Motley Fool Hidden Gems Investing - Who Wants To Be A Millionaire?

Episode Date: March 22, 2022

If you want to soothe supply chain woes, try cutting out the middleman. Nike’s direct-to-consumer sales now make up more than 40% of the company’s revenue. (00:18) Auri Hughes joins Asit Sharma to discuss: - Nike’s earnings beat and global strategy - Okta’s hack, and what it means for the cybersecurity company - How rising fertilizer prices could cause wider-spread inflation.   (10:44) Alison Southwick and Robert Brokamp discuss how millionaires save, spend, and invest on this week’s Answers. Stocks: NKE, OKTA, WFC Host: Asit Sharma Guests: Auri Hughes, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Coming up, Nike exceeds expectations, a cybersecurity company suffers an embarrassing breach, and so much more. Motley Fool Money starts now. I'm Asit Sharma, sitting in for Chris Hill, and I'm joined by Motley Fool Senior Analyst Ari Hughes. Ari, welcome to Motley Fool Money. Hey, Asit. Thanks for having me. Hope you're doing well. Pretty well for a Tuesday. Ari is laughing because I say this almost every time we talk. Ari, Nike Inc. reported fiscal 2022 third quarter results this morning. Shares were up. Nike had an earnings beat. What do you make of this report? Yeah. So, looking into this, Nike's obviously a large dominant company. And I think

for really large cap companies, global business starts to be really important. And from what I researched, a lot of the conversation was around China and kind of the expectations there. And a lot of people are starting to be happy that that business is turning around essentially. So, the China business is improving despite recent backlash against Western brands and a shortage of merchandise. So, kind of this maybe like this cultural aversion. And then, obviously, the supply chain issues normally. But yeah, essentially, the sales were down only 8%. When analysts anticipated, they would be down 12%. And then last quarter, as far as China, those sales were down 24%. So, even though

declines aren't great, that's still substantially less than where it was before. So, still plenty of room for Nike to make that ambitious push to be this global retailer, even stronger than it already is. I noticed the company enjoyed pretty brisk direct-to-consumer sales. Ari, it looks like Nike direct sales were up 15% year-over-year to $4.6 billion. That's a pretty big market now for this company, selling direct-to-consumers. Yeah, that's really interesting you bring that up. I didn't read about that. But I think that strategy makes a lot of sense because if you can take out middlemen or different parts of the supply chain, ideally, I think that would increase your margins,

even if you're selling to the same consumers. Supposedly, that should take out some unneeded steps in the supply chain. And I think there's been a lot of other brands that have had success going directly to consumers as well. Yeah. And I think as they expand that global footprint, it becomes more important to start to brand the product. Even though this Nike trademark is incredibly strong, Nike still has to invest in its marketing. You had pointed out to me when we were chatting about some steps the company is taking to try to win over its shoppers' favor from overseas. Yeah. The steps the company is taking is they're partnering with two Chinese retail distributors, Top Sports and Paoxing.

If I'm pronouncing that right, my Chinese is rusty because I don't speak Chinese. And they also cited a recent brand campaign that was tied to the Beijing Olympics. So definitely a lot of focus to continue to win business in this area, as you can see. So definitely would seem to be some smart strategic moves on Nike's path. Reports today that fertilizer prices are coming in at record highs. Ari, this is something that, frankly, isn't on my radar screen. Maybe it should be. This is a note that caught your attention.

Why do we need to worry about the price of this commodity class? Yeah, I think it's really interesting. Obviously, a lot of talk around inflation. And I think it's interesting because agriculture is just so essential to probably the global economy in the world because we need food after all. So these inputs that go into growing food are up significantly. So 30% since the beginning of the year for such things as ammonia, nitrogen, nitrates, phosphates, potash, if I'm pronouncing that right, and sulfates, which are kind of these chemical components that help grow food. And it's just really interesting because I guess more so than you would think, a lot of these things are produced in the Russia and Ukraine area. From what I'm reading, Russia, which accounts for around 14% of global fertilizer exports, has temporarily suspended outgoing trade. So obviously, I think that would probably put some pressure on these items that are just so essential to the economy.

