Falling Knives & Hidden Gems: What Adobe Teaches About Risky Stocks

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2:19and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now.

2:37Welcome to Investing for Beginners podcast. Today, we're going to do a Q &A session. We got three great listener questions that cover a wide range of topics. And Andrew and I thought this would be a fun conversation and also help you learn a thing or two along the way as well. So who could beat that fun and entertainment and education? It's hard to beat. All right, so here we go. Hi, Dave and Andrew. I've been investing for a couple years now, and when I started, I opened two accounts in Wealthsimple, one RRSP that's managed and one TFSA that's also managed. About a year ago, I started investing on my own, buying stocks through an RRSP, and things are going pretty good.

3:17Now I just found out that it's probably better to do this in a TFSA as I'm 35 years old and have a long time till retirement. My question is, do I sell my stocks that have been compounding over the year and restart in the TFSA or do I leave it there and just restart in the new TFSA? Thanks so much for all the information you give to us. New to this and this is from Freddie. So obviously from Canada, two accounts he's talking about our Canadian retirement accounts. And so with that, let's help answer Freddie's question. So what are your thoughts, Andrew? Yeah, thanks for writing in, Freddie. Thanks for giving us the question.

3:56And thanks for being a listener. We really, really appreciate it. And this is a great question. So I'm US-based. I don't have experience with a RRSP or a TFSA. But from my understanding and doing some research, an RRSP is very similar to a 401k here in the United States. and a TFSA is very similar to a Roth IRA here in the United States. Both of those give you tax advantages for retirement. The difference is when you get the tax advantages. So you get the tax shield on the RRSP. When you put the money in, you get a tax shield. And then when you take the money out in retirement, then you're taxed.

4:36The TFSA, it's flipped. You pay the tax on the money, So you put in after-tax money, and then that's when you're taxed. And then the shield comes when you pull the money out. You are not taxed at that time. Again, like a Roth IRA. So the question here I think is twofold. It's what do you do with the money that you have in there right now? And then what do you do with any new money? And so I'll talk about what I would do. What I would not do is just roll over money from an RRSP and put it into a TFSA before first learning if that's the right thing to do for my personal situation or not. So I'm going to guess, and I'm not a Canadian.

5:24I didn't side hustle in Canadian taxes, so you'll have to forgive me for not giving you the most accurate information on it. But I would guess that you would probably take a tax hit if you wanted to convert from an RRSP to a TFSA. Because if you did that in the United States, that's exactly what would happen. So you have to ask yourself, if I want to make that conversion, am I willing to take that tax hit? Am I willing to pay those taxes in this year? Basically, by doing so and by deferring that, you are getting compounding benefits on the money. so you are probably going to make hundreds of thousands of dollars in tax savings if you really do have like 30 years till retirement so it could probably be a great financial move but you do have to pony up if you were doing in the united states you would have to pony up and that's not always an easy thing to do even though we might know that it could make us a million dollars in 30 years so that would be the first thing i would say is it very much depends on your tax situation your own personal temperament.

6:33And if the cost benefit between the emotional cost, the financial cost, and then the benefit, if those outweigh, then yeah, you might consider doing that. But just because I should have done this in the first place, I would not use that as a reason, not only because of the tax implications, but because it's kind of also a FOMO mindset. But as much of the FOMO we have to deal with being investors, looking at the stock market, seeing these businesses that just explode out of nowhere, I don't want to add another FOMO to your list. Do you have thoughts on that part? Yeah, you don't want to add another FOMO to the list.

7:12I would agree that moving the money from the RRSP to the TFSA just because is not a really good reason to do it. I would probably hold off on that. And for several reasons. And correct me if I'm wrong, but if you will try to do this here in the United States without a legitimate reason, i.e. you left the job and you're trying to take the 401k air quote with you, you can do that here without being penalized for it once a year. But I don't know how the rules work in Canada. Again, I did not do a side hustle on taxes and retirement accounts in Canada, so I'm a little short on knowledge of this. But just functionally, like Andrew was saying about the FOMO part of it, I also would question if it's only been in there for a couple years, how much money is there really in the grand scheme of things, right?

