Motley Fool Hidden Gems Investing - "You are the baker of your own cake."

Episode Date: March 31, 2022

For the 1st time in two years, investors experience a negative return in the Dow, S&P 500 and Nasdaq. But don't worry, you got this! (00:20) Asit Sharma discusses: - Amazon renewing its deal with JP Morgan Chase to issue Amazon's rewards credit card - Why shareholders of both companies should be happy with the outcome - How investors can take solace in a growing economy, even as stocks cooled off this quarter (14:00) Dylan Lewis talks with Brian Feroldi about how investing in the stock market is the great wealth creation machine in the world, and Brian's upcoming book "Why Does The Stock Market Go Up?" Post a review on Apple and include a question about a stock or industry! Stocks: AMZN, JPM, AXP, C, SYF, AAPL Host: Chris Hill Guests: Asit Sharma, Dylan Lewis, Brian Feroldi Producer: Ricky Mulvey Engineer: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. As the first quarter comes to a close, we've got some thoughts for your mindset, and we've got a preview of Brian Feroldi's new investing book. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst Asit Sharma. Thanks for being here. Asit Sharma. Chris, thanks for having me. We're going to get to the end of this quarter, mercifully, the end of this first quarter for investors. But I want to start with Amazon, because for months, Amazon has been negotiating with JPMorgan Chase on its rewards credit card. You tell me, how big a deal is this that essentially JPMorgan Chase, for all intents and purposes, won the bidding

rights to remain the flagship rewards credit card for Amazon, because it seems like it's been a good relationship in the past, although that hasn't reportedly stopped Amazon from talking to American Express and Citigroup, among others, about saying, well, what would you be willing to give us? It seems like JPMorgan Chase made some concessions to keep this business, when you look at 150 million Amazon Prime members in the U.S., it was worth it. Chris, this deal is huge. I mean, if you think about what a big business consumer lending is in this country, it starts to make sense. I mean, this sort of reminds me of one of those deals where a big company is trying to relocate a manufacturing plant and local cities and states

are bidding against each other and giving all kinds of concessions, but it's worth it over five or 10 years. I feel the same way about this deal. There's a massive amount of loans that JP Morgan has under its purview now through this program for so many years. I think $20 billion was the figure I saw. There are companies that do this full-time for a living. Example is Synchrony bank. Synchrony Financial is in the business of teaming up with companies issuing these retail credit cards. Chris, Synchrony Financial last year had about $15 billion in interest income. This just goes to show you that a bank which does full-time credit analysis understands how persuasive it can be if they can manage their risk to get that spread on the

interest that consumers pay and what better customer to have, what better partnership to have than Amazon.com, which just grows so inexorably. This was fiercely contested. Kudos to JP Morgan for being able to retain this business. I think it will continue to be lucrative for them even though they give up five percent on Prime purchases, on Whole Foods purchases that customers make. they still make money on the interest spread. It seems like a win for both companies and a win, therefore, for shareholders of both companies. Although, I think if you're an Amazon shareholder, this is one of those deals that lives in the shadows in a way. It's meaningful to the bottom line for Amazon, and yet it is not something I have ever really

thought about as an Amazon shareholder, in the way that I have thought about Amazon Web Services or the retail part of the business, the investments that they've made in shipping and logistics, that sort of thing. Those are things that I study a little bit more closely. When I saw this story this morning, I thought to myself, oh, wait, right, yeah, this actually matters to the the underlying business and the bottom line. Based on the reports I've seen, the negotiations got heated at times, which doesn't surprise me when you think about a bank like JPMorgan Chase being led by someone as smart as Jamie Dimon. But again, I think if you're a shareholder of either, you've got to be pretty happy. I think so. Looking at Amazon's

balance sheet, they have the ability to leverage that balance sheet up and take over this business themselves. I know this sounds like an out-of-left-field comment, but look at PayPal. A few years ago, PayPal was handling its own financing for its own consumer lending. It's a gravy-type business. As a shareholder of Amazon, your mind starts wandering like, hey, this could be impactful to the bottom line. Companies like Amazon are smart as well as Amazon does logistics and so many other things. It's not a financing company, so it's best to find a very strong partner, a robust partner in a company like J.P. Morgan. Let them take that business, which helps Amazon's profit to keep them efficient. If you're, of course,