So, it's like one more thing that we need to worry about when we think of rising inflation. And I know from personal experience, listeners have this experience too, I mean, food is getting more expensive every time we go to the grocery store. But this also has an impact not just on developed countries, but also some emerging markets as well, right? They may be a little less equipped to handle this type of dysfunction versus countries like the U.S.? So essentially, Wells Fargo expects the food impact to be felt globally, but they anticipate

that to, I guess, be more felt among emerging countries. I guess if you're developing, you don't have probably all the resources or kind of luxuries as a developed nation. So obviously, these substantial increases to the inputs of the cost of food would probably be felt more as what I would imagine. Today, news emerged that Okta is investigating reports of a possible digital breach. Now, Ari, this story, here we have a company that specializes in providing verification, authentication of sign-ons to the cloud, to various websites.

It's heavily used by enterprise customers. This is not the kind of breach you want to have. Am I right? Yeah, I think it's ironic to say the least. For me, it's something you kind of read and chuckle where I guess your business specializes around security and yet there's this group saying – it's almost like they're taunting a little bit like, oh, we had access to your systems. Um, but you know, the message from the CEO is that, you know, it's, uh, it's not currently an issue. And he says, uh, that, you know, they're investigating it and he doesn't feel, you know, he didn't see the activity going on, but yeah, it is a chuckle because, uh, you know, that's your business, maybe your clients, that's not going to reassure your clients or folks that

are, you know, maybe, um, interested in using your solutions, but, um, definitely interesting that. It's an arms race in this security business. Not the kind of publicity you want. Okta is an interesting story. This company had a phenomenal run after its IPO. Like other tech stocks, Ari, it's well off its highs. But the story on Okta seems to have cooled a bit. They've got great revenue growth. The last quarter they reported had 63% year-over-year growth. but I don't know about that income statement. Yeah, we were looking at this and it's been a big winner significantly. And if you look at the financials, the company is definitely getting larger and it's growing, but we're not seeing a lot of that translate to the bottom line

necessarily. And some of the net income losses have actually gotten worse year over year, especially this last fiscal year. And a lot of that looks to be driven by some stock-based comp. And I would imagine for a company like this, maybe like marketing as well. But it has high gross margins, has a lot of potential. We're just not seeing a lot of that growth fall to the bottom line, ideally. Right. We're looking at $1.3 billion of revenue in 2022, their fiscal 2022. Ari, they had an operating loss of $760 million on that. You point out, though, even though this is a book loss in terms of cash flow, much of this is going to that stock-based compensation. They have a big investment in R&D, in sales and marketing. That's been really ramped

up. That's been the history of Okta for, I would say, the past few years. Instead of pulling those losses in, they just seem to be getting wider. You did point out to me when we were chatting that the company does have positive operating cash flow. It looks like they generated about $104 million worth of operating cash flow in the last 12 months. What do you make of a story like this when you've got a company which has increased its sales at such a big rate, but still has trouble making that bottom line turn green? Yeah, it's really interesting because this is exactly the type of company that the market has not been in favor of these last few months. We saw that big drawdown for growth-oriented stocks because the company's growing, getting bigger significantly,

but we're just not seeing that growth fall to the bottom line or result in profits. I would imagine this is exactly the type of stock that sold off. Eventually, with these type of businesses, I like to see, and I think most investors would like to see, you do want to see the business eventually transition to profitability and being significantly cashflow positive after a while. So there's probably demand for the product apparently, but we're just not seeing that fall to the bottom line yet. Investors are saying, Okta, show us the money. Ari Hughes, thanks a lot. Thank you.

who wants to be a millionaire i mean who doesn't want to be a millionaire allison southwick and robert brokamp break down how millionaires spend save and invest on this week's answers and they discuss how important or maybe unimportant hitting seven digits really is So, who wants to be a millionaire? Chances are just about everyone would raise their hand, unless, of course, billionaires on the table, in which case I choose that. There are about 56 million millionaires in the world today. How did most of these people find their way into the Dos Comas Club? What traits do they most have in common? That's what we're going to talk about today. Yeah, to be a millionaire has been a marker

of financial success for a long time. The term's first appearance likely occurred in France around the 1700s, and it literally means a thousand thousands. To figure out how the typical American millionaire accumulated their thousand thousands, we read several books, surveys, articles. Some of these looked at people with a million-dollar net worth, so that would include assets like home equity. Others just looked at investors with million-dollar portfolios. Regardless of how a millionaire was measured, it turns out that they have several traits in common, and we boiled them down to five. And while being an American is not one of those, it certainly helps. We make up less than 5% of the planet's population, yet have 39% of the world's millionaires, according to Credit

