Transcript

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The information presented and discussed should not be construed as an offer by RBC Dominion Securities Inc. to sell specific securities and/or services in any jurisdiction outside of Canada.

All opinions and views expressed by the speakers are not representative of the views and opinions of RBC Dominion Securities Inc. All information and opinions provided in this podcast are in good faith but without legal responsibility.

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This is Capital Insights, a podcast from the Chapman Private Wealth Group.

Welcome to this month's episode for the Monthly Partner Memo. My name is Jack Taylor, and I am a Certified Financial Planner and Associate Wealth Advisor at the Chapman Private Wealth Group.

During this episode, we will review Paul Chapman's October 2025 Partner Memo. And quick note, these are Paul's words, and so when I speak in the first person, I am, of course, referring to Paul.

Here are a couple relevant quotes. Quote, "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs.

Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball.

They know overstaying the festivities-- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future-- will eventually bring on pumpkins and mice, but they nevertheless hate to miss a single minute of what is one hell of a party.

Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though. They are dancing in a room in which the clocks have no hands," end quote from Warren Buffett in his 2023 Berkshire Hathaway Letters to Shareholders.

Quote, "I'll never forget it. January of 2000, I go into George Soros's office, and I say, 'I'm selling all the tech stocks, selling everything. This is crazy-- at 104 times earnings. This is nuts.

We're going to step aside, wait for the next fat pitch. My two gunslingers, portfolio managers at his fund, who were investing in the tech bubble stocks, didn't have enough money to really hurt the fund, but they started making 3% a day, and I'm out.

It's driving me nuts. I mean, their little account is like up 50% on the year. I think Quantum, their main fund, was up 7%. It's just sitting there. So around March, I could feel it coming.

I just-- I had to play. I couldn't help myself. And three times the same week, I picked up a phone, and 'Don't do it. don't do it.' Anyway, I picked up the phone finally. I think I missed the top by an hour.

I bought $6 billion worth of tech stocks. And in six weeks, I had left Soros, and I had lost $3 billion in that one play. You asked me what I learned. I didn't learn anything.

I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So maybe I learned not to do it again, but I already knew that," end quote, from the legendary investor Stanley Druckenmiller in his 2015D Lost Tree Club Speech.

Friends and partners, apologies for the longer-than-usual quotes this month, but I find them quite insightful, and they just may prove salient at some point in the future.

I am sometimes flummoxed by the lack of a foundation in what passes as an investment strategy for many. The lack of a true foundation makes one susceptible to the wind. And sadly, the de facto investment philosophy of many is to invest in whatever just finished working.

These quotes are wonderful reminders for us. Fear of missing out, greed, envy, or as Druckenmiller said, the need to, quote, "play", end quote, are just a few magnets for mistakes.

Emotions can cause even the best investors to do foolish things, even when they know deep down that it's foolish. I think true wisdom lies in knowing what you don't know and admitting that to yourself.

This is why the smartest person in the room is often the one who most frequently says, "I don't know." Unfortunately, admitting you don't know something doesn't play well on social media or in the news media.

But the real wisdom is out there if you look carefully and listen to the right people. And I hope to bring some of that collection to you via my Monthly Partner Memos.

Humility is the most effective attribute as an investor or advisor, in my view. And there are some good graphics on the website and in our monthly email that we send out, that you can see to help illustrate these ideas and themes.

The world is never short of risks. And 2025 is so far an interesting year, to put it mildly. Policy and geopolitical uncertainty, the erosion of central bank independence, markets reaching new highs, concerns over deficits, persistent inflation, US dollar headwinds, and recession worries are a few of the risk items to note. And we still have a third of the year to go.

Social media feeds are a firehose of addictive and mostly useless content curated by algorithms built not to inform, but to keep us endlessly scrolling. Unfortunately, it also creates information overload. And many investors are distracted from some of the real drivers and narratives.

Unfortunately, negativity sells. Data shows a steady rise in pessimism across financial media over the past 50 years. It would be nice if the media reported news objectively, but at the end of the day, this is not the reality or the incentive structure. And incentive structures drive virtually all behavior, professional or otherwise.

The press does not write about boring things. It writes about the extremes. Investors tend to get things wrong. And when they cling to simplistic cause-and-effect models, especially when fixated on a single variable, there are many forces shaping a complex global economy and markets.

The level of the stock market is more a function of money flowing into the stock market, liquidity, and investors continue to plow money into stocks regardless of what happens with the economy.

So far, this could change. The AI narrative has been a massive tailwind for the markets and is unprecedented, in some ways. The stakes in the AI movement are incredibly high.

The amount of capital expenditures from these companies is simply historic. And put plainly, it had better work. These companies, like Microsoft, Apple, Google, Meta, et cetera, are spending as though they are laying the infrastructure for electricity and that all this investment will result in technology everyone uses and no one can live without once they have it.