a shareholder of J.P. Morgan, you're absolutely right, Chris. They actually need to have this extension of their consumer lending business because you're talking about, again, a massive base, as you mentioned, of customers, a gravy-type business. It allows them to take more risk in other areas of their business, which, of course, they're very good at, whether it's derivatives or investment banking. You need this core strong business which provides the gravy, both sets of shareholders should be happy. Today is the last day of the first quarter of the fiscal year. It is, for investors, the first losing quarter in two years. Right now, we're looking at the Dow Jones Industrial Average and the S&P 500 will probably

finish the quarter down 4%, Nasdaq down somewhere in the neighborhood of 9% to 10%. I'm happy this quarter is over. I know nothing magical necessarily happens when the calendar flips to the second quarter, but it does feel like we've all been through this. I don't want to say we've been through the ringer because it could have been worse. Look, in the short-term, it can always get worse, but it does feel like as investors, we've gone through a rough quarter together. I feel the same way, Chris. I think that the one thing that gives me a lot of hope and a a lot of optimism is the fact that the first quarter correlates with most of the earnings season that's just passed. I was looking at S&P 500 corporate profits this morning up

30%. Big companies are finding ways to make money. Growth companies are still growing. Many foolish investors out there listening have much of their portfolios in high growth stocks and those have taken a beating. Yet if you look through the earnings that most of the star and leading growth companies produced, they were quite robust. Market sentiment, market downturns, both of these can take your attention away from. Here I'm going to roll out my lame analogy of the day. I went to the stables this morning, I walked and looked to all the stalls, all my analogies were lame, but here we go. You are the baker of your own cake. Sometimes I'm baking a cake and my wife or my kids will come and sort of peek in the oven.

It's ready. It's not ready. You should pull it out. You should check on it. But I'm the one who put that cake together, right? So I eventually am going to pull it out and plunge a dull knife in and see if it comes out and the knife is clean. I know my cake is done. No one else can really tell me when my cake is done. What earnings season does is gives the retail investor a chance to check on his or her cake. You focus on the earnings, focus on the narrative of the companies you've invested in one by one through that quarter, and you start to get a sense that most of us, okay, I'm going to be okay in the long run. These are good companies. They're doing a lot of good in the world. They're throwing off some profits, operating

cash flows. This is something that helps me. I hate to undermine this lame analogy by pointing out that I'm a terrible baker. Nonetheless, we all keep trying. That was not a lame analogy. That's the first thing. The second thing is, there's an investing podcast in the U.K. called Playing FTSE, which I recommend people check out, FTSE, playing footsie. And I was invited to be a guest on the show recently, it's three guys in England. And one of the things we talked about was, because I'm older, probably by a couple of decades than the guys who host the show, one of the things I talked about was it's always painful. Like, I've been reminded of that recently, when I think about 2008-2009,

I think back to 2001. Now, any period where the market over a three-month period, a year or more, it's never fun, it's always painful. The longer you stay in the market, it's not that you don't feel the pain, it's that you become experienced by what you went through in the past. You're forged by the fires you've gone through, to stick with the baking analogy in some small way. But thank you for pointing that out about corporate profits, because these are the times when it's all the more important to push aside the stock price and what is happening with the stock and focus on the business. It's not easy to do because the stock price is so readily available and it's so much easier to just look at your portfolio

and say, oh, is it green or red? What has it done over the past few months? It takes a little bit more effort to look at the business and say, wait, how is it doing, even though the stock price may be coming down? But it's almost always worth it to go through that exercise. Yeah, I think it's a really nice point that you've made. For those of us who have been through a few cycles, you do get a bit of that toughness or at least memory of the past, which makes things easier. And okay, I wasn't going to do this, but another lame analogy when I was walking through the stalls this morning, you know, it's like going into, it's like going to a very large museum. If you ever walked through the Metropolitan Museum of Art or the Art Institute

in Chicago. After a few hours, your feet are really tired and you're like, I don't want to do this anymore. But that really wonderful landscape painting is like two galleries ahead. I got to get to that. Years later, you remember the painting. You don't remember how much pain your feet were feeling and how tired you were. And so I think veteran grizzled investors know this. Some of the younger investors listening today, it's their first experience. So, I guess we're here to tell you that the battle scars start shrinking, and you realize over time that if you do focus on the companies, I'll add one more thing, just focus on the U.S. economy, how resilient it is, things will be okay.