8:11So just to use easy numbers. If you're 35 now and you're going to retire in 30 years, the 30 years of compounding that you're going to get on setting that money aside now in the account you think is a better fit for what you want to do is going to far outweigh the process and the headache and the stress of moving a much, much smaller amount to the account you have now. And so I guess I would probably, if it was me, and I'll just throw an easy number out. Let's say it's$1 ,000 just for easy rounding. $1 ,000 is not, in the grand scheme of things, is not worth a lot of heartache and stress and headache about, yes, would it be nice to have everything all in one umbrella?

8:59Of course. That would be very nice. We just talked about apps and super apps and combining things in our last show. and if you think about that with brokerage accounts, yes, it would be awesome to have everything under one umbrella. Unfortunately, life doesn't always work that way and situations happen and you just gotta deal with it. So my opinion would be to focus way more on what you have now, the TFSA going forward and depending on what the rules are in Canada, let's say that you're in a job and seven years from now, you leave that job and you wanna roll that money into the account that you have now, then that's a perfect time to do it and it's a bigger amount of money and it makes sense to do that.

9:45When it's early and maybe it's a smaller amount, I'm just guessing so I don't have the information, but if it's a smaller amount, is it really worth, your time is valuable, right? And using that time to focus more on your family, your job, your hobbies or other things you could do to create more revenue for yourself, I think that would be more worthwhile than stressing about whether you still have four stocks in an old account and you got all the other stuff in the new one. That's how I think about it. Yeah, perfect. Totally agree. I guess the second part to this is, do you put new money in the TFSA or do you put new money in the RRSP?

10:26And I found a great flow chart on Reddit, which is completely useless for all of us since you're all listening. and not watching. But basically it can come down to, just like here in the United States is what we tell people, Evan tells people a lot. If your employer gives you a match, so for example, you're going to put in$100 in the RRSP, they're going to give you$100 match. Always take as much match as you can. That's 100 % free money. It's hard to double your money in the stock market. It's a lot easier to double it if a company is matching you. your employer is matching you. So take that. And then the discussion on whether to go RRSP or TFSA after that is really personal preference.

11:12And I think how Dave answered it is a better answer because you can go into things like, oh, well, how much money am I going to make now? How much money we're going to make in the future? What our tax rate is going to be now? Whether they can be in the future? There's a lot of factors. You can go down that rabbit hole. There's a lot to be said for simplicity and just doing enough to continue making progress.

11:36I had my cough. I 100 % agree with that. I think you have to decide what kind of investor you want to be and what's going to work best for your situation and how much work you want to put into this. And again, not knowing the ins and outs of an RRSP, if it only allows you to invest in index funds, for example, and you really want to buy individual stocks, then I think that answer is pretty simple. If it offers you a match and it offers you a match in company stock or other index funds, that's like Andrew said, it's free money. You got to take it. And maybe you've used that for your free money part and you invest everything else into TFSA.

12:21So depending on how you have things set up, I think you just need to figure out what, like Andrew said, it's a personal situation. So what Andrew and I may do versus what I may do may be different. And what we tell you to do may be different than what you may want to do. So I think before you make any decisions, think about what it is you want, how you want to go about doing this. And depending on if you have the option to do it, maybe talk to a retirement account specialist or somebody along those lines to give you a little bit of guidance on the tax rules and how that could impact you now, as well as when you get to retirement and kind of set yourself up and then you can go from there.

13:04But I think the more knowledge you can accumulate, the better decisions you can make. And also just spending a little bit of time thinking about what it is you want and how you want to do this. And then you can make choices from there. How do you do that? That's a crazy idea. Well, actually you go on TikTok and you find out what everybody else is doing. Just kidding. My favorite platform. Right. Or you go to Reddit and you see what everybody's raging about and then you do the opposite thing. There you go. What if you could get a 25 % match on every dividend you earn? Well, now you can. When you earn dividends on the Plink app, you'll receive a 25 % cash boost up to$250 bonus per year.

