Motley Fool Hidden Gems Investing - Doomers vs. Dollar-Cost Averaging

Episode Date: October 21, 2024

When one of the big names on the market is calling for a collapse, what’s the average investor to do? Create a peace of mind hedge.    (00:22) Jason Moser and Dylan Lewis discuss: - Nassim Taleb���s recent calls for a market drop and why he’s focused on the U.S. dollar, domestic debt, and S&P 500 concentration.  - What investors can learn from someone focused on tail-risk hedging. - The peace of mind hedges investors can put in place for their own portfolios  (19:35) Asit Sharma and Mary Long discuss Sonos’s ongoing recovery after rushing to release an app before it was ready for prime time.  Visit our sponsor at www.landroverusa.com Companies discussed: AAPL, MSFT, NVDA, SONO Host: Dylan Lewis Guests: Jason Moser, Mary Long, Asit Sharma Producer: Mary Long Engineers: RIck Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis One of the most notable voices had something spooky for the market. What does it mean for investors? Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jason Moser. Jason, thanks for joining me. Jason Moser Dylan, happy to be here. Dylan Lewis Happy to have you. In particular, happy to have you break down some recent comments from Nassim Taleb. He had an interview with Bloomberg this month. The author of Black Swan had what I'm going to characterize as some Black Swan-y type comments for the market and for investors. I'm

going to kick us off with the attention grabber here, and I want to get your reaction. Quote, my focus would be more on being hedged against an eventual market collapse because we're more fragile than we were at probably any point in the last 20 years, if not, you know, 30 years. Jason, if your morning coffee didn't wake you up, I'm guessing that one might have, just a little bit. A little bit. A little bit. Yeah. I mean, listen, I think Taleb is a fascinating guy and clearly very intelligent, well-read, great writer. I think a lot of us have read a lot of his stuff. Now, with that said, I mean, he also strikes me as kind of a professional doomer, right? I mean, he's always kind of taking that glass half-empty perspective. So, I mean,

I'm not surprised to hear this. And I think for me, maybe it's an issue of semantics. I mean, when he's talking about like a market meltdown, I mean, I wonder, is he talking about a correction or is he talking about like everything is just going to hell in a handbasket? I don't know which. What I do know is if we go to zero, we have bigger problems than just, you know, our portfolios. So I kind of look beyond that and think, all right, well, then if he's talking more about some kind of a correction or even some kind of a major correction, that's a little bit of a different story right i mean that's not something that should scare people out of the markets and and so uh when i hear him talk about this stuff i think it's always interesting to understand kind of the

drivers behind behind his his ideas there why does he think this and and i think he raises some good points uh some of it uh is is related to uh the state of of the dollar currency right and uh and other parts of it are just related to the condition of the economy, inflation and things like that, valuations as well. Absolutely understand things like the state of the dollar and market valuations. I try to be a little bit more like the Tom and David Gardners of the world and take that glass half-full approach and look at these as potential opportunities instead. We'll maintain the optimistic point of view, but I think maybe zoom in on some some of the topics that Talib brought up as an opportunity to check in on some different things

that are maybe moving around or getting attention in the market. You mentioned the dollar, and that is something that he brought up in the interview, and something that we actually really don't talk about all that often, but was kind of interesting. One of his main points was that the U.S. has intervened in some geopolitical issues abroad and really used a lot of economically focused sanctions as part of those interventions, which has hurt global confidence in the U.S. as a pure reserve currency. Talib essentially saying there would be capital that would be coming into the dollar and into the U.S. stock market that otherwise is going elsewhere now because of that lack of confidence. Well, that probably is the case. And I think it's always important

to remember that when we look at things through that geopolitical lens, we have to remember a couple of things. Number one, that's a very complex issue. It's not always just, you know, one plus one equals two. And it's also always changing. I mean, particularly here in the U.S., our political landscape is ever changing. And it feels that way probably now more than I can recall in my lifetime. I definitely get the state of the dollar. I mean, when we start talking about the dollar and a weak dollar, for example, again, I mean, it can be a complex issue. But typically, when you see that dollar weaken, it's going to increase the cost of imported goods and services. We're going to see companies that rely on those imported materials, they can potentially