Look, we've got a war right now that's going on in the Ukraine, we have soaring inflation, higher interest rates, so much uncertainty in the world, and yet this country continues to innovate. Companies are going about their business, investing their capital, albeit a little more cautiously. The world, I hope, is going to be okay. I can't make that call any longer, but if the world is okay, I think the U.S. stock market over time will be okay too. Asit Sharma, great talking to you. Thanks for being here. Thanks for having me, Chris. Okay. Before this next segment, two quick things. First, I wanted to mention the name

of that podcast again. It's called Playing FTSE, F-T-S-E, Playing FTSE. It is a stock market podcast based in the U.K. I had a great time talking with those guys, so please check it out if you're interested in hearing me as a guest on a podcast instead of being the host. Second, I feel compelled to give you a heads-up on something. Tomorrow is April April Fool's Day is our holiday here at The Motley Fool because let's face it, it is the one day when all of us are fools. If you've followed us for a while, you know historically, we like to have a little fun on April 1st. In the past, we've used it as a chance to share a financial lesson in a fun way. For example, in 1998, we made a confession. We

came out and said we'd made a huge mistake and now had to reverse our entire investment philosophy. We explained that due to an error that one of our interns made, we had been incorrectly saying for years that most professionally managed mutual funds failed to beat the market, when in fact they have outperformed it. Turns out we had the chart upside down. We apologize for the error and we fired the intern. Now, the next day we revealed the joke and followed up with the lesson, which is that most professionally managed funds really do lose out to a low-cost S&P 500 index fund. Now, you may think that sounds like a lame joke, like who's going to be fooled by an upside-down chart? It turns out the answer is many people, many people

were fooled by that. The Raleigh News and Observer ran a story on the front page of their business section saying, Motley Fool apologizes, admits most funds beat the market. Then the day after that, the newspaper printed another story because they realized they were the ones who had been fooled. Anyway, this went on for most of the past 25 years. But this year, we have something different planned for April 1st. It's not a joke. It is a new initiative that we're excited about. David Gardner is going to be a guest on this show tomorrow. We're going to be talking about that. so I hope you'll tune in. If you've listened to the show for a while, you have heard from Brian Feroldi, longtime contributor to The Motley Fool. He has more than a quarter million followers

on Twitter, in large part because he spends most of his time on Twitter trying to educate people about the benefits of investing in the stock market. It is the topic of his brand new book entitled, Why Does the Stock Market Go Up? For a sneak preview, here's Dylan Lewis. We've worked together a long time, and I think one of the reasons that you're such a good person to follow, Brian, is you can comfortably do things at the 201 level, at the 301 level, at the graduate level, but you can also take things to a 101 audience and remind folks that have been doing things for even a long time, the core stuff that they've abstracted away from as they've gotten more advanced in doing what they do. What's your quick case for why the average

person should care about investing in the stock market? That's a perfectly fair question, because before I really knew anything about investing or the stock market, I just thought it was random numbers that were printed in the paper and on the TV that sporadically went up and down, and I didn't understand why anybody would pay attention to this extremely boring thing. However, the truth is that the stock market is the greatest wealth creation machine of all time. It is literally the number one way that an ordinary person with ordinary means can truly build extraordinarily wealth in their lifetime. And even if you don't care about money at all, you certainly recognize that money affects many

of the decisions that we can make in life. Money affects where you live, the life experiences that you have, where you send your kids to school, the healthcare that you receive. Money is an incredibly important topic that affects everybody. The other thing is, even if you don't really care about the stock market, the odds are good that you actually have money in the stock market, even if you don't know it. As of today, there's more than 100 million Americans that are invested in the stock market in one way or the other. So they are needing that money that they've invested to grow over time, to afford them the life that they need, that they want in retirement. So whether you want to know and learn about the stock market or not, I think it's really important for