Suisse. That's way ahead of the next country, which is China, with 9% of the world's millionaires. All right. Well, let's get into it with millionaire trait number one. They save 20% of their income. Morgan Housel, author of The Psychology of Money and Friend of the Fool, looks to the singer Rihanna as a good cautionary tale here. Rihanna went from having $50 million in 2007 to almost declaring bankruptcy two years later. She sued her financial advisor for mismanaging her money, and he responded, was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money? And as Morgan Housel writes in his book, you can laugh, but the truth is, yes, people need to be told that. When most people say

they want to be a millionaire, what they really mean is, I want to spend a million dollars, which is literally the opposite of being a millionaire. So clever, that Morgan Housel. He is so clever. And the various studies found that either the savings rate of a typical millionaire was a little bit below 20. Some found it was closer to 23% or 25%. But regardless, it is significantly more than what the average American is doing. So according to the Federal Reserve, the current U.S. personal savings rate is currently just 6.4%. And the average contribution rate to a 401k at Fidelity is 9.4%. That's from the employee, and then the employer match gets thrown in there, so the average total savings rate is 13.9%. Certainly, these folks who

are real-life millionaires are saving more than the typical American. One study found that millionaires actually closely mirror that 50-30-20 budgeting guideline that has become more popular over the last 15 years, so it goes like this. 50% to required expenses, 30% to discretionary expenses, and then 20% to savings. Obviously, this is easier if you make more money, and the typical millionaire definitely has an above-average income. But income only explains about 30% of the variation in wealth from one household to the other, according to Thomas Stanley, the co-author of The Millionaire Next Door. The other 70% is explained by things like just being relatively frugal given an income. For example, 55% of millionaires buy used cars. And they have other

money-friendly habits. So perhaps surprisingly, the majority of millionaires live according to a budget. Some people might think, well, if you're a millionaire, you don't need a budget, but that's how they became a millionaire. Of those who don't have a budget, they have what could be called an artificial economic environment of scarcity. That's more commonly known as pay yourself first. In other words, they invest a good chunk of their income before they can spend it. And again, according to Millionaire Next Door, almost two-thirds of millionaires can answer yes to this question. Do you know how much your family spends each year for food, clothing, and shelter? In contrast, only 35% of high-income non-millionaires could answer yes to that

question. So the bottom line here is millionaires are more likely to have a plan for where they want their money to go and have a pretty good idea of where it went. Millionaire trait number two, they own a reasonably priced house and live in it a long time. Look no further than Warren Buffett for this classic example here, Warren lives, Warren, as if I'm on a first name basis, lives in a quiet Omaha, Nebraska neighborhood in a $1 million plus home that he bought for $31,500 in 1958. Not what most people would expect from someone worth more than $100 billion. And while Buffett is a billionaire, this trait of buying a reasonably priced home and living in it for a long time remains true for millionaires as well. Most of the millionaires had never

purchased a home that costs more than triple their annual income, 56% own their homes for at least 20 years. Obviously, if you're spending less money on a house, you'll have more money in your bank account. But the psychology and the impact on your wealth of having more house than you need actually goes beyond just the hit of your mortgage. Isn't that right, bro? Yeah. The typical millionaire lives in a neighborhood where she or he has four to five times more wealth than the person next door. And on average, their mortgage is less than a third of their home's value. This is important because housing is by far the biggest expense for the typical American family. And the price of the house that you buy is highly correlated to

