I’M CERTAIN OF THIS: THE TIMES ARE UNCERTAIN
It will not surprise you to learn that a number of our clients have been in contact with us lately, asking how we should deal with the additional market uncertainty arising from the actions of the current President of the United States. Whether you like him or hate him, nobody can deny that President Trump has a habit of issuing proclamations, executive orders and after-hours posts on his social media platform that move the financial markets, sometimes drastically. When he proclaimed that all Chinese goods imported to the U.S. would be subjected to a tariff of 145%, the largest U.S. stock market index, the S&P 500, lost $5.8 trillion in value in four trading days. This is almost exactly twice the value of all the companies listed on the Toronto Stock Exchange, and amounts to about $17,000 each for every person in the U.S.
President Trump’s style of doing business has greatly increased uncertainty in the financial markets. Purchase and sale of traded securities is already a difficult business. Nobody can know the future and we all make decisions based on numerous assumptions. Some turn out to be right, some wrong and some just so-so. However, the Trump regime has added a whole new level of difficulty to the process. Last week, for example, he announced that he would put a 25% tariff on all iPhones that Apple imports to the U.S. This is because he would like Apple to build factories in the U.S. instead of using ones in India and China, or other countries where labour is cheaper than in the U.S.
No financial analyst, prior to Mr. Trump’s election, spent any time considering what the impact of a 25% tariff on imported iPhones would be on Apple’s earnings. It was simply not among the problems that arose when attempting to figure out how much a share of Apple should be worth. Now, as owners of Apple stock for our clients, we DO have to worry about this, but that is not the real problem. We always recognized that, like all stock analysts, we had many “known” unknowns: what will Apple’s earnings be this year? for example. Now we have what former Secretary of Defense Donald Rumsfeld calls “unknown unknowns.” We don’t know what actions the President might take, when he might take them, and whether or for how long his decisions will stay in place. If a 25% tariff, why not a 50% or 100% tariff, or even a complete ban on imports? Known unknowns are hard. Unknown unknowns are impossible.
Philosophers have spent a lot of time on the question of how best to make decisions in situations of uncertainty. Without attempting to summarize an entire body of thought in one paragraph, I can report two important conclusions. Much depends on the relative importance of the decision. Causing a nuclear war by mistake is much more important than deciding whether or not to take an umbrella on your morning walk. Obviously, we would like really important decisions to be free from as much uncertainty as possible; or to put it another way, we would like the uncertain decisions we must make to be less important. The second big point is that we would like to be in situations where we do not have to make many decisions in uncertain situations at all. If you do not have nuclear weapons you don’t have to decide when to use them. If you do not go outside, you don’t need umbrellas.
Philosophers (and economists) don’t always live in the real world, but we do. At Baskin Wealth Management we are making decisions all the time on what to buy, what to sell, and for which clients (in 2024 our trading team executed over 26 thousand transactions). How do we deal with uncertainty, and how have we addressed the two conclusions I have noted above about decision making under uncertainty?
In the first place, we rigorously diversify our portfolios so that no one security can be too important for any client. When a stock has gone up a lot, we are disciplined about trimming it back to reduce risk. In this way we ensure that each holding is more like an umbrella than an atom bomb. In the recent market turmoil one of our long-time holdings, TFII International, took a major hit, falling as much as 55%. This was unpleasant and unwelcome to say the least, but since no client had more than 5% of his or her money in this position, the damage was contained. More like getting wet in a rainstorm than like getting blown up, to extend the analogy. (By the way, we think this is a good stock to own and have confidence that the price will rise.)
In the second place, we try to limit uncertainty by buying only very high-quality companies that provide goods or services that people must have. We would rather invest in a company that hauls garbage than one that might or might not invent fusion power. The first has inherently less uncertainty and less risk. The unknown unknowns about fusion are simply much greater than the mostly known unknowns that confront the garbage industry. For this reason, we often tell clients that boring is better.
The capital market volatility we have witnessed in the first five months of 2025 is unlike anything I have seen in my 45 years in the financial services industry. I expect it to continue for the next 18 months at least, leading up to the U.S. mid-term elections. We have done what we can to ameliorate the added risks. Rigorous discipline on diversification and security selection cannot relieve us from the uncertainties that we must confront, but we know that we and our clients can survive the occasional soaking. It’s a lot better than getting nuked.
Chairman
David Baskin
PROPOSED TAXES ON CANADIANS HOLDING U.S. STOCKS
You may have read in the papers that the “Big Beautiful Tax Bill” currently before the U.S. Congress has provisions that would impact Canadian companies and Canadian individuals investing in U.S. stocks. It is important to recognize that this Bill has not been passed by the Senate, and might well be changed before it becomes law. For this reason, we are not taking any action at this time. The Bill is intended to retaliate against the Canadian law that imposes a digital services tax on major U.S. technology companies. It is possible that the provisions in the Bill are nothing more than a negotiating tactic.
The Bill proposes to increase the rate of withholding taxes on dividends and interest paid to Canadians by U.S. companies. Currently the withholding tax rate is 15%, and Canadians get a full tax credit so that there is no double taxation. Under the proposed legislation, the withholding tax would rise to a punitive 50% and it is not clear how this would be treated by the Government of Canada, since the law explicitly states that it overrides the Canada-US tax treaty. In the worst case, the U.S. withholding taxes could be considered by Canada to be a tax not contemplated by the Treaty, and the pay-out to Canadian shareholders would effectively be cut in half. If the new withholding tax applies to tax sheltered accounts such as RRSPs and RRIFs, this would be a major departure from existing practice.
Most of our U.S. holdings were purchased for growth, and not for income from dividends. In fact, of our ten largest U.S. companies, four (Amazon, Live Nation, Netflix, Berkshire Hathaway) pay no dividend at all, and of the next six, five have dividends under 1% per year. In short, for our average client, this new tax would pretty much be a non-issue.
The other new tax has to do with the payment of dividends across the Canada-U.S. border between related companies. This provision is very hard to analyze due to the complex relationships between various entities. Should the Bill pass, we will need to assess how our current line-up of investments is affected. Companies like Brookfield, the major banks, and the energy companies have subsidiaries in the U.S. so this could be a more important concern.
You can be sure that we are paying attention to this issue and that we will take whatever steps are necessary to optimize investment returns both before and after taxes.
Chairman
David Baskin
Media Appearances
Barry Schwartz on BNN’s The Open – May 21, 2025
Benjamin Klein on BNN’s The Close – May 28, 2025
Long Term Investing Podcast
More Q1 earnings – May 6, 2025
Lessons from the greatest investor of all time – May 13, 2025