everybody to at least get a very basic education about it. Yeah, there's the old Groucho Marx quote, money doesn't buy happiness, but it does let you choose your own form of misery. And I think that's kind of an important thing to keep in mind as we're thinking about the role money might have in our lives. The book is called Why Does the Stock Market Go Up? It might be easiest to start with why do individual stocks go up and kind of build off of that. What's an easy way to kind of wrap your head around that, Brian? Well, first, it's really just too important to understand what a stock even is. It's easy to overlook this, but a stock is a record-keeping tool for figuring out who owns how much of a corporation. When you buy a

stock, you are, in a very real way, you get a legal claim on a portion of a company's assets and future profits. That is what a stock is, and that is why stocks have value. To your point, Why does an individual stock go up over the long term? The answer almost always breaks down to the company, the business behind that stock becomes much more successful in time and substantially grows its revenue and profits over long periods of time. A real simple example of this would be to look at one of the most successful businesses of the last 20 years, Apple. So, So Apple, in the year 2000, so roughly more than 20 years ago, Apple, the company, was pulling in about $7 billion in revenue. And on that revenue, it generated about $600 million in profits.

If you fast forward to today, Apple has grown to extreme ranks. So last year, Apple pulled in more than $378 billion in revenue, and it generated more than $100 billion in profits for its investors. So Apple, the business, grew its top and bottom lines by enormous figures. And that's why if you invested $10,000 in Apple back in the year 2000, that figure would currently be worth almost $2 million. So that's really the core reason why a business grows over time and its stock does well over time. The underlying business becomes much more profitable. Right. And as a shareholder, your claim, your stake to that business is getting more valuable because the business is getting more valuable. Brian, when we look at companies,

we're often talking about things like margin expansion, total addressable market. All of these things are kind of steps down the way, but you can trace them back to at core, is the business growing? Is revenue growing? Does this look like it's going to become a more valuable business down the road? Yeah, that's 100% true. To your point, the stock market can be a really confusing thing because what happens to a business and what happens to that company's stock can diverge wildly over short periods of time. And we at The Fool define short periods of time to essentially be periods less than three years. That, for many people, is not a short period of time. When you're living through a three- or five-year period, day by day, hour by hour, it can seem

that it takes a really long time to go by. However, when you measure a stock or the stock market over that period of time, that's like the minimum amount of time that you have to look at a company to really judge whether or not the business is succeeding and the stock is succeeding. But that's not something that humans are naturally programmed to do. Anytime you hear someone talk about the returns you can expect from the stock market, they'll say something in the neighborhood of 7% to 10% annualized over long periods of time. And I think that's the key there. I want people to read the book, so I don't want to give away too much. But what's the key factor, as you've been looking at this, for why the market goes up? Why people

expect that 7% to 10% over long periods of time. Yeah. If you go back and look at what the stock market or the S&P 500 has done since the day of your birth, you can be pretty darn sure that the market has risen substantially since then. And the reason that the stock market, the U.S. stock market, has gone up substantially over time is really the exact same reason that Apple has gone up over time. The businesses that make up the U.S. stock market have increased their profits year in and year out for years and decades on end. There's a number of reasons that underlie that that explain why profits have gone up over time. But if you look at just the last 30 years, for example, the earnings of the S&P 500 have gone up about 8.5% per year. Now, that's certainly

not in a straight line, right? There are downturns for the market, for the economy as a whole, such as 2000, 2008, 2020, when earnings dropped like a rock. Other periods, there was rebounding off of declines and earnings skyrocketed. But if you look at the earnings power of the companies in the S&P 500 over multi-decade periods, the underlying trend is very clear. It's gone up. What's incredible about that is the composition of the S&P 500 over that period has changed dramatically, and that is still true. If you look 10 years ago, 20 years ago, 30 years ago, the largest companies in the S&P 500 are different names than they were today, even with businesses rising, falling, other businesses coming in and becoming the leading

companies in the country and really in our modern economy, that still holds. That narrative is still true. And that's how powerful these companies can be and really how powerful compounding can be. Yeah, that's one reason why everyone at The Fool loves index funds, especially for people that have no interest in picking individual stocks. If you look at the Dow or the S&P 500, those indices are self-cleansing. Every couple of years, new companies are added to the S&P 500, companies at a declining phase are removed. So, that continuously refreshes the companies that are in those indices and is a big reason why the earnings power of those indices continues to rise over time. I want to anticipate a question that

