As Canadian investors grapple with a rapidly evolving landscape, BNN Bloomberg sat down with Kevin O'Leary, the chairman of O'Leary Ventures, for his perspective and insights across equity markets, Canadian tax changes, his efforts to buy TikTok and more. 

The famed Canadian businessman, investor, financial commentator and TV personality joined BNN Bloomberg's Jon Erlichman on Morning Markets Friday to share financial advice. 

Jon Erlichman: Do you remember those first TV appearances? 

Kevin O'Leary: I do, and I don't think much has changed in terms of the controversy. You have to put it out there and I've learned since then you can't make everybody happy all the time so why try? 

Jon Erlichman: And you've never really shied away or been scared of sharing your opinion. Where does that come from? 

Kevin O'Leary: It comes way back from my mother telling me when I was a teenager, “If you always tell the truth, you'll never have to remember what you said.” So I just tell my truth and some people don't like it, I don't care. 

Jon Erlichman: Give us your truth on the situation for the economy. Everybody's trying to figure out where we go from here. What happens with interest rates? You spend a lot of time in the U.S. obviously as well, so there's a separate narrative there. But what's your assessment of what's going on right now? 

Kevin O'Leary: I read a great op-ed piece yesterday in the Globe and Mail, by Dan Daviau, the CEO of Canaccord. And I thought he hit the mark on a really important issue for Canadians. This concept of the competitiveness of nations, the competitiveness of provinces or states, because post-pandemic, something unique has happened, I've noticed this as an investor.

Let's say you're a fantastic tech team out of Waterloo. Waterloo is legendary…And you want to raise $200 million for your startup. Now as an investor, with the proposed changes to the tax landscape of Canada, which is a policy decision that the country has to make. 

You have to think about this, why would I nexis the headquarters of that new hot startup, that growth company, this was Davos Point. Why would I leave it in Ontario where the taxes are no longer going to be competitive? Why wouldn't I just move that to Texas or to Florida or to North Dakota, if it was an energy tech deal, which is exactly what's happening because we know that 40 per cent of the people in these companies don't have to work at HQ (headquarters) anymore? 

So you leave the tech team in Ontario or in Alberta or wherever it is, and you build the company outside of a punitively taxed jurisdiction. This is bad news for Canadians, and I think we should all wake up and understand policy makers do a lot of damage. It reminds me of the early 90s when Bob Rae came into Ontario and we were the fastest-growing software company in Ontario. We moved it to the U.S., created tens of thousands of jobs, raised billions of dollars and not a dime of it, or one job in Canada because Bob didn't believe that it mattered. He always thought that every company and I'm not criticizing him now, such a long time ago. But I'm just pointing out (that) bad policy creates unintended consequences. Rae’s policy was very damaging for Ontario in real estate and tech. I see coming, something very damaging for the Canadian economy. 

Jon Erlichman: So at the end of the day, do you think Ottawa should reconsider this capital gains tax change that's been announced?

Kevin O'Leary: I hate to get into partisan politics and I don't mean to at all in the statement, but I've been very vocal about policy in Canada. I think Justin Trudeau is a wildly successful politician, I really do. I think he's a horrible manager. I think the policy that he's putting forward in these different mandates within cabinet are from mediocrity. It's so hard to say these words, but again, it's true. And Canadians should start thinking about, “I don't care who is the Prime minister, but they have to have the concept that Canada is a very important economy.” We're the richest country on Earth by capita, by natural resources. And it feels to me as an investor and as I talk to foreign investors to try to attract capital here, they think our country is run by idiots. Sorry. 

Jon Erlichman: And so are you reconsidering some of your (investments)? I mean you invest in all sorts of stuff here. Are you actively trying to figure this all out for yourself as well? 

Kevin O'Leary: I read Daviau’s piece and I said he's right. Now I have to contort my investment strategy. I want to invest in Canada, but I don't want to be taxed an uncompetitive rate…my cost of capital goes up. So I think what we should do is not raise (taxes). We’re right now in the middle, we're right in the sweet spot. Raising taxes now is a bad idea. It's bad policy. Regardless of the partisan, politics (it) doesn't matter. But he's right. It's going to make people like me and others say, “Wait a second, let's just hire those engineers up in Canada. But let's put the company somewhere else where it's competitively taxed.” 