face higher costs because of that. That's going to affect margins. That's going to affect profitability. And you mentioned it, it can make U.S. assets seem a little bit less attractive to foreign investors. We don't see that incoming investment like we might otherwise. and ultimately it can absolutely then impact interest rate policy. You can see a state where maybe interest rates go a little bit higher in order to combat those costs, those inflationary costs. So, yeah, I get it. Now, I mean, that's not something that lasts forever, right? I mean, we could talk about this over the last 40 years. I mean, it ebbs and flows. But I definitely understand his perspective when it comes to the state of the dollar today.

One of the things that's interesting to me is he pointed to a specific reason why he feels like that confidence is waning. I think you could tell a similar story by simply just looking at the inflation picture for the United States and some people saying, you know what? This is an economy that's experienced a lot of inflation over the last couple of years. There's been a lot of dollars printed. It's only natural to want to be a little bit more interested in alternative stores of value for things that you're not transacting in but are trying to hold. and ideally have appreciate or not lose value. Yeah, and I think we're seeing that play out. For one example, I think,

look at the crypto space, for example. And I mean, I think long-time listeners know I'm not a big crypto guy. It's just not for me. I'm not sitting here and poo-pooing it. It's just, it's not something that I'm terribly interested in, but we've certainly seen a flight towards things like crypto.

And in one of the questions we've debated or at least deliberated over the last several years is kind of the role that crypto serves Is it a medium of exchange or is it a store of value? And I mean, we definitely have not seen it take off as the medium of exchange for the masses. I mean, it clearly can be used that way, but it's not something that most people do, right? It's just not something that most people really opt for.

We're starting to see it now really maybe make that argument for a store of value. I mean, it's hard to argue with the numbers, right? I mean, Bitcoin obviously has performed very well over the last several years. And once you weed out some of those pretenders in the crypto space, I mean, there is an argument to be made that it can be a store of value, at least here in the near term. You look at other options as stores of value. I mean, talk about precious metals, things like gold and silver. And obviously, those are considerations as well. All right.

I want to go over to one of his other major points of concern, and that is debt. specifically our debt relative to the GDP in the United States currently clocks in at 124%. It has been over 100% for the last decade. Historically, it has been below 100%. And the concern here is, if you have been following the story at all, you know that that debt load also comes with interest payments and servicing that debt, and that that may get unruly over time. Yeah, it absolutely can. I mean, it is. I think we could argue now that it is it is a bit out of control and you want to talk about politics i mean this is this has been a political football that's just been thrown back and forth

here over the last several years and i don't think it's going to stop anytime soon so it's absolutely it needs to be a focus uh for our our government um in whatever form here over the coming years and hopefully it will be um you know it kind of takes me back to something i remember at Fool Fest, right? We had that Fool Fest recently where we had all of our members join us for a great event here for a few days. And we had Morgan Housel spoke one day and he kind of brought up this point. He's talking about like when things get out of control, kind of seemingly out of control like they are now, you know, how do you get yourself from under that weight? And And oftentimes it really the answer is kind of simple. You grow your way out of it. Right.

And typically that's what we've done historically. Like when when that when those interest payments become so, so heavy, when it becomes such an issue. I mean, it's not something that we can't escape. I mean, think you probably need to see a little bit more fiscal responsibility on the government's part. But then you also have to look a little bit further down the road, look a little bit more long term and growing your way out of it is is an option. I mean, we've seen it historically in the past. It is something that can be done. Now, how exactly you do that, I guess that's another conversation entirely. But I think it's important for folks to know that, I mean, there is a light at the end of the tunnel. It may not seem that obvious right now, but it definitely just requires a little bit longer-term thinking.