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16:01All right. That was a great question, Freddie. I hope that helped answer your question. So let's move on to question number two. This is from Boz. And the question is, Adobe stock looks cheap compared to its historical valuation. What underlying factors should I consider to determine if it's actually undervalued or if the market is pricing in real risks? Is it a falling knife? Great question. And let's talk Talk about Adobe. Oh boy. So we both own this, to be clear. Okay. We both own this. How do you interpret how the market has been treating this stock since we bought it, which was in the summer?

16:44I think there is unquestionably a lot of fear around AI and how it could impact Adobe's business. And I don't feel like Adobe has done a stellar job of quelling those fears through their, not only their investor relations, but also what they've relayed to analysts during earnings calls. They have certainly not been bearish, but they've also not been like, this is how we're beating it. And so they've kind of been, you know, this is just my interpretation. I feel like they've been kind of ignoring the elephant in the room and not really addressing it head on and saying, this is what we're doing.

17:33This is how we're going to beat it. It's more like, these are all the things we're doing. This is business as usual for us. And like kind of nothing to see here kind of thing. That's how I feel. Now, whether or not that's how other people interpret it, I'm not sure. But I certainly feel like the market is punishing them for what could happen with AI and how they think AI is going to impact Adobe's business. What are your thoughts? I think that's a good evaluation of it. And that would make sense. Just to break down, if you're not familiar with Adobe, they have all these different marketing products to help marketers do things like create marketing materials, create brochures, that sounds really 1990s, but create infographics, create PDFs, create all these things.

18:23a company could want or use. And you are seeing the AI, the photo image generation is very, very impressive when it comes to AI. And the big argument with AI is we're just getting started. The AI is going to get better and better and better. And with image generation, it has in fact happened as well where now you can edit images pretty nicely with AI. where it didn't have those capabilities just a couple years ago. So Adobe owning Photoshop and some of the other related kind of things for photographers. They also own software for video editors and all these different software suites. I'm not going to go down the list, but to your point, there's this perception that this disruption is coming for Adobe, and that's why you see the stock pretty low.

19:25It appears that maybe this is hitting some sort of floor for the stock. One of the interesting things about the stock market, which you'll learn over time, we're talking about stocks that are falling knives and stocks that maybe are hidden gems, is the whole basis behind value investing and buying companies cheap is that at a certain price, every stock looks attractive enough. At a certain price, there becomes a floor for a stock where people just say, the numbers are just too good here that I don't care what the narrative is, I'm going to buy. And so you look at all the different falling knife stocks, the ones that, I mean, maybe there's survivorship bias here, but the ones that have survived, you can see a floor in the stock chart where all the people who believed in the company had left, but the people who were left buying the stock were the ones who were looking at the numbers and saying, look, I don't care if this business sells melting ice cubes and that's their business model.

20:33I see$100 million in profits or whatever it is. And so at this price, this stock's a good deal. So you do see that. And when I look at the stock chart for Adobe over the last four years, I wonder if this is kind of like that floor. It hasn't quite hit the 200 and it had dropped below 300 back in 2022. But definitely the PE continues to go down, down, down, down, down, continues to compress. So from a numbers perspective, the stock i mean the company looks great the numbers still look great i guess to me the bigger question and i and i wonder if if where you feel about this i kind of drives me a little nuts that people never make this distinction but whatever i'll just let it roll off my shoulders but is it is this uh is this a distribution story or is this a technology story because you have technology companies that are not necessarily technology stories, but more distribution stories.

21:42As much as there's so much hate about Apple and their ability to innovate, the fact remains that when you go to buy a cell phone, you have the option. You go into an AT &T or a Verizon, and you have the option between Android or iPhone. So there aren't a million different competing options there. You have to go to the distribution place. You go for grocery, you have the option between Johnson & Johnson consumer products, or you have Procter & Gamble. It's a distribution. There are a few distributors that are the choke point of the industry. And if you are with them or not, it has a larger, to be frank, it has a larger economic impact on those businesses, then, oh, well, they made, did you see the innovation of their laundry detergent?