pretty much everything else you spend money on. Your choice of housing affects your budget, your debt, mostly due to your mortgage, your taxes, childcare, education costs, insurance, utility costs. Plus, if you live in a pricey home and neighborhood, you tend to act and buy like your neighbors. So literally living below their means by living among people with incomes lower than theirs has been a key to financial success for some millionaires. Millionaire trait number three, they are long-term accumulators. Depending on the survey you look at, 75% to 86% of millionaires have created their own wealth. They didn't inherit it. For most millionaires, it didn't happen overnight. Most millionaires reached the two-comma club in their 50s through a slow and

steady game of earning, saving, and investing wisely. If you don't want to wait until you're 50, your options are either make a lot of money quickly or save a lot of money aggressively. Those who do it sooner are either super savers or entrepreneurs. For our impatient listeners out there, this feels like the right time to talk about the FIRE movement. Ah, yes, the FIRE movement. So FIRE stands for Financial Independence, Retire Early, although I think these days the FIRE folks emphasize more the F-I than the R-E because they still work, but they're financially independent and they can do work that they want because they want to and not because they have to. If you're not familiar with the FIRE

movement. Here are three people to learn a little bit about. First, I would say is Vicki Robbins. She's the matriarch of the movement. She was a disillusioned actor who basically retired early in the 1970s, along with a guy named Joe Dominguez, who was a former Wall Street financial analyst who, in 1969, retired at age 31. They wrote a book in 1992 called Your Money or Your Life. Joe has since passed away, but Vicki republished the book in 2018 and updated it. That's a great start. Two people that I bet a lot of people have not heard as much about is Billy and Acacia Caterly. They retired in 1991 at the age of 38, and they're still going. I interviewed them first in 2004, and then I catch up with them every three years or so.

And so, they're almost 70, and they're still living a great life. And they've been able to do it by living on less than $30,000 a year via geo-arbitrage, which is basically living in lower-cost areas of the world. So, over the last 30 years or so, they lived in Mexico, Panama, Vietnam, Thailand, the West Indies. They've also squeezed in some more expensive places like Australia and New Zealand. You can learn more about them at retireearlylifestyle.com. Then the third one is probably the most prominent figure in the FIRE movement, Mr. Money Mustache. He was an engineer who lived on around $25,000 a year, retired at age 30 with a portfolio of about $700,000 and a paid-off house. You're going to learn a lot at his website. I'll just provide

some sort of back of the envelope math that came from one of his articles. I think it's a good guideline to give you an idea of how long you're going to have to work depending on your savings rate. According to these calculations, if you save 10% of your income, you'll have to work more than 50 years. If you can increase that to 30% of your income, you may only have to work around 28 years. Move it up to 50% of their income, some people do it, even people here at The Motley Fool that I know are doing this, you could cut that down to only working 17 years. So I think these are good guidelines for folks who maybe have gotten a later start or want to move up that timeline to join the million-dollar club, save a lot more. Millionaire trait number four,

they own multiple businesses. Now, depending on the study, either a large percentage or most millionaires own their own companies, and most have multiple streams of income, such as real estate or a side hustle. Remember Rihanna I talked about at the top of the show? Well, the incredibly successful musician who blew through $50 million in a couple of years. Well, the story does have a happy ending because Rihanna is now worth $1.7 billion, despite not putting out a new album in almost six years. So where'd all that money come from? Well, for starters, the financial advisor she sued settled for $10 million. There's that little footnote. But from there, Rihanna went into fashion in partnerships with Puma, Louis Vuitton,

and now the bulk of her wealth is from fashion and beauty. And she's not alone. Jessica Alba made estimated $200 million by founding The Honest Company. Dr. Dre took home as much as $500 million when Apple bought his headphones company. Don't get me started with every entrepreneurial thing The Rock does. Okay. So maybe a billion-dollar partnership with Louis Vuitton is not an option for you. It's not an option for most millionaires. But what is, bro? Yeah, you don't have to go out and create your own company, but you do likely have to own one and should own many. The good news is that's pretty easy to do, just invest in the stock market. Because when you own a stock, you actually are a legitimate part owner of that company.