It's the way that we would look at a business that is taking on debt with its own operations, right? If they're able to take that debt and bring it back at a higher rate, whether it be in top line or in shareholder returns, that's something we're happy to see. If you're concerned about that growth and what you're able to do with that debt, you're going to have more concerns about that piling debt load. Yeah, I think that's a terrific way to look at it. I wouldn't put it any differently. All right, keeping it on the investor side and thinking a little bit about the market

and companies, one of the other major concerns that he brought up is one that we have talked about quite a bit on the show. And that is that we are currently in a bit of a cloudy macroeconomic period. And the majority of market returns have been driven by relatively few companies. I think last I checked, Jason, 10 largest companies make up over 30% of the S&P 500. That is without recent precedent. That is high if you take the long view. And it's something that I think a lot of people have grown a little uncomfortable with. Well, and that's understandable. And it really, a lot of that, I think, is based on the excitement behind AI. But it's worth remembering. I mean, as you noted, I mean, those returns, a lot of those returns are being driven by a handful of

companies. And that handful of companies, they're the ones that are really making inroads on this AI narrative. And I mean, there's a lot that we don't know in regard to AI and exactly how it's going to impact us in our lives. I mean, I think we're starting to see at least some ideas there. But yeah, when you look at current valuations, I mean, I think the current S&P forward valuations around 24 times earnings, not crazy, definitely overvalued compared to historical norms. If you look at the period between January of 1971 to June of 2017, the S&P 500 PE averaged around 19.4 times. The median was around 17.7 times. So you compare that to what we're seeing this forward valuation around 24 times now. Yeah, that does seem a little up there. Now, I think something

to keep in mind too, though, as you noted, I mean, a lot of these returns are very concentrated within a handful of companies. That can be scary. By the same token, this could also be good or at least less bad, if you think about it in the sense that maybe these valuations, they might seem expensive today, but they might not be as far-reaching across the market, given that they're so concentrated. So, maybe that indicates there are pockets in the market where valuations are a little bit more reasonable. So, when we look at that overall picture today of the S&P 500. Yeah, that tells one story, but there are plenty of sort of sub-stories within that story. Since you brought up AI, Jason, Talib did mention AI is going to be a great investment,

but that it may not be the Microsoft, Amazon alphabets of the world that wind up being the true winners. And I think with respect to the everyday investor, they may not be able to participate in some of the major gains that we see. It's interesting to pair that perspective up with some of the moves that we've been seeing in the private markets recently with open AI and with perplexity. Right. And I think we saw the news perplexity talking about raising money here. It's somewhere in the neighborhood of a valuation, I think around 160 times sales based on the most recent financials that we've gotten regarding perplexity. And for those new to the game, yes, 160 times sales is quite expensive. Now, I think I would push back a little bit on

his perspective there regarding the big tech players in the space. And the main reason why, number one, you look at these companies, we're talking about Microsoft, Amazon, Alphabet, Apple, Tesla to a degree, Nvidia, of course. These are companies that have done a lot of stuff over the years. They've been very successful for a number of reasons, right? They're very successful for fundamental businesses that they've built through the years. I think the interesting part about these businesses as well is that not only are they making investments in themselves and their AI capabilities, but they also are making investments in those smaller companies within the AI opportunity that we, as public equity investors, wouldn't necessarily have the

opportunity to own. Perplexity is a good example. You and I, we can't go out there and just buy shares of perplexity today. It's not a publicly traded company. But we could go out and buy something like an NVIDIA. And an NVIDIA does have a private venture wing of the business that is making investments in a lot of these smaller companies and trying to participate in the opportunities that they are uncovering as well. And I mean, it's not just AI. I mean, we were talking recently about Chipotle and their little private venture wing of their business. They got $100 million that they put aside to invest in the restaurant space and how they see that segment moving forward. And absolutely, they are viewing AI as an opportunity in that segment as well. I

mean, they made an investment in a small little Mediterranean concept, but they also made an investment in an AI company that is assisting in supply chains, understanding the sourcing in the quality, in the supply of the, you know, ingredients that these restaurants need. So it really does span markets. It's not just these big tech companies. I think it's a really fascinating part of a lot of these larger, more successful companies that have a really long track record of doing well. Now they're kind of taking it to the next level and utilizing some of that capital that

