Motley Fool Hidden Gems Investing - Focus on (Tangible) Value

Episode Date: January 21, 2025

Over the weekend, a Trump-backed memecoin was, for a moment, worth over $10 billion. For another moment, TikTok was banned; then it wasn’t. When so much is in flux and anything can go to the moon, how do you figure out what actually matters? (00:14) Anthony Schiavone and Mary Long discuss: - Separating signal from noise in an attention economy. - Finding value in a fast-changing world. - Earnings from a company that straddles the digital and the physical. Then, (16:02), Robert Brokamp and Alison Southwick talk about how to build a comfortable income cushion for your retirement. Check out the Nick Maggiulli article mentioned here: https://ofdollarsanddata.com/the-new-currency-is-attention/ Companies mentioned: PLD, $TRUMP, $MELANIA Host: Mary Long Guests: Anthony Schiavone, Robert “Bro” Brokamp, Alison Southwick Producer: Dylan Lewis Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Can we have your attention? You're listening to Motley Fool Money. I'm Mary Long, joined today by Anthony Chavone. Ant, always great to see you. Thanks for coming on the show this morning. Thanks for having me. We're coming off a cold three-day weekend, talking beforehand. Do you get up to anything? I gave you a little bit of time to think of something fun. Did it come back to you? Yeah, I actually went to a concert on Friday with my girlfriend, so it was a good time. Nice, nice. Good concert. Any music recommendations for the listeners? Well, it's country music, so I don't know if the viewers or listeners, I should say, would like that, but it was a good time.

Good. Glad to hear it was a good time. We closed out the weekend with lots of big news. Perhaps the biggest story is that Americans have a new but also old president, Donald Trump, once the 45th president of the United States, now also the 47th. After being inaugurated yesterday, Trump signed a flurry of executive orders into action, about 200 of these total, and they impact areas from immigration to energy to remote work to tech. We'll dive into some of the specifics, just to name a few, because of course there are many. Enforcement of the TikTok ban will be paused for the next 75 days. Federal workers must return to the office five days a week. Trump declared

emergency measures in the energy sector broadly and also on the southern border specifically. Tariffs, which had been really hyped leading up to yesterday, did not wind up getting as much attention as expected at the moment. Again, all told, about 200 measures that were signed yesterday. And I think it's kind of important to miss this in a lot of the headlines, but this was kind of done in a way that was a live sign-a-thon slash press conference as well. Trump not only signed executive orders into action in the Oval Office, but also partially at Capital One Arena before cheering supporters. So this is government, but it's also kind of entertainment. And I think that that's important to notice because you have these political moves that

are being made that have impacts that will roll across many industries, impact lots of people, but you've also got a lot of fanfare wrapped up in this. And as investors, that's important to point out because part of our job is to separate signal from noise, to adjust our radars, to focus on what really matters. So Ant, there's a lot of headlines out yesterday and today. The S&P is kind of up slightly, but for the most part, the market's not really reacting to a lot of these measures quite yet. As an investor, are there any of these stories that you are paying particularly close attention to? Yeah, Barry, I think you mentioned two of the most important things for individual stock pickers to understand. And that's one,

separating signal from noise, and two, focusing on what really matters. And so when I think about these executive orders, really regardless of who's president, I think a lot of it is noise. You know, an example of that is, you know, the energy sector was one of the worst performing sectors during Trump's first term. And it was one of the better performing sectors under Biden's term, even though their policies wouldn't necessarily indicate that. So as long-term investors, the quality of the management team and the quality of the underlying business is ultimately what is going to drive returns over the longer term. But with that being said, I think an interesting story, stick with the energy theme, is Trump declaring the emergency

measures for the energy sector. As Trump said, he wants to drill, baby, drill. But at the same time, A lot of energy companies have made it clear to investors that they are prioritizing returning cash to shareholders through dividends and buybacks rather than investing in new exploration or production projects. So moving forward, I think it's going to be kind of interesting to see how this plays out and if energy companies remain disciplined on the production front. Another very obviously financial industry that's likely to be impacted by the new administration is crypto.