Jon Erlichman: Let's talk a little bit about your investing philosophy outside of just ROI (return on investment). What is it you're looking for in a business when a business comes in front of you? It might be on paper, you might be looking at what the business represents, (or) you might be talking to an individual, what are you looking for? 

Kevin O'Leary: So I now have empirical data of over 25 years of investing in startups and venture capital, which is a portion of what I do. It's not all of what I do, but it's an interesting part. And here's what the data will tell you. If you look at a seven-year cycle of a portfolio, you make an investment in 10 deals, and then you're going to have to wait five to seven years to see where you're going to get your yield from. 

Traditionally speaking, you would get two out of 10 to provide all your returns, and you would think you would know which two, but you never do. And that's the issue. But shows like Dragon's Den and Shark Tank in the U.S. have changed the model a little bit, because the reason most companies go bankrupt in the first 36 months that are startups is their customer acquisition cost is never below the lifetime value. (It’s) a fancy way of saying they go bankrupt advertising, they can't get customers. 

But when all of a sudden you get a Dragon's Den show and 36 million Canadians see it over a year through syndication, or 110 million Americans see Shark Tank. All of a sudden, these companies have zero customer acquisition costs because it's an eight-minute infomercial on prime-time TV. And so we found our numbers went up to four out of 10 made money. And so these shows are very important in supporting entrepreneurship. And there are great Canadian entrepreneurs, as there are great American entrepreneurs and it's on in 42 countries now. So I'm very fortunate this platform has made me the most hated guy in Austria, it's fantastic. 

Jon Erlichman: You've also introduced people to royalty streams…I know you've said perpetuity is one of your favourite words. But it is interesting when a lot of people get introduced to investing, they think, buy a stock, buy a bond. Why has that always been very important outside of (that) it generates a lot of cash potentially for you? Why was that always an interesting investment offering that you really leaned into? 

Kevin O'Leary: Because I'd argue that a royalty stream in perpetuity is better than equity. And here's why, let's take a very simple example. A company called Wicked Good Cupcakes, it made cupcakes in a mason jar and shipped them to people. Everybody thought it was a joke. I invested in it, it was a wild success. Hickory Farms eventually bought it. I didn't have any equity, but I had the perpetual royalty of 7.5 per cent. So Hickory Farms came to me and said, “Hey listen let's talk buyout on your 7.5 per cent.”

And I said, “Why? I'm happy. I'm getting a check every month. And I love the cupcakes.” That was a more interesting negotiation than had I had the equity, (in a) non-control position. And so I teach a lot now in colleges up here in Canada as well and Harvard in the U.S. I show these structures. And you have to think outside of the box when you're a venture capital investor because it's return of capital that's more important than on capital. Unless you get your money back, you never get a return. Royalties guarantee cash flow, as I like to call it. Cash flow, I love that word. 

Jon Erlichman: You mentioned equity, so let's just talk a little about the stock market. Back in those early days when you were, here with BNN, and that was the era of the income trust as well. And that's a model where investors are getting a lot of the income streams. But when you're looking at the stock market and you're looking for investment ideas in the stock market, what is your philosophy around that by comparison?  

Kevin O'Leary: That's all about diversification. My rule is very simple because in Canada we enjoy access to the world's largest market, the U.S. and our own. So the rule is very simple. This will work for you day in, day out, through every market cycle. No more than five per cent in any one stock, no more than 20 per cent in any one sector. 

Now, we do not have 11 sectors in Canada. So you must put some of the S&P in your portfolio. Canada is very resource-based. We have the world's envy of our banking system. So I'm a huge shareholder of the Canadian banks. But I do it all through ETFs (exchange-traded funds). And so for me, I'm making sure that I never have an overweighted position. A good example would be when Tesla came up I didn't want to buy, but my son got a job there and he was bemoaning me, saying “Why don't you own some of the stock of the company I work for?”

I said, “Well, I think it's overpriced.” He said, “Just buy some and hold your nose.” I bought it way before the splits, but every time it hit five per cent, I sold it down to five per cent. It did nothing except go up for years and I kept it at five per cent. I got all my capital back and I had zero cost base, and when it did have its decline, I didn't suffer any losses because I'd stayed to the mantra of no more than five per cent in any one stock, no more than 20 per cent in any one sector. 

