Motley Fool Hidden Gems Investing - Getting Kids to Invest

Episode Date: December 6, 2022

You might not expect to find a multi-bagger stock in aftermarket automotive parts. But, that's exactly what one retailer has accomplished. (0:44) Deidre Woollard and Jim Gillies discuss: - Europe's energy crunch, and why Russia isn't playing along with price caps. - Investing in economic cycles as a contrarian. - Why AutoZone is "one of the best managed companies and capital allocation stories." Plus, (17:31) Motley Fool Contributor Brian Withers joins Alison Southwick and Robert Brokamp to discuss how to encourage kids to invest when time is on their side. Companies mentioned: AZO, DIS, CMG Holiday Music: Disco Christmas by Universal Robot Host: Deidre Woollard Guests: Jim Gillies, Alison Southwick, Robert Brokamp, Brian Withers Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Deidre Bullard. Europe's got an energy crunch and AutoZone keeps driving along. You're listening to Motley Fool Money. Welcome to Motley Fool Money. Today, we're looking at the impact of energy prices as cold weather gets real here in North America. We're checking out more retail results and we'll be talking about kids and money. I'm Deidre Bullard sitting in for Chris Hill and I'm joined by Motley Fool Senior Analyst, Jim Gillies. Hi, Jim. How are you doing? I'm doing all right. I'm a little bundled up today. I know you are probably a lot more bundled up than I am because you live in Guelph, Ontario, Canada, where I don't think it's very

warm right now. We're getting close to winter. Energy is a huge problem this year. How bad could it get and what areas are you looking at? We're not that cold up here. Unfortunately, Ontario is pretty much all natural gas-fired housing plus a lot of energy. It's all very natural gas or nuclear. We actually live in a pretty decent area for energy, but that is not energy pricing. That's not the case for a large part of America and Europe, even Canada for that matter. My approach to energy is basically this. There's a certain amount of demand worldwide for energy of all sorts. We're talking about heating, we're talking about electrical power, we're talking about driving your car, but there's a certain rather large number that represents

the amount of aggregate demand. That number is growing just shy of about 2% annually, and it has for the last seven decades or something like that. It's probable that that trend will probably continue for the foreseeable future as much as we want to get on efficiency, and I think that's a great thing. As a former environmental engineer, a big fan of energy efficiency, I think it's driven as well by the move to renewables and the move to more sustainable energy sources than just burning hydrocarbons. I think I'm a big fan of that. I've got solar panels on my roof. When they work, they're great. But that giant bowl that we need to fill every year is growing by about 2% a year. The portion of that bowl that's been filled by fossil fuels,

the big three fossil fuels, coal, oil, and gas, tends to run between 75% and 80%. It's about 77%, I think. Let's say 75% to 80%. That amount has not been changed for the better part of my lifetime, the last four decades plus. We can say, oh, cold weather might pretend higher heating bills or higher energy bills or higher cost of gasoline, although it's coming down. I kind of step back and go like, one hot summer where everyone's running their AC, one cold winter. That doesn't change what I kind of look as the bigger drivers here. And the bigger driver is gradually 2% of your expanding bowl that you have to fill. Heretofore, we fill it mostly with fossil fuels. While I'd love to see that change, and I think it's important to drive as much

change as possible towards the renewable side of things or even towards the nuclear side of things, my investing dollars, the present value of an investing dollar does tend to be more focused on what's working now and what will probably be working for the foreseeable read less than the next decade foreseeable future, and that does tend to be oil and gas plays for me. Especially when you're looking at a lot of the oil and gas plays today, after a lot of them lived a little, shall we say, liberally in the last oil boom when oil got up to about $100, average around $100 from 2012 to 2014. Those companies didn't make a lot of money because they were spending it all over the place and paying big dividends and living on company

credit cards. Oil fell, those companies got destroyed, and they're now coming back and they're living within their means more now. They're really focused on shareholder returns, so dividends, share buybacks, living within their means in terms of cash flow, they're not willy-nilly borrowing. I know it's not very popular, it's certainly not where I thought I'd be as an environmental engineer. From an investing perspective, I like the oil and gas plays, with some nuclear stuff. But oil and gas plays are for me, if I can get a 5% yield, and I know you're going to probably buy in between 5% to 10% of your stock or your shares this year, and you're going to make a lot of money with basically oil prices above $55,

that's that's kind of where i'm putting my money well that makes sense because what you talked about how long this cycle is it's it's exciting to have renewables we want to have more renewables it's where things are going but as you pointed out it's not where things are at right now and this year especially we're facing this you know the geopolitical concerns have been dramatic we've got, you know, last week, the EU agreed to cap the Russian seaborne prices at $60. And so, that's led to all of this concern about, is this process going to work? Are they instead just going to go to China, India, anyone else, and sell their oil there? There have been some tanker problems happening. This is all short-term stuff, but is it anything that we should keep an eye on?