You saw Bitcoin pass $109,000 yesterday. It's now closer to about $105,000. But ahead of the inauguration, again, another flurry of news. Trump released two meme coins, one named after himself, that's dollar sign Trump, and another named after the first lady, dollar sign Melania. These are meme coins. That's not a value statement or a judgment statement. The official website for these coins is literally gettrumpmemes.com. The Trump coins shot from $10 to $70, essentially overnight. It reached a total value of $5.5 billion within a few hours of launch. It then lost some of that value when Melania coin came onto the scene the eve of the inauguration. We were talking a bit before the show, Ant, you're a value investor. So you mentioned to me that

you've never really been too much into this crypto stuff. Do you watch any of these developments? Trump has called himself the crypto president. So we've got this more crypto friendly administration coming into office. There's stories right before the inauguration of these meme coins going to the moon and making plenty of people, Donald Trump himself, but also other individuals rich in the process. Does any part of you watch this and think, I'm not really that into crypto, but hey, maybe I should consider carving out some space in my portfolio for this stuff? Yeah, well, honestly, from a psychological standpoint, when I see like a 15-year-old making thousands of dollars on meme coins in just a couple of hours, I do start to wonder, what am

I missing? Is this value approach that I'm taking, is that still working? So I think that's a natural human thought during times like this. But the other side of that is, as an individual investor, I think it's important to know yourself. I think it's probably one of the first things you should do before making an investment is just know your own biases or your ultimate goal of investing. And for me, I know that I don't know anything about how crypto works. The more I try to learn, the more confused I get. So I guess you could say crypto for me kind of falls into the too hard pile, as Warren Buffett would say.

There's so many securities and stocks out there that you can make a lot of money through, but by owning businesses that you understand. And for me, crypto is not one of those things. So I'm not carving out any space in my portfolio. you. But I'm not saying that that's right or wrong for investors. It's just not necessarily right for me. I'm going to get a little philosophical for a moment. I promise it'll all come back to investing. But in an attempt to try to bring these stories, the executive orders that we saw signed yesterday, the meme coins going to the moon, and even the TikTok

back and forth that's played out over the past few days and weeks, the common theme that I see through all of this is that we live in a world in which your attention is everything. Kyla Scanlon, who's an economy commentator, has written really intelligently about this, not just over the past few days, but over the past several months. And I shared a Nick Majuli article with you earlier this morning because he had an essay that kind of hit on this common thread of attention being everything as well. Rather than summarizing him, I'm just going to quote him directly. He says, quote, my only recommendation is to stay the course and focus on the things that create actual value for people. What skills generate value today and what skills will generate value in the future?

That is what matters. Though the game is changing, I believe that value creation will beat attention chasing in the long run. It might not seem that way right now because we are in an extended bull market in crypto and for assets in general. But when things turn south, value will win out. It always does. That's the end of the quote. it sounds like based on your earlier crypto comments that you and Nick are in similar camps. We're going to get to more of this value-based stuff later on in the show, actually talk about

some companies. But first, I want to turn Nick's question to you. What do you think creates value today and will continue to create value in the future? And take this however you want. It can be a skill, company, fill in the blank. Yeah. So from an investment or business perspective, I think companies that serve a real, tangible economic need, they will continue to create value in the future. So I think of things like real estate and food. Who doesn't want to live, work, and plant a nice building? Who doesn't want access to quality, affordable food? Will those things ever change?

I don't think so. So I have a high degree of certainty that those evergreen themes will continue creating value far into the future, more so than something like a mean coin. Again, kind of bringing our talk back to the beginning, focusing on what really matters is important. And as far as skills go, I think being able to hold a conversation and be personable is going to be a huge differentiator and value creator moving forward. We spend so much time in the digital world, whether it's on our phones or working remotely, that just being personable is going to be a required skill, I think, moving forward. Just having that knowledge advantage or credentials might not be enough anymore as things like artificial intelligence shrink the knowledge gap between people. So as someone in their 20s, that's something that I'm trying to improve upon personally as well because I think that's a really important skill to have. And so with that, let's turn our attention to a company that does seem to be creating some value, which also pretty fittingly happens to be in that physical real estate space that even you just mentioned there. And we're going to talk about Prologis, a REIT that released their fourth quarter earnings this morning. And when I reached out to you about being on today's show, you said, yeah, you always love talking about Prologis. For listeners who are unfamiliar, give us a quick refresher. What exactly does Prologis do?