Perhaps, but this is why concerns about AI adoption are so important. If AI isn't adopted as quickly as these companies assume, or doesn't provide an economic benefit in the near or medium term, then much of this massive investment will appear wasted, and that will be substantially negative.

I don't love to send you to external sources for additional reading, but there is a link on the website that is a must-read to highlight the risks on this front. Considering we are only hearing about all of the positives AI will bring, you need to hear an alternative and skeptical view from a very respected manager.

We had better hope that the AI boom isn't similar to the telecom boom during the dot-com bubble. At the time, telecom companies spent heavily on capex, but profits just didn't materialize quickly enough.

This led to a decline in their free cash flows, and that ended the boom. We all know what happened next as well. Keep in mind that sometimes in financial bubbles, investors correctly identify the economic value of a technological innovation but misidentify who will capture that value.

Remember pets.com. The market follows the economy and company earnings almost exactly over the long term, full stop. So far, the US economy is OK, but it is showing some cracks, particularly in the labor market.

Bottom line, there is that the labor market is not bad, but it is losing momentum. If the labor market goes, then likely so too will the economy. And the market is likely correct, in this case.

To fight a slowing economy, the central banks lowered interest rates in September, as expected. Their decisions to cut interest rates confirmed widely held market expectations for the start of a rate-cutting cycle, at least in the US.

That may not be a new bullish force, but it does strengthen the support under the markets. The evolving balance of risk between inflation and the labor market has led central banks to place a greater emphasis on keeping the labor market on a steady footing.

While easier financial conditions should provide broad support for the economy, there remains significant uncertainty over how far and how fast interest rates will fall, as central banks are also committed to maintaining inflation stability that is aligned with their long-term targets as well.

Fiscal stimulus is occurring via the passage of the One Big Beautiful Bill, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries.

We will be watching the future path of monetary policy closely, alongside government bond yields, as central banks navigate the complex trade-offs between the labor market, inflation, and the broader economy.

We are coming into a seasonally challenging period. And finding diverse sources of diversification remains prudent for portfolios with so many moving parts in the markets. Even in the face of all this uncertainty, the world is flush with opportunities, one of which is highlighted in the section below.

And we'll just review, on a high level, the following segments that we have in our monthly partner memo. The first one is titled "The Headwinds for Markets and Central Bankers." The economy is clearly losing momentum, so there is going to be support by some central bankers and the Trump administration for lower rates.

But they are between a rock and a hard place since inflation is stubbornly elevated. If we can avoid recession, then the cutting of rates should portend the extension of positive markets. But if the Fed is reducing interest rates because of a weak economy, then things may not be so rosy.

Inflation has remained stubborn and making central bankers' jobs difficult. If central banks lose the narrative of their ability to solve a financial crisis, there is a perception and therefore market issue. And there isn't much room for error in the markets because they aren't cheap. And you can learn more about this on our website.

The second segment is titled "Is This the Start of a New Economic Cycle and the Continuation of the Bull Market?" The market is continuing to rise, and the economy has proven generally resilient. Demand for discretionary services and upward price adjustments to meet that demand strongly suggest the economy is not falling into recession.

The job market is weakening, but not yet crashing. The Fed is boosting monetary liquidity, which is good for asset prices. The interest rate cuts should boost CEO and business owner confidence. Small business sentiment is rocking. We should see the chart below as well.

Higher business activity only means improved hiring. Lower rates should help housing markets as well. Markets are running, but the last 20 times, equities were within 2% of an all-time high, and the Fed cut rates. Stocks were higher every single time. And you can also learn more about this on our website.

The last segment is titled "In the Face of Expensive Markets, Opportunities Still Abound. This is One of Them." Infrastructure represents one of the most stable investments globally. Think toll roads, utilities, and data centers, to name a few. Stable, long-term plays.

To highlight this, see the chart below showing the sources of global infrastructure returns. This chart shows that core, real assets can provide both income and diversification, even through difficult markets.

Even through the pandemic, the income they generated was robust. By providing stable income, infrastructure can help stabilize portfolios during various stages of the economic cycle, while also providing the opportunity for capital appreciation.

We have partnered with one of the most reputable firms in the world to offer access to their private institutional infrastructure investing platform, and have used our scale to negotiate lower fees than even a large institution can access.

And targets 9% to 11% annual net total return, with a 4% to 5% annual distribution yield. You can learn more about this on our website. As always, if you want to contact us to review any topic in greater detail or request a podcast topic, please feel free to reach out to us via email at ChapmanPrivateWealth@RBC.com, or through our website at www.ChapmanPrivateWealth.ca.

You'll also be able to find our monthly partner memos and helpful articles and resources on our website. We also have the Wealth Plan, which is a financial planning series that we have coming down the pipes. And we are very excited about that. And hopefully, it's a timeless resource that you can share with your friends and family. Otherwise, take care, and have a great month.