i i do like uh i do like how it was worded the eu agreed to cap russian uh russian seaborne oil prices did russia agree to this cap um not so much no not so much i and i and i think that's always kind of where i come down on these things is uh you know if you foist something upon a person if you foist something upon a country or a company or whatever um you should expect they're going to work around it. It's probably a terrible analogy, but if there's a specific type of tax that's leveled upon you as a citizen, regardless of some sort of income tax, or they change the tax bracket where the higher income tax bracket might apply, what's going to happen to the people upon whom that tax is expected to fall? Well, those people are going to start shifting money

around to try to report lower taxable earnings or take advantage of tax shelters. They're going to react, and so such taxes, when they come in, never quite raise the tax revenue that they initially thought they're going to do. I look at this going, okay, so we've got this price cap on seaborne Russian oil that is $60 a barrel. I did see that Ural crude, so the Russian oil price, it was like $70 a barrel two weeks ago, and it was about $80 a barrel a month ago. Now, it's barely over $60. Certainly, the pricing market seems to think that, oh, yeah, okay, great, it's going to be $60. Yeah, if I'm Russia, I'm just selling. Okay, fine, screw you to the EU. I'm just like, I'm going to China and India. And to the degree that the West

and Europe can put pressure on China and India to not buy, I suppose that could hurt Russia a bit. This sounds horribly cynical and I'm sorry for that, but I think most countries, most people are going to act in their own self-interest pretty much all of the time. You've just imposed this upon Russia, they're going to act in their own self-interest, which means picking up the phone and calling clients in China and India. I don't have to like it, but I think it probably does flow in the direction, no pun intended, that you suggested. Well, let's take your contrarian point of view to retail. We had two very different companies reporting earnings today, and both did really well. We had AutoZone and we had

Cigna Jewelers. Different companies, but definitely specialty retailers. Let's start out with AutoZone. Good quarter for them. Net sales of $4 billion. They're the same store still, you always got to look at that for retail, that's up 5.6%. In the short-term, it seems like AutoZone great for the recession, people repairing their cars or cars staying on the road longer. Is this a long-term play? I think AutoZone has been one of the great long-term plays for the past couple of decades. I've never owned a share, which more fool me, I suppose. I think AutoZone has been probably one of the best managed companies and one of the best capital allocation strategies in the past few decades. Because what do they do? They basically

have a market space that not a lot of people come into or are going to be chasing them down. Their distribution network is already a prohibitive, I think, competitive advantage for potential interlopers. I think there's probably some argument that the rise of electric vehicles, if it does play out the way certain people think it'll play out, probably could be a bit of a detractor to AutoZone's business because a lot of the parts that we replace on our internal combustion engine vehicles, a lot of those maintenance items may migrate away, or cars with regenerative braking, so you're not slamming on the brakes a lot as much because you're using the car's natural regenerative braking to slow yourself down, might extend,

say, the life of your brake pads and your brake rotors and whatever. Maybe you replace them less, and if you replace them less, it weighs on AutoZone or competitors like O'Reilly. You probably still use the same amount of windshield wiper blades, but I think that that this company has been, and probably for the foreseeable future, probably continues doing what it's been doing. It's taken over. It's a saying I got from our colleague, Bill Mann, and I think it's a really good one. Companies that take over mountains no one else know they want until it's almost impossible to dislodge them. AutoZone is one of, I'll argue, is a duopoly in the auto parts space, replacement parts, accessories, that sort of thing

with O'Reilly. As a result, they have a distribution network second to none, and they can leverage this whole thing to make a great amount of cash. Then what do they do with that cash? I'm a cash flow-based investor, probably a little too obsessively, to be honest with you, but it is what it is. The amount of cash that they have generated has led them to buy back, just relentlessly buying back their own stock. When they've done what they've done, relentlessly buying back their own stock, it ratchets. I think the market cap today is about $45 billion, $47 billion. I think over the past, I'd have to go look up the number of years, but since they started being very aggressive with the buybacks, I think, here it is, since 1998,