At a high level, I like to think of Prologis as the toll taker in the world of global commerce. That's the way that Hamid Magadan, the CEO, explained how he views his company. So Prologis, they are one of the world's largest owners of warehouses in the world with 1.2 billion square feet of real estate in about 20 countries. And essentially, Prologis makes money by selling space to other businesses. So like Amazon is Prologis' largest tenant, for example. And to me, as long as humans are on Earth, I think space is going to be in demand. So I think it's a business that has some staying power. So it's a very simple business.

It's a very important business that essentially facilitates global trade and is essential to e-commerce. They're essential in e-commerce, but Prologis is also trying to break a bit more into the data center space. In early December, they sold a Chicago-based data center development to HMC Capital, but they've got plans to develop about 20 new data center projects and are putting $7 billion towards that investment over the next four years. Two-part question for you here. One, why does the data center business make sense for Prologis if their focus is e-commerce? And two, what are you watching

to measure Prologis' success in this area moving forward? So I think the data center business makes sense for Prologis because one of the neat aspects about owning a warehouse is that it's so simple. It's simply a concrete slab on the ground, four walls and a roof. So warehouses can easily be converted into other property types like data centers in this case. And with Prologis specifically, there's a few reasons why they are a good data center partner. One is that they own 1.2 billion square feet of warehouse space that they can convert into

data centers. They also have a massive land bank that can be worth more than $40 billion once it's built out. So that's a huge advantage, just having that space already ready to go. They also have the most scale and the lowest and best access to capital in the REIT industry, you know, so they can afford to build out these expensive data centers, which can cost hundreds of millions of dollars, you know, in some cases. And then third, energy is really important for data centers.

And, you know, Prologis already has an energy team in place because they're already one of the largest owners of rooftop solar. So I think it's just kind of a natural adjacency to Prologis' warehouse business. But it's also important to note that Prologis doesn't necessarily plan on owning these data centers for the long term, at least as of now. But right now, they're mostly simply developing these data centers and then selling them to other property owners, like you mentioned before. As far as what to watch for to measure their success, I would watch, one, how much money

they're deploying towards data center development. And then two, how many gigawatts of data center capacity they're developing. They plan to spend between $7 and $8 billion in the next five years to build out roughly three gigawatts of data center capacity. But on the earnings call, management actually mentioned that they can develop 10 gigawatts of the next 10 years. So to me, that kind of seems like the data center development is going better than expected and maybe even accelerating.

So you've got the data center development perhaps going better than expected. One of the closely watched metrics on today's call was that of occupancy. After several quarters of declining occupancy, Prologis went into this earnings call guiding for 96% to 96.5% occupancy. They didn't meet that. Average occupancy among Prologis-owned and managed buildings was 95.6%. Might sound like we're splitting hairs here, Ant, but why the continued decline in occupancy when there were a lot of other strong points that Prologis put out this morning?

Yeah, I mean, it still is strong occupancy. I mean, 95.6% compared to 10, 15 years ago. I think it's still higher than then. So we know it has come down. Still good occupancy. But I think the reason why it's coming down is really just simply because of supply and demand. I mean, we saw a huge increase in demand during the pandemic for industrial real estate because everybody was buying their goods online. So that led to massive rent growth.

And then that rent growth ultimately led to more supply as developers chased those high returns. So now that demand is a bit more normalized, specifically in Prologis' Southern California market, we're starting to see occupancy come down. But importantly, since Prologis is providing a better value to their tenants, their occupancy rate is actually higher than national average. So I think that's a key fact to focus on as well. At the same time that you've got this ever so slightly declining occupancy, you've also got earnings per share of $1.37. That's an increase of over 100% from the previous quarter. How do both of those things be true at the same time? How is it that you've got earnings per share increasing, you've got core FFO increasing, and yet you've also got this declining occupancy that we just talked about? So leases for warehouses typically run anywhere from three to seven years, roughly speaking. And remember that we had that massive rent growth during the pandemic. So leases that were signed five-plus years ago are significantly discounted to the current market rental rate. So as those

leases eventually expire, Perlages is able to mark those below-market rents to market prices. and that led to, I think it was 40% cash rent growth for Prologis this quarter. So that's really the driving factor in why Prologis is still able to grow their cash flows despite a decline in occupancy because they've built up all this rent growth over the last couple of years

because of that massive rent growth and just the time it takes for those leases to expire. That's a good place to end it. Anthony Chabon, thank you so much for the time this morning and for helping us to highlight some things of value in companies, but also just as we think about skills and how to create value moving forward.