they've been able to raise over the last several years, decades, and put that capital to use in this sort of newfangled AI opportunity. Earlier, you talked about how Taleb is a bit of a doomsayer. I think he might prefer the term someone who does some tail risk hedging. Part of his book of business is Universa Investments. They're a hedge fund that focuses heavily on having pretty good downside protection when things hit the fan and kind of having asymmetrical opportunities. that is a very different investing style than what we do here at The Fool and really what is

available to most retail investors. What would you ask or tell the average investor to do with this, knowing that when he speaks, the market tends to listen? Yeah, yeah. I mean, I think this is a good question. And I think you're right. I mean, he's playing a different game than we're playing, right? And I think it's always important for investors to understand what are your capabilities, what are your resources, and what kind of game ultimately you're playing. And I think most people who are listening to the show are pretty clear how we approach investing. We take that longer term view and look for companies that are just fundamentally succeeding. So we're not investors that are looking to take a lot of

action. We like to just park our money in great businesses and just let it go. But hedging is something I think a lot of people want to consider. In hedging, it takes many, many forms. So, I look at it like, for me personally, I'm not an active trader. I mean, I tend to just, I own a portfolio of a handful of companies. I probably have 34 different companies in my portfolios altogether. And then I own shares of an S&P index fund as well to kind of take advantage of that opportunity as well. So, for me, when I think about hedging, I mean, you can look at it a couple of different ways. One way investors can do it, if you're really spooked by market valuations, if you hear what Taleb's saying and you're thinking, oh, man,

I got to probably take a little something off the table here. There's nothing wrong with just going a little bit heavier in cash, right? I mean, you can always do that. And you have to understand that comes with a cost, right? I mean, if you look at the S&P 500 returns, historically, claiming, you're looking at around a 10% average annual return there. So the heavier you go in cash, the more you forego that opportunity. But if it helps you sleep at night, then there's something to be said for that too. Now, for me right now, I'm a little bit heavier in cash, but I say that with the disclaimer that I've got two girls in college. And so we're sort of trying to make sure we've got tuition locked down. And that's like we've said, you don't want to have

money in the market that you know you're going to need within the next three years. Well, I'm in position where I know I'm going to need this stuff for the next three years. So, I've got some of that cash locked down. If you exclude that, I'm not very cash heavy. But the way I like to look at hedging, more so for me, I feel better about this, is I just continue to dollar-cost average into that S&P index fund every time I get paid. I mean, I've got my paycheck that comes through, we've got a great retirement planner, The Motley Fool, that gives us a lot of options, and I just let that money automatically go into that S&P index fund every pay period, That's twice a month. And so that's dollar cost averaging just in its purest form.

And dollar cost averaging sounds boring. It is. That's kind of the point. But the beauty of it is, is it takes advantage of those opportunities. It ebbs and flows. Yeah, you're buying in some of those peaks, but you know what? You're also buying in some of those valleys, too. And it really does help smooth out that volatility. And it ensures that you are always investing. And I think that what we've seen is that just works. We've got the proof. We've got a business that's been built on this concept. It's been working for years.

And I know while it sounds boring, I'd like to say it. Oftentimes, the best course of action is simply inaction. I love that the remedy is the total opposite of black swan investing. Just be a lazy investor, Dylan. Just be lazy. You don't need to be right at a particular point in time if you're always putting money into the market. Well said.

Jason Moser, thanks for joining me today. Thank you. Coming up on the show, a loyal customer base is an asset until it's not. Up next, Motley Fool senior analyst Asit Sharma joins Mary Long to talk Sonos, the premium audio company that's still working to recover from a botched app rollout earlier this year. stop wasting your nights on a mattress that doesn't get you experience the most comfortable mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort choose firmer or softer adjust cooler to warmer and right now save up to 2500 during our massive labor day event hurry into your local sleep number store today because we have your