so just over two decades. Again, $45 billion market cap today, roughly $47 billion. They bought back $31 billion worth of stocks. They bought back almost their entire self. And what that's done is it's taken the share count from back in the day, it's gone from the share count from like 150 million shares, I think. Yeah, like in 1998, there was 152 million shares outstanding. Today, there's 19 million shares outstanding. They've just been eating themselves. And then you go look at, okay, well, what's that done to the share price? Because as a company buys back its own stock, if you're not selling, you own a greater proportionate amount of the company because you didn't sell while the company bought in and took it out. Just

over the past decade, looking at the last 10 years, it's gone from $360 a share ballpark to $2,500 a share. Just by doing nothing and letting this company generate cash and then return that cash back to you in the form of very aggressive share buybacks, you've got what, an eight-bagger? It's not a very exciting story. Cybersecurity is much more exciting, e-commerce, a much more exciting story. But it's these quiet little non-exciting stories, these stories where, again, it's essentially, I took over a mountain no one else knew they wanted, and I've treated myself to 21% annualized return, which is roughly what AutoZone has given you over the past decade. I'm not very exciting myself, so I try to avoid the really exciting investing

stories. Again, it's remarkable to me, I've never owned a share of AutoZone, even though I respect the hell out of them. You're plenty exciting. Oh, I am not. Well, I think you talk about it being a quiet play, but I think it's also a visible play. I mean, if you're driving around, you see them, there's thousands of stores all over. They're definitely visible. I want to talk about one more that's visible, probably not your area of interest, but Signet Jewelers, they also reported. Parent company of Zales, Jared, Kay Jewelers, they also recently bought Blue Nile. So, they've kind of got a lock on consumer jewelry. And, you know, we're headed

into a recession potentially. It's inflation's high. You might think this is a bad time to be them, and it hasn't been. They had a great quarter. They raised their forecast. What is happening here? The consumer discretionary seems to be doing a lot better than I would have thought. Can I be contrarian? Oh, please. I'm not sure we're heading into a recession. Yeah, I'm not so sure either, but everybody likes to talk about it. Well, that's just it, right? Everyone likes to talk about it. If there is a recession coming, and there might be, but I think it's kind of primed to be fairly mild. And my evidence I'll cite against that is, again, the unemployment numbers don't say recession. Yes, a lot of the

big tech companies are doing some layoffs, but the more blue-collar companies are, as of yet, not following along. Then the other pieces of evidence I would point to is, have you tried to travel recently? Boy, people are spending a lot of money to do practically anything. Then the third piece is just what you've just said here, the consumer discretionary, and certainly the wealthy haven't noticed any inflationary issue, but for those of us, shall we say, further down the socioeconomic ladder, there's a lot of spending going on, on consumer discretionary on jewelry on you know people are still playing with cars go to cost i just the pent-up demand i think from from the the pandemic from being you know largely shuttered

depending where you lived i suppose but you know having your options to go out and do things for much of 2020 and 2021 that demand has been unfettered and i think it's still running pretty hot and so because of that i i'm not sure we're into that much of a recession if if you're not that much of a recession, then companies like what's going on with Cigna and what have you, I think, make a little bit more sense. It doesn't mean I'm buying a lot of jewelry, but some people are. So, I kind of took your question about a specific company and kind of went off on a macro rant, but that's more, I'm kind of like, yeah, I'm not sure we're going to get the recession some people think we're going to get. And if that's the case, then I actually

think it portends fairly bullish things for stocks. I think it portends fairly bullish things for stocks that people may be thinking about a recession and thinking, okay, I should stay away from those stocks that are mostly discretionary. It seems like the contrarian view is maybe not. Well, I think that's a great place to end things. Thank you so much for your time. It's always a pleasure to talk to you, Jim. Thank you very much. want your kids to start investing then keep the conversation short motley fool contributor brian withers joins allison southwick and robert brokamp to discuss how he got his kids in the market and let that compound interest go to work last month brian you posted a thread on twitter

and it started, my kids will be millionaires by the time they are 40. Here's how. And the here's how wasn't because they will win the lottery or because a wealthy aunt is going to suffer a sudden tragic accident. Don't ask how you know that. The answer was because you introduced investing to your kids at a young age, which is an incredible gift to give someone you love. The younger, the better. So Brian, how did this happen? So, um, let's, let's jump in the way back machine back to 2004. Ooh, fancy music. Um, I was 37 years old. My kids were, were five and seven and I had just joined the Motley Fool. And, and at the time it was sort of just, I had this realization that it was, you know, investing was all about time in the market and not timing the

