The Most Underrated Investment Tool

I think a lot about our successes and failures and try to imagine whether there are universal truths that can explain why things went right and wrong. Like a Unified Field Theory for investing.¹ I haven’t come up with anything worth a patent yet, but there are a few observations worth discussing. At the top of the list is what I believe to be the most underrated and underutilized investment tool: common sense.

The history of financial markets is a story of booms and busts. In modern history, we remember canals and railroads, fibre optic cable and telecom networking gear, commercial construction and housing, and, as Dustin Hoffman learned in The Graduate, “plastics”. There are many more examples of great innovations and business successes that led, ultimately, to great losses for investors. In almost every case, the damage could have been mitigated with a little common sense.

Why Investment Skepticism Pays Off

My career began in investment banking, first in New York and then in Toronto. Most of my investment banking journey was spent working on mergers and acquisitions. That may make it sound a little more glamourous than it was. For the most part, I was tasked with trying to sell businesses that no one wanted. My first-ever assignment, at 23 years old, was sitting in a data room in Los Angeles while potential buyers looked through reams of information on Getty Synthetic Fuels, a subsidiary of Getty Oil, which had just been acquired by Texaco. Getty Synthetic Fuels collected methane emissions from landfills and sold the gas to utilities. Sounds sort of interesting in the current context of renewable energy. In 1984, it was not very compelling. No one was interested. For years, I seemed to draw the short straw and was repeatedly assigned to work on the divestiture of bad businesses. It wasn’t fun at the time; however, I developed a pretty useful skill: I could smell a bad business from a mile away.

After seven years in the investment banking world I made the switch to investment management and joined the predecessor firm to Nexus. I had developed strong analytical skills in investment banking and added to those by passing all of the CFA exams. While I did not have the experience buying and selling stocks that my more seasoned colleagues had, it turns out that my nose for businesses to avoid was a skill as useful as building spreadsheets. In hindsight, my early career imbued me with a level of common sense that is unusual in a new investor.

The Limits of Common Sense

To be sure, common sense is no silver bullet. It is not a creative tool. It doesn’t help much with the quest to find new and attractive investment ideas. That requires the hard work of an investment analyst – reading, listening, talking with company managements and industry experts, and analyzing all the collected information in a rigorous analytical framework. What it does do, is instill a healthy dose of skepticism. It helps us avoid being carried away with exuberance in the market, or miraculous valuations displayed on a computer screen. It keeps us from missing the forest for the trees. It reminds us that the most powerful force in markets is reversion to the mean, and the most dangerous idea in investing is that “it is different this time”.

A Reality Check on Current Market Euphoria

To illustrate my point, I could go back and reminisce about the various stock market collapses in my career. However, it might be more interesting to reflect on some of the market dynamics and investor attitudes at the present time. I have no crystal ball and I am frequently wrong. But I think it is always wise to ask oneself: “Is this a bet I am willing to make?”

Of course, the topic that dominates markets at the moment is artificial intelligence (“AI”). Let me assure you that I am enthusiastic about AI. There is no doubt that it will have a profound effect on our economy and society. We use it at Nexus to save time doing routine tasks. Perhaps no company is identified with the rise of AI as much as Nvidia, a designer of graphics processing units (“GPUs”) that are at the cutting edge of what is used in the data centres powering AI. Nvidia is a company that has been wildly successful, almost by accident. A few years ago, GPUs were used mostly for video games and to power the graphics on computers. It turns out that they are very well suited to the computations needed for AI. Nvidia’s importance to AI is undeniable, and the growth and profitability it has achieved is outstanding. What is not to like? Of the 82 analysts who cover the stock, 79 call it a buy. Valued at the average of these analyst price targets, Nvidia would have a market capitalization of $7.6 trillion, “a figure equivalent to nearly one-quarter of U.S. nominal GDP and approaching the $8.5 trillion total market capitalization in Japan, the second-largest component of the MSCI World Index.”² Do we have anything against Nvidia? No. Do I want to bet that it will become worth 25% of U.S. GDP and worth almost the entire Japanese stock market? No. You don’t need a detailed financial model to conclude that this makes no sense.

Stepping back from the specifics on one company, other aspects of the AI excitement also make no sense. Capital spending for data centres and “compute” has skyrocketed at an incredible rate. Capex by the five “hyperscalers” was about $240 billion in aggregate in 2024. It rose to a bit more than $400 billion in 2025. It is expected to be almost $800 billion in 2026.

Are these vast sums of money likely to earn an attractive return? Almost certainly not. We have no idea which investments will be economic and which will not. But common sense tells us that when anyone accelerates spending at this rate, it turns out that a lot of dollars are mis-spent. It has happened with virtually every technological revolution in history.

My final observation relates to stock markets as a whole. My career has been focussed on investing in Canada and the U.S. There are three junctures when one country seemed so much better than the other, clients questioned why we even bother with the lesser. At the start of 2000, it was the U.S. that had been so much better than Canada for more than a decade. At the height of the tech bubble most investors believed that was virtually certain to continue. However, when the bubble burst, the collapse was much worse in the U.S than in Canada. The U.S. suffered more in the Global Financial Crisis than Canada. From January 1, 2000 to January 1, 2010 the Canadian market returned 5.6% per year. The U.S. benchmark, the S&P 500, was DOWN 4.1% per year (both total returns in Canadian dollars). The same clients that asked why we owned Canadian stocks in 2000 asked why we owned U.S. stocks in 2010. Since then, the U.S. market is up 16.3% per year while the Canadian market is up 10.0% per year. Nothing wrong with the Canadian return, but it trails far, far behind that of the U.S. market. As I write this piece, it is easy to be cautious on Canada and difficult to imagine how our stock market could become a darling. But common sense tells me that these returns will revert to the mean. I have no idea when, why, or how. But I am pretty darn confident that the U.S. stock market cannot continue to outperform the way it has.

The Best Investment Advice I’ve Ever Received

I’ll conclude my thoughts with one final recollection. Early in my career, I attended a small institutional investor lunch with Matt Barrett, the well-known CEO of the Bank of Montreal at the time. While I have no recollection of anything else he said that day, one phrase stuck permanently in my head: “If there is one thing that I have learned over the course of my career, it is that when something grows like a weed, it usually is.” Sounds like common sense.