number. Asit, I'll be honest, this is not going to come as a surprise. I work for a podcast. I care about good audio, but I am not totally sold on dropping hundreds of dollars on the home speaker setup that Sonos sells. Yet you have called this a great company. So what is it that makes Sonos different from other players in this $100 billion audio market, many of which sell products at a much, shall we say, friendlier price. Yeah. To my chagrin, Mary, I grew up in an era where being an audiophile was a thing. And so I've sadly burned a lot of money on audio equipment my whole life. So this doesn't sound like too outre an idea to me, but let's talk about Sonos. I think with this small company, they have a lot of tech leadership, a lot of innovation. They have

a patent portfolio that has some 3,800 patents. Big players in the industry like Amazon, Alphabet, Apple, try to mimic or reverse engineer the sound quality that Sonos has achieved. They were a pioneer in a market that's now called sort of the smart speaker market, even though their products aren't associated with smart speakers. But the technology underlying that was something they pushed forward. So I think when you get these attributes together and you combine that with very sticky brand credentials, you can be what I, you know, if you said, I said, I probably did. You can be a great company. With their customer base, they have some very interesting statistics. About 60% of the base are repeat buyers. Folks usually buy another Sonos

product within three years of buying their first one. So they grow by selling more product to folks. I think that for me is, just to keep this brief, what makes this better than just a good company? It's that high quality sound plus that loyal customer base. Now, you're going to talk to me and we're going to talk about some challenges to that loyalty. Yeah, because loyalty is hard to earn and easy to lose. This May, Sonos rolled out a new app, an update to its app, and that rollout really infuriated this very loyal customer base. The list of problems with that rollout is long. Basically, sound drops in and out. Volume blasts high at random times, and then you can't readjust it. Devices that are linked to the app will oddly disappear. And you couldn't do basic

things like set a sleep alarm or a timer. So again, this infuriated this famously loyal customer base. Management has downgraded guidance and response, expects to lose, is it $20 million as a result of this? And the stock has lost a bunch of its value since then. How is Sonos trying to make this right? Yeah, we can figure out exactly how much they're going to lose or how much they pull back on their guidance later. It's a big number, right? I want to give you a bit of background on how Sonos got here, because it's sort of important to the rest of the story we'll talk about. Sonos had been a leader in the home market. They had these wonderful soundbars. the sound follows you from room to room for many years. And they bought a company called RHA in

2021 to help them break into the headphone market, which they had their eye on for a long time. One of the things Sonos has wanted to provide to the market for a long time is sort of a lossless Wi-Fi based headphone, which there are very few available. And at the price point that they're selling these at, I don't know, some 450 bucks, it's actually a pretty decent deal. But it was easier said than done. They started hinting about this headphone when they acquired RHA. 2021 turned into 2022, 2023. And late last year, the CEO, Patrick Spence, started saying to Wall Street, okay, we're going to roll this headphone out in 2024. And then I think it got delayed from a spring launch into a June launch. So this looked and looks on the surface like a classic case of

management saying, okay, we've made these promises to Wall Street and they've been out there for a while. We got to make this product roll, whether it's really ready or not. Now on the technical side of it, the headphones, I think they were ready. The problems, as you point out, had to do with Sonos' app, which wasn't ready to accommodate the headphone. And so they had so many problems. They could have just rolled this out in a beta and kept the current app as such. They failed to do that inexplicably. These previously loyal customers were just up in arms. At one point, I think Patrick Spence, who keeps an open email line, as some CEOs do, he had 30,000 emails coming in just from frustrated customers. What they're doing to make this right, first, Patrick Spence

went on an apology tour of sorts. He talked to home installers, who are a very important part this company. Sonos sells to affluent households and commercial installers recommend their product. That's a big part of their financial mojo. He talked to them. He talked to customers and put out a video apologizing for everything Sonos had messed up. They committed to a few things. Okay, so I'm going to read some of these big picture items. They are going to approach change with humility. They're appointing a quality ombudsperson. They're going to extend home speaker warranties for another year. So that's good. Okay. Relentless app improvement. Everyone knows this app is not up to speed, so they're going to work on it. And they're also

going to establish a customer advisory board. Now, as I read through that, it may occur to some listeners that some of this sounds obvious. Wouldn't you be investing in quality control in the first place? Not to say that they didn't, but with this particular part of the business, the all-important glue that ties all these products together, the app, they have under-invested consistently over the years. So you mentioned how pivotal these headphones are to Sonos and even to this app rollout and kind of how that played a role in things. Sonos did release its first set of headphones out this summer, the Sonos Ace. They can be yours for $449. For a company that's built out home audio and that's long teased the promise of this headphone product,

