canadian holdings in your TFSA. But the bigger question is: what percentage do you want to allocate to each geographic region? If you don’t have enough room in your other accounts for your desired percentage of U.S./international holdings then I wouldn’t hesitate to put some of those in your TFSA. I think your overall plan and strategy should be the focus. The withholding taxes are not likely to skew your returns materially.
My much younger (25 years) wife and I have a $425,000 combined portfolio of which 60% is in Registered Retirement Income Funds (RRIFs), 30% is in TFSAs and 10% is in a non-registered account. Except for $25,000 in RBC stock, we have no other dividend-paying stocks. Both of us are out of work and on Employment Insurance (EI) until early 2025. Between Canada Pension Plan (CPP), Old Age Security (OAS), and other company pensions we have an income of $2,500 monthly. Our objective is to generate at least another $2,300 from our portfolio to cover our monthly expenses of $4,800.
I turned 71 this year and I am trying to decide whether to allocate growth or dividend stocks in my RRIF starting in January. I currently own all growth stocks. Am I wrong in thinking it doesn’t make a difference? My tech and other growth stocks are likely to appreciate by 6% or more annually and I’ll need to withdraw about the same amount from my RRIF. But I could also withdraw 6% from dividend-paying stocks. Obviously, the idea is not to deplete my assets by the RRIF withdrawals.
As you suggest, maybe it doesn’t really matter whether you invest in dividend-paying stocks or growth stocks. The goal is to achieve your investment objectives. At a high level, I am a big believer in the “total return approach.”
In some investing environments, when interest rates are relatively high, your portfolio might generate enough dividend income for you to live on and you will never have to sell anything. But even still, this can be a risky strategy because you may, or may not, be as well diversified and/or you might miss out on sectors that are incredibly attractive such as tech!
The “total return approach” is about investing more broadly (this can be 100% stocks but with lots of variety—growth and dividend-paying). Your source of spending would come from dividends as well as capital gains. The idea is that the focus is on making money and withdrawing the money you make regardless of how you made it. In some years, if you don’t generate your 6% you will need to draw down on some capital but in other years, you will make more than you need, and this is where the power of compounding will kick in.
Historically, this kind of approach makes sense, unless we are in a period of very high interest rates.
I hope this helps! As a side point, and given your age difference, I wonder if your wife is interested in learning about investing. It might be useful for the two of you to talk about some of the concepts in an article I wrote a few years ago “Suddenly Single: How to Plan with Female Clients.”
Do you have questions about your own investment portfolio? Consider calling The Rich Thinking® Financial Advice Hotline. This will be a win-win: you get a free 30-minute confidential Zoom chat offering an independent, unbiased perspective on your financial situation with no sales pitch! In exchange. I get to use the anonymized data that will come from these conversations to make my Rich Thinking research even better. Email me to book your Zoom discussion: barbara@barbarastewart.ca