Always appreciate having you on. Thanks, Mary. Thanks for having me. How do you stuff a cushion? An income cushion, that is. Up next, Robert Brokamp and Allison Southwick talk about how to build a solid safety net during retirement.

Historically, investing in the stock market has been one of the best ways to build long-term wealth, but that reward doesn't come without risk. According to Ben Carlson of Ritholtz Wealth Management, since 1928, the stock market has experienced a 10% decline in 64% of years, a 15% decline in 40% of years, and a 20% decline in more than 26% of years. If that was a lot of percentages to comprehend, the headline is the stock market doesn't always go up and to the right, womp, womp. Now, so far this century, it has plummeted more than 50% twice during the dot-com crash, which was 2000 to 2002, and the Great Recession, which I think we can all admit was really not that great, from 2007 to 2009. The price of the S&P

500 didn't exceed its year 2000 peak for good until 2013. If you're still working and saving for retirement, you can hopefully ride out the downturns in the stock market. You may even benefit since your retirement account contributions will buy stocks at cheaper prices. But it's a different story when you're retired. Your portfolio is your paycheck, and you need to build in some safety to offset the volatility. Yes, and one way to do that is by creating an income cushion, a five-year's worth of portfolio-provided income that is kept out of the stock market and invested in cash and bonds. Why five years? Well, historically speaking, it's a timeframe over which the stock market has been very likely to produce a positive return, but not always.

Again, since 1928, U.S. large-cap stocks are profitable in 73% of calendar years, 83% of three-year holding periods, 88% of five-year holding periods, and 94% of 10-year holding periods. But just because stocks produce positive gains doesn't necessarily mean they outperform cash and bonds. In the sixth edition of the classic book Stocks for the Long Run, Jeremy Siegel provided data on how often stocks outperform bonds and treasury bills, which are essentially cash, over different holding periods since 1802. Over a one-year holding period, stocks outperform bonds 60% of the time, five years, 69% of the time, and 10 years, 74% of the time. The percentages are maybe one to three percentage points higher

for when you compare the performance of stocks to cash. But the bottom line is that the shorter your timeframe, the more you should play it safe with your money. An income cushion of five years is our standard practice, but when should someone have a larger or even smaller cushion, more like a throw cushion? Well, you definitely should adjust for your own circumstances and your risk tolerance. Some financial planning experts recommend that retirees should play it safe with money they need in the next decade, or they might even create a bond or tips ladder of 30 years, tips being treasury inflation protected securities. On the other hand, retirees who are comfortable with risk, perhaps have high levels of non-portfolio sources of income, things like

social security, maybe a pension, a business, they might choose a smaller cushion, especially if their essential expenses are covered by those other sources, and they're really just using their portfolio to cover discretionary or fund expenses. In the end, the right asset allocation for you really is unique to you. Okay, so it starts with deciding how big of a cushion is right for your situation, then what do you do? Well, here's some steps to stuffing a comfortable cushion, and we're going to assume it's for five years. Number one, you start with the amount of income you'll need in your first year of retirement or this year if you're already retired. Number two, you subtract income you'll receive from non-portfolio sources like Social Security or

pension, and that determines the shortfall that must come from your investments. Step three is you project income needed and received for the subsequent four years, making adjustments for inflation, determine the future shortfalls, and then number four, add up the total amount that you'll need from your portfolio for the next five years and invest that much in cash and or bonds. Let's look at an example of someone who needs $75,000 in the first year of retirement. Let's just say she will receive $15,000 from a pension that does not adjust for inflation, like many corporate pensions don't, and $25,000 from Social Security, which of course does adjust for inflation. So you subtract the pension and the Social Security from $75,000 of income that she needs,