Why is breaking into the premium headphone market so exciting and something that Sonos wants so deeply? This is going to sound crazy after all the criticism for how bad their app was. But Mary, they wanted to do something that's insanely difficult. And they wanted to provide their customers with something they couldn't get elsewhere. So for them to be able to have ambition and prove it out, even though it's taken some time, I think in the long run is going to be a great move for Sonos. The reason they did it, why they wanted to break into this market, you'll probably read in the financial press that they

want to compete with the likes of Bose and Apple. And that's true in some other hi-fi headphone purveyors. But really, it's more about extending into their market. Because they have these repeat buyers who tend to be more affluent, it's a natural extension. If you love Sonos' products. If you love to listen to Sonos on your soundbar downstairs, upstairs, you're a ripe target market for a pair of headphones that will work theoretically seamlessly with a great app. So everything about this makes sense. It's not really a big jump into a lateral market for them. It just, with their business model, is the next logical progression or thing to sell to their high-end customers who tend to be audiophiles. This company's got a pretty strong balance sheet,

$470 million in cash, no debt. How would you like to see the management team put that capital to use? Don't touch that money. Don't touch it. I would like Sonos to just keep that cash pile as it is and to spend their resources on developing internal software, making that tech stack better, capitalizing it on the balance sheet and even not looking at their tech as an expenditure, but in the accounting world, just going balance sheet to balance sheet. So turning cash into internal product that will keep the app where it should be. I mean, it should be a seamless experience. And once upon a time it was. So I don't think they need to do any kinds of acquisitions. Now's the time to just keep that money there. And as they launch new products,

Okay, maybe you dip into that balance sheet a bit for some marketing purposes, and that goes on the P&L. But basically, don't worry about it. Now, this has come to a point where it's got to do right by customers, and it's got to keep focused on great products and making up for all the sort of badwill that's out there. How do you value a company like this? Because when you think about competitors, you've got Apple and Amazon. Okay, both of those companies are playing a lot of other games. They've got a lot of other irons in the fire as well. Currently, Sonos trades at a forward PE ratio of about 18, Apple and Amazon closer to 40. So if you look at a comparison basis, it looks less expensive, but is that the right way to look at this? It can be. So, basically, those companies, as big as they are, are valued in the marketplace at a higher premium because they're growing faster. And Sonos, as small as it is, has hit a roadblock. It had a sugar high from COVID, and then the housing market slowed. So, a core source of their revenue became a little bit of an obstacle. Now, the rapid product introduction cadence they want to do, which is two products a year, should help solve for that. But also just taking a look at their financial statements, this is a company that's sort of near break-even at a $1.6 billion sales level.

So if you're an investor, you want to look ahead three to five years because with their gross margins, which they're right now around 45%, they should push up to about 48% to 50%, which is just where you want to be as a manufacturer at the minimum. Well, they could really scale their profitability if they just added a little bit to the top line. So you can see just doing a little bit of back of the napkin math here, it wouldn't take a lot for Sonos to really be valued more in the marketplace. And there's no reason why a company like this also shouldn't be able to grow at at least a 10% to 15% cadence. And with their technology, with their experience, and dedicated sound engineers, I think they have a shot at doing that. But for me, you know, it just comes down to looking at that forward free cash flow, maybe, if you want looking at forward estimated earnings per share, if the company just grows a little bit, because actually, their financial position, as you mentioned, is quite clean, and they're very close to profitability. So it's sort of, I think, a favorable setup if you believe that the customers are going to come back and they haven't been driven away permanently. Asit, thanks so much for taking a look at this company with us and keeping an eye on how Sonos can climb back up the slide that it's since run down. Thanks a lot, Mary. This was a lot of fun. As always, people on the program may own stocks

mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.