I'm sure some people have right now, because we're in a period of some uncertainty and I think some people are probably seeing some red either in their individual stock holdings or in their index fund holdings as well. We can't just look at why the market goes up, also have to ask the question every now and then, why does the market go down? There are a lot of answers for that kind of question, Brian. Yeah, you have to think of the stock market as a live, continuous, ongoing auction where buyers and sellers are meeting with each other and setting the price. And the emotions or the feeling of those buyers and sellers matters tremendously in the short term to what happens to stock prices. When investors as a group are

feeling bullish, they're feeling optimistic, prices tend to rise over time. Conversely, when there's bad stuff happening in the world, as there's plenty of that happening today, investors as a group feel more pessimistic and prices tend to fall. Getting back to our example with Apple, this is why the stock market can seem so complex to new investors. Apple's revenue and profits over the last 20 years have essentially gone straight up. If you looked at almost any earnings report that's coming out of the business, you can't help but be impressed with the revenue growth, the margin expansion, and the profitability growth. However, during that last 20-year period when Apple was just having success after success after success at the business level, its stock

has visited some very, very interesting places. In the year 2004, Apple's stock peak to trough dropped more than 80%. 80% peak to trough. Moreover, during the 2008 recession, Apple's stock dropped almost 60%. And there have been numerous periods along the way when the stock has just fallen 25%, 30% or more, seemingly randomly. This is why the stock market can be so difficult to understand, because Apple, the business, and Apple, the stock, were doing such different things for vast periods of time. Brian, I'm sure there are some people who are staring at businesses in their portfolio and saying, it seems like the business and the stock have diverged a little bit. We're seeing some red, even though seemingly the numbers that I'm

seeing in earnings reports look really strong. I consider you someone who's a little bit of a master of the mindset when it comes to keeping yourself long-term focused. What would your advice be to folks who are maybe feeling a little panic right now based on what they're seeing in their portfolios? Yeah, completely natural. The last two years in particular have been some of the weirdest years I've ever seen as my time as an investor. In 2020, the world economy was falling apart, and yet stocks, specifically high-growth stocks, did nothing but go up. Over the last year, the world seemed to have gotten better, and many of those high-flying growth stocks of 2020 have done nothing but go down. I know that my personal portfolio, which tends to tilt towards

high-growth and tech companies, has fallen dramatically over the last year, and I'm underperforming the index. However, when I view that, the thing I always like to remind myself is, I look at the businesses that are behind the stock tickers that I own. That's how I judge whether the companies are succeeding or failing or not. I just accept as an individual shareholder that there will be times, such as the one written right now, when the businesses that I own could be succeeding, but their stocks could be doing bad things and really underperforming. That is just the price of admission if you want to invest in the stock market. The volatility gets even higher if you invest in individual stocks like we do. So I've just accepted that fact and I'm

perfectly comfortable with it. But to your point, it's a really hard thing for investors to understand. You spend a lot of time thinking about money, investing, and your financial journey. What does money mean for you and how do you position it in your life? So I am just, for whatever reason, super interested in basically everything that has to do with money. I love personal finance. I love investing. I view it as almost like the ultimate game that I'm trying to figure out. If I do well at this game, I also can vastly increase my net worth. You have to, at the same time, realize that the point of life and the point of living isn't just to maximize a number in some spreadsheet. If folks are looking for a little

bit of help doing that, the book is called Why Does the Stock Market Go Up? It's available on Amazon or wherever you get your books. Brian, it was a delight chatting with you. Thanks so much for joining me. It's always a pleasure, Dylan. Brian, For All These New Book comes out on April 5th, but it is available now for pre-order. 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 Chris Hill. Thanks for listening. We'll see you tomorrow.