and you get $35,000, and that's how much she needs from her portfolio in the first year. But we're going to assume that her income needs and her Social Security benefit are going to grow at a rate of inflation of 3%, but again, her pension is fixed. So you have to put all this in a spreadsheet and grow it out. So in that first year of income, it's $75,000, but year two, it's $77,250, and it grows all the way to year five. Inflation will inflate that to $84,413. Pension stays the same. Social Security, again, starting out at $25,000, but by year five, she's getting $28,138. Again, you take the income, you subtract the sources, and you get a shortfall for each year. You add up all those shortfalls. In this case, that total is $190,457. That's how much

that should get stuffed into the income cushion. Let's say I've picked out the most perfectly sized, tufted and embroidered income cushion. Now, what should I consider to actually invest it? These are interesting times for fixed income investments. Since the Federal Reserve began cutting rates last September, the yields on Treasuries with maturities of two years or less have gone down, but to different degrees. Meanwhile, the yields on longer-term Treasuries have gone up. The result is that in some cases, cash in really short-term bonds are yielding more than intermediate-term bonds, which really isn't normally the case. Once you get to bonds that mature in maybe 10 years or longer, you do get some extra yield, but not very much. So I think

nowadays it makes sense to lean toward high-yield savings accounts, money markets, and treasury bills for a good part of your income cushion. Maybe throw in some short to intermediate-term bonds and CDs for the money you need in years three to five of your income cushion. All right. So you've created your cushion. You spend it down as you pay your bills. And a year later, it's now a slightly smushed four-year cushion. What do I do now to sort of fluff it back up? Well, of course, you refill it. And once again, you go through that process of projecting how much you'll need over the next five years and protecting that money. That spreadsheet you used to first calculate your cushion, well, you might as well save it because you're going to be using

it every year. Usually. When wouldn't you use it? Well, after a year when your portfolio has declined in value, maybe due to a bear market in stocks or bonds or both, as happened in 2022. In those years, ideally, what you will do is reduce your spending so that you can live off the remaining four-year cushion, as well as any interest or dividends that you get from your investments, until your portfolio recovers. Really, one of the best things you can do for the longevity of your nest egg is resist selling stocks when they're down as much as possible. It may not be completely possible. On average, it takes two to three years for stocks to recover after a bear market. And there are plenty of times when it took longer, including the two

bear markets in this century. The first two, they took about five years to recover. But if you have a well-diversified portfolio, ideally something has held up better than the overall stock market. And that may be what you consider selling while you wait for the rest of your stocks to get back to the previous prices. And then at that point, ideally, you restock your income cushion and build up those five years again. Okay, Bro, it's time for your final thoughts on creating a retirement income cushion, be it tufted, embroidered, freely throw, bolstered, or boxed. And yes, I Googled cushion design elements. Very nice. Very nice. Well, there are two main- I do my research here, bro. Two main things I would like to point out as we close out

here. First, in my view, the income cushion is the bare minimum you should have out of stocks when you're retired. You still need an emergency fund like everyone does. And I would say most Most other retirees should likely have some additional money in cash and bonds apart from the income cushion. In the episode a couple of weeks back, I mentioned that I looked at the average allocations for the target date funds offered by BlackRock, Fidelity, T. Rowe, Price and Vanguard. For the 2025 funds or the funds for retirees, the average allocation was 46% stocks, 54% bonds. It's likely too conservative for most Motley Fool money listeners. You all tend to be very comfortable with risk and investing in stocks, so perhaps the classic

60% stocks, 40% bond, balanced allocation. It might be a more appropriate starting point, but again, it really depends on your circumstances and your risk tolerance. Finally, don't wait until retirement to begin building your cushion. Once you're within five to 10 years of retirement, gradually accelerate your allocations to cash and bonds, which you can do by directing all or a portion of your future contributions to your 401 and IRA accounts to cash and bonds. Maybe stop reinvesting dividends from stocks and use that money to build up your holdings and cash bonds, and then rebalancing your portfolio once a year, moving some of your money from stocks to safer assets. That way, your cushion

will be nice and stuffed and ready on the day you stop working. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. For Anthony Chavone, Robert Brokamp, and Alison Southwick, I'm Mary Long. Thanks for listening. We'll see you tomorrow.