22:34Oh my goodness, this startup has so much better laundry detergent. They're going to take Procter & Gamble's business, right? No, you don't see that. So when it comes to Adobe, and this is still a very new thing because the internet's new, we're only talking about 20, 25 years, software companies, things like that. Has this industry turned into a distribution story rather than a technology story. And if it's still a technology story and the better tech will win, then we'll probably lose on this investment. We'll probably won't keep up with the market if it really becomes who has the very best tech.

23:13But I would argue that investors should consider maybe this is a distribution story. Maybe they have their tentacles in so many of their enterprise customers that the tech can be the tech and they can build whatever customers want, but they have the customers. That would, I guess, be my impassioned rebuttal to what's going on with the stock price on Wall Street and why I still believe in Adobe. Yeah. I would agree with all those things. I hadn't thought about that question about whether it was a tech company or whether it was a distribution company. My instinct tells me it's a distribution business, that the technology that they create, while it's great, I don't know that that's really the strength of why they've been as successful as they have been.

24:00We both are users of Canva, and we know that Canva has pretty good tech too. But I would say that based on Adobe's integration with so many different industries that utilize their technology, their platforms, that that's really the power of Adobe has been the distribution of their technology. And the fact that it's used in design schools, it's taught in art schools, all these places that those people go out and work in the professional world all know how to use those platforms because they're taught them in school. And then those platforms are also used in the professional world. Our friend Brandon works in the photography industry and we've talked a lot about Adobe with him.

24:48And several of the things that he's told us have been that the company is certainly integral to a lot of what they do. And yes, AI is unquestionably chipping away at parts of those businesses. Vanity Fair recently had a photo shoot that was all AI created. And it created quite a stir in the fashion world. and those are things that Brandon is concerned about in his industry is how much is AI going to take away from us but there's also the question of the editing of the images and all the other parts of what goes into creating a magazine is not just the taking of the picture it's also the rendering and the different editing that they do to the pictures to optimize them as best they can.

25:39To my knowledge, a lot of that can only be done via Adobe. And those tools are integrated very closely into that whole industry. And you think about the design industry, not just for like images, but you think about any sort of graphic design or any sort of images that we see on the internet, or even in the building space, you know, they use Adobe to help render what buildings will look like to help raise money to build the building. And so there's a lot of different aspects of it. And I think when I think about the business, to me, it feels very strongly that it's a distribution business, that the software can be commoditized over time.

26:23And we've seen that happen in other industries. And I don't see any reason why it couldn't be in this aspect. So kind of to your point, yes, AI can definitely create some pretty amazing stuff and it is going to get better. The more that it does, the better it's going to get unquestionably. But there's also the distribution part of that and how much access do people have and can they do all the things they need to do with that just with the air quote taking of the picture, so to speak, with the AI generation. So I think we're a little premature on the, it feels like the prediction of the demise of Adobe is a little premature.

27:08We could be proven wrong, for sure. But it just feels like, to Andrew's point, when you look at the numbers in fiscal and look at just the top-line numbers, revenue growth, margins, it all looks perfect. It hasn't changed. And even though the stock price is ugly, that part of it is not. And so if you were starting to see some disruption, if there was disruption going on, you would think it would start to play out in the numbers and it doesn't appear that that's happening yet. And it feels like the market is anticipating what could happen, but it hasn't happened yet. And I guess the other thing just kind of popped into my head, Andrew interviewed David Gardner recently.

27:53And one of the things that David talked about in his book was the snap test. And basically what he means with the snap test is if you snap your fingers and that business to exist, how much would that impact that industry? And you think about if Adobe went away, just boom, it's gone. How much would that impact? Could AI fill that spot? No, it couldn't. And so when you think about that, to me, that tells me that this is all a little bit premature. So I don't feel like it's a falling knife. I feel like the market is offering people an opportunity to invest in a potentially great business on sale.