Jon Erlichman: So that's a very important point at a moment like this where a lot of people start wondering, not with Tesla this year, but with a number of stocks whether things are too frothy out there. Especially when it's up against a theme like AI and people are like “This is transformational, it's going to change the world.” And you might be sitting on a nice gain if you were lucky enough to get into some of these stocks. But you're wondering the risks of getting off the table, but you're saying there's no harm in taking some profits along the way. 

Kevin O'Leary: But it's not human nature to sell your winners. And so the biggest mistake I see in portfolios, and I look at all kinds of people's portfolios, including incredibly wealthy people, is you have this massive concentration of their wealth in two positions. 

And I say, “Why aren't you selling some of that off?” (And they say) “I don't want to take the capital gains hit.” 

Never let the tax tail wag you as an investor because if you're paying taxes (it’s) because you made money, what are you complaining about? But you've got to keep that diversification. So the key is to yes, sell your winners down to five per cent and understand that every hot stock eventually gets cold for millions of different reasons. But you only learn that through the experience of losing money. So I really try and get people to understand the concept of diversification in equities. 

Jon Erlichman: Then just a final question in this block on age. So people are investing at all ages. A lot of times we hear about if you're younger in you're investing life, you should be putting more capital to work so that that will pay off in the future. What would you say to people who are just starting out, even if maybe they don't feel young, but they want to try to figure out the investment code?

Kevin O'Leary: I still say diversification across fixed income and equities. So the classic is a 60-40. So 60 per cent equity, 40 per cent fixed income. But during the zero interest rate days, I did move to 70-30. And that's served me well. And I don't consider interest rates today to be punitive at all because I remember rates at 16 per cent. So this to me feels very normal. It makes sense to always have a little diversification. But if you're going to get into fixed income, most people don't understand how these covenants work on a triple B bond, again an ETF is better. I actually read bond covenants. I'm a fixed-income guy. They are very complicated. And if you don't have that training don't try. 

Jon Erlichman: To remind our audience, if TikTok is for sale and there's a lot of buzz around that right now, you have raised your hand. What do you make of the situation around TikTok right now?

Kevin O'Leary:  I'm very close to it. I spent a lot of time on Capitol Hill talking to both sides. This is going to be the first deal in history where you need the pen of the president, whoever that person will be, post-November to actually get the deal done. You're going to have to embed the DOD, Department of Defense, to scrutinize whether or not the supreme leader is getting any data out of the new TikTok. 

But my advantage on this deal that I've pointed out, because it's going to cost around $30 billion cash that's sort of the number of people throwing around. There's seven million U.S. businesses on that platform generating $11.1 billion of revenue. They're all shark tankers. They're all in their 20s and 30s. Two generations of Shark Tank. They all know who I am. I'm going to create the largest equity crowdfunding deal in U.S. history. I think I can raise between $5 and $7 billion from that base alone. 

So it's a very interesting deal. There's lots of competition, but in the end, you're going to have to attract sovereign wealth. I think my plan is the best one, and I think my ability to execute it is the best. I'm talking my own book when I say that. But TikTok, even though the company will challenge the decision Congress made, will not win because it's an issue of national defence (and) national security. So the judges at the Supreme Court are going to err on the side of Congress. They should run a parallel process. They haven't started yet. I'm going to be a buyer. I will be the buyer, I think. 

Jon Erlichman: On the political front, we've got a U.S. presidential election coming. What are you watching heading into the fall?

Kevin O'Leary:  So the reason you should care, I know it's a little perverse right now with the porn star wars going on in New York, it's unusual not to have policy debates. We don't have them yet. We're just hearing all this crazy stuff in New York. 

But if you look at the polls right now it's a 50-50. You can't really call who's going to be president. But if you have a 50 per cent chance, what sector of the U.S. economy would you go long (in) if you thought Trump, that administration came in? 

Now that administration is pro-energy, it's deregulatory. It's tightening on immigration and border security. So these are all the elements. But the one I find most interesting is if you know, you're going to get a more pro-business environment around the regulatory area of federal law. It's the Russell 2000 Index that’s give you the best bang for the buck. Now unfortunately two-thirds of the Russell 2000 doesn't make money. So there's only about 380 companies you really care about. You will find them encapsulated in an ETF called OUSM. Full disclosure I helped design that, then it was sold to ALPS. So they they own that now. But we still index for it. It's all of the profitable companies in the Russell 2000. So it pays out a distribution every month and you get better policy domestically. They're not worried about international sales. They're domestic U.S. companies. I'm very bullish on what happens to those mid-cap companies.