market. And I had been investing for about six years at that point. And this realization just hit me like a ton of bricks. And I was like, man, if I just realized this 10 years ago, 15 years ago, wait a minute, duh, I can give my kids a headstart that I didn't have. And in fact, I can give them about a 30-year headstart. And so that's when I committed that I was going to make this happen however I was going to try to make it happen. Now, your boys are now in their 20s, but you started when they were about five and seven. So what exactly did you do? Because while I'm sure your kids were very advanced, they probably weren't ready for a discounted cash flow and EBITDA. I don't know that we've ever done discounted cash flow with the kids,

but it all started with a piece of construction paper and a Buzz Lightyear figurine. It was something I called the pennies game. So I took one of these 11 by 17 pieces of construction paper and broke it into six squares or made it into six squares. And then I took a Buzz Lightyear figurine and put it on one of the squares. At the time, Pixar was a public company. And so that represented, that square essentially represented Pixar. I drew the golden arches for McDonald's. I took a Nintendo game cartridge they had for EA Sports. And I filled in the rest of the squares with other companies they were familiar with. And then I sat them around the little piece of construction paper and I gave them a set of pennies. And I said, invest each, you know,

as many pennies as you want into the companies that you think have the brightest future, the ones that you like the best. And they went ahead and they put their pennies down. And five minutes later they were off back to their game boy colors um you know playing uh one of their pokemon games they were it was sort of quick and done they were like okay whatever well we'll get back to having low expectations we'll revisit that in a little bit here but let's talk a little bit more then about okay so they put their pennies on the where they wanted to they allotted their little chits so to speak um then what did you do how did this how did this then work sort of the mechanics of the pennies game throughout the year. Yeah. So, um, for each penny, uh, it represented

a hundred dollars and I invested a hundred dollars into each of the companies that they had chosen on the, the, um, the piece of construction paper. And the next year I had them sort of more involved in the process about picking the companies that went onto the piece of construction paper. We did it just once a year. And part of the reason I did it once a year, so I could have enough money so that they could spread it out over a few companies. I always have a hard time just picking one stock if I can only invest in one stock today. So that allowed for multiple purchases. And the other piece that I did was I wanted to set them up for success. So I sort of picked from a vetted list of stock advisor buy recommendations so that I knew that these were sort of good

companies to start with. And then the last piece was I let them pick. I didn't influence their picks. And so that they knew that they were in charge of what they were investing in and how much. So what happened when your kids got older? Like how did the pennies game sort of evolve or how did the conversations change? Yeah. So after a few years, I actually shared their portfolio with them, and partially because I didn't want them already picking stocks that were already more than maybe 10% of their portfolio that they had. But as they got older and they got more savvy with computers, I set up a spreadsheet to split the money up between the stocks that they selected. And eventually, they set up the buy orders in their Fidelity

account to buy the stocks. We rarely sold, but if there was a decision that came up that we thought it was a good time to do it, we always involved the kids in the decision and they had the final word. And we did this once a year for about 12 years until the oldest started in college. And then we stopped funding the accounts. Now, in the past, I have tried to talk to my child about investing. She's nine now. And it made me feel a bit better that you had a similar experience with your kids, which of course, as we mentioned before, leads to the advice of have low expectations on how much time you're going to spend actually talking stocks. Yes. I remember when I brought up the time, it's time to do the pennies game again this summer. I would actually get eye rolls.

And it's like, no, don't make me do it. Like, seriously? So, you know, we did drag them through a few years. But, you know, I did share when good things happened, like there was a spiffy pop or one of their stocks has doubled over the period of time they had owned it. I think the key thing here is, like anything else, is to expose your kids to as many experiences as possible. And hopefully something clicks along the way. And I guess the other piece is don't really force it and meet them where they are. I've always tried to ask them about why they pick certain stocks, and I always get insightful answers. And I've seen some parents insist on an investing journal, but that would have never worked with my kids. No, I don't think mine either. You talk about