In fact, according to the Spectrum Group, 72% of millionaires said smart investing was a key to their success. Fidelity does an analysis every few years on folks who have accumulated at least $1 million in their 401ks. On average, these 401k millionaires are in their late 50s, a time when some experts might recommend that they play it pretty safe with their portfolios. But according to Fidelity, only 13% of their assets are in conservative funds like stable value or bond funds, another 20% in target date or hybrid funds. But the bulk of their money is in the stock market. And as Alison mentioned, some studies of millionaires found that they frame their wealth in terms of multiple streams of income. So here's another celebrity example

for you. Arnold Schwarzenegger actually made not most of his money from acting, but from real estate investments, at least according to Thomas Corley, the author of Rich Habits. So you can apply this to your life as you see fit. It could mean that you get another job, maybe a side hustle. It could mean that you actually invest in real estate. And we talked about that a couple of weeks ago. But I think it's also a good way to look at your portfolio, especially when it comes to determining whether you're sufficiently diversified. All right. And our final millionaire trait number five, they keep getting better and better. Millionaires just aren't ones to rest on their laurels.

They continually try to improve in all aspects of their life, mind, body, and wallet. In a previous episode, we talked about how healthier people are wealthier and wealthier people are healthier. The cause and effect goes both ways. And it turns out that every study of millionaires in the U.S. that looked at health found that they exercise more than the average American. For example, one found that they exercise at least 30 minutes a day, four days a week. Another found that they exercise six hours a week. But self-improvement for most millionaires isn't just limited to health. Yeah, it does seem that millionaires also look into self-improvement and are big readers. So

according to one study, 88% said that they read every day to increase their knowledge about their job and their industry. And one study found that people who have above average wealth, at least relative to their income, spend nearly twice as many hours per month planning their finances and their investments as under-accumulators of wealth. So that's how most millionaires got to where they are, at least five traits. But a million dollars is just an arbitrary round number. To quote Chris Rock, wealth is not about having a lot of money. It's about having a lot of options. So what number do you need to reach to give you options? Is it a million? A billion? Well, I hope it's not a billion. It might be a

million. It might be a couple of million. It might be less. But really what's important is how much you need to accomplish your financial goals. And obviously that's unique to you. And you should figure it out. Maybe use a good online financial calculator or maybe work with the help of a financial planner to figure out whether you're on track for your various goals. However, since most of us have the goal of eventually retiring, I'll pass along some benchmarks of how much you should have saved at this point in your life. Many firms provide these benchmarks. Probably the most well known come from Fidelity. J.P. Morgan actually provides some good retirement savings rules of thumbs in their Guide to Retirement, which is available for free online. Highly recommend it.

But for this show, I'll pass along the benchmarks from T. Rowe Price. And they're expressed as a multiple of household income and assume retirement age is 65. For example, they think you should have saved up for retirement by the age of 30, half of your household income. If your household income is $100,000, T. Rowe Price thinks you should have $50,000 saved by age 30. That moves up to two times your household income by age 40, five times by age 50, nine times by age 60, and then by the time you retire, you should have 11 times your pre-retirement income at age 65. Now, a lot of factors will determine what's the right number for you. One of them will be income. And frankly, the more you make, the more you have to save,

because the way Social Security is designed, it's going to replace less of your income. So if you're a higher income American, you might need 12 to 14 times your salary saved before you can retire. So again, these are just generalized guidelines. You should definitely do an analysis based on your own unique circumstances and goals. And finally, if you want to learn more about millionaires, here are some books to check out. We mentioned The Millionaire Next Door by Thomas Stanley and William Danko. That's gone through several editions. Actually, the most recent version is called The Next Millionaire Next Door. A few other books, Rich Habits by Thomas Corley, Millionaire Mystique by Jude Miller Burke, and How Rich People Think by Steve Sebald. And a special

thanks to Fidelity, who was kind enough to send me their most recent stats on their 401k millionaires. Whatever your big financial goal is, it's still the same equation of making good money, saving as much as you can, and compounding your wealth by investing. Only you can decide what number is right for you and wherever your finish line is, a million, a billion, or even a trillion. We're alongside the path here at The Motley Fool, rooting for you all the way. As always, people on the program may have interests 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 Asit Sharma. Thanks for listening.

We'll see you tomorrow.