thinking about investing in like teachable moments. And I'm reminded of a well-worn story here at The Motley Fool of how our founders first fell in love with investing. They tell the story all the time. And basically they were with their dad at the grocery store and their dad pulled some chocolate pudding down from the shelf and said, you see this chocolate pudding? We own shares of the company that makes this chocolate pudding. So let's buy some chocolate pudding. And so from a young age, they made the connection that investing gets you something awesome like chocolate pudding. So what are some teachable moments that you've had with your kids about investing? Yeah, there was one story of the Gardners, I remember, where they had graduated from high

school and they were gifted some stocks, I think from their grandfather. And when they looked at this portfolio statement, they were amazed at the sort of super low cost basis. And then the value of the stocks was mostly all in gains. And I wanted that kind of experience for my kids. And so, you know, over this period of time, you know, we started when they were five and seven and like now they're in their 20s. Some of that did happen. And that was really cool. But I remember one specific time when Zach was in a Chipotle with me and he asked, how does Chipotle make money? And I was like, oh, boy, don't screw this up. so um that went that went over pretty well and i love chipotle as a starter stock because it's

pretty easy to understand but you know i've also had kids the kids teach me i remember they were buying netflix in 2010 when i was selling and they've bought apple multiple times even though both of them are are android phone users and i was like why why are you buying apple stock when you own Android phones. They were like, Dad, didn't you just pay over $1,000 for the new iPhone X? And I'm like, well, you got me there. And also, Alex has had a tremendous conviction for Tesla from the very beginning. Let's talk about the type of account options you have for investing when you're a kid. And I know this is a topic near and dear to Bro's heart. So Bro, you've been sitting there so patiently and quiet. Let's hear everything you

have to say about this topic? Well, maybe not everything, but I do have three options for you. So the first is a custodial account like an UTMA or an UTMA, and that's what Brian used for his kids. There are some tax benefits. So investment earnings up to $1,150 is tax-free for the kid, and then the next $1,150 is taxed at the kid's tax bracket. But then gains taxed after that are taxed at the parent's tax bracket. And I should add that these numbers are for 2022, and they're going up a bit in 2023. Another thing to know about these accounts is that the kids get control at the age of majority, and that varies by state, but it's generally 18 to 21, but can be as high as 25 in some states. And at that point, once they get control, they can do whatever they want

with the money. It is important to know that the account is considered an asset of the child on college financial aid applications, which lowers age eligibility when compared to maybe a parental asset. Then finally on this, it's an irrevocable gift, so the money must be used for the kid's benefit and you can't take it back. A second option might be a college savings account like a 529 or Coverdell. These have tax benefits too, so the growth and withdrawals are tax-free if the money is used for qualified educational expenses. But this won't set your kid up to be a millionaire by age 40, as Brian is trying to do with his kids, because obviously the money will be spent on college. That said, it can still teach kids about the power of

just regularly contributing to a portfolio and letting it grow over the years. And then the third option is you just own the account, but you eventually gift it to the kid. And the benefits of this are basically more control because you can spend the money however you want. And you give it to the kid when you feel she or he is ready. And frankly, some kids aren't ready to just be given thousands of dollars when they're 21 or so. And this will lower the impact on financial aid eligibility because it's considered a parental asset. The main downside of this is that you'll owe the taxes on the interest dividends and gains while the account is yours. When you give the account to your kid, the cost basis of the

investments will carry over. Brian, before we get to your final advice here for people who want to get their young loved ones investing, how can they connect with you online? You're on Twitter. I know you're on Twitter. Where else? I'm on Twitter at Stocks with Brian, and then I'm also on LinkedIn. Look me up, Brian Withers. Look him up. He's a nice guy. He's great to hang out with. All right, Brian, what is your parting advice here. So I guess last, I'd like to encourage members to start with even a small amount, just little math. I guess we can do math on the show, right? If you invest 600 bucks over 10 years, say your kids between the ages of seven and 17, by the time they're 23, they could have

$18,000 built up if they achieve a 10% annual growth rate, which is the market average over the last 50, 100 years. And having that kind of nest egg starting out could be a huge financial advantage. And a side benefit is they already have 15 years of, air quotes here, investing experience, and hopefully will realize the power of long-term buy and hold. 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. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.

to this white Christmas. I can dig it, boss. Get a little fun. Right on, brother. Come on, Rudolph. Hitch up that sleigh. We're gonna fly down and have ourselves

a disco Christmas. Disco Christmas We're gonna hustle down the street On disco Christmas We'll be down at Junior Union This time we're

doing it all right We're gonna dance into the night The skin we'll have for us A disco Christmas Oh, oh, oh.