Motley Fool Hidden Gems Investing - Young Investors, Root for a Bear Market

Episode Date: December 17, 2024

Investing is a decades-long game. (00:14) Bill Barker and Ricky Mulvey discuss: - The Federal Trade Commission’s ruling on junk fees. - What killed a merger between Kroger and Albertsons. - How younger investors can prepare for the next bear market. Then, (17:28) Alison Southwick and Robert Brokamp offer some tips on tax-loss harvesting. WSJ column discussed: https://www.wsj.com/finance/stocks/why-this-frothy-market-has-me-scared-295c07c3 Companies discussed: KR, ACI, AZO, AAPL, ORLY, SBUX Host: Ricky Mulvey Guests: Bill Barker, Alison Southwick, Robert Brokamp Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

say goodbye to junk fees well some of them anyway for now at least you're listening to motley fool money i'm ricky mulvey joined today by bill barker bill appreciate you being here thanks for having me so this is something i'm kind of excited about is a is a buyer of things as a buyer of tickets and occasionally hotel rooms, the Federal Trade Commission announced a final, what it is calling a final junk fee rule. This hits live events, hotels, vacation rentals. Basically, if you're a hotel,

you cannot just add a resort fee onto the end of the booking. You can still charge it. You just have to tell your customers up front. And there's some weirdness in here, Bill. There's no real uniform enforcement. the rule will be also become effective four months from now notably when there is a new presidential administration in the white house does this rule change much is this something i

should be excited about well i i excited is uh an interesting choice i think that your future experiences might be less annoying uh rather than actually uh all that much better i don't think it's got any real competitive change in the landscape for companies. They charge what they charge, and they're still going to charge the amounts they charge. But they'll list the price sooner in your transaction experience with the much like, I suppose, a gas station does. When you see the price for gas, it's the price you pay, right? And so, it's not all that great to look at high prices for gas, but you don't get an additional surprise after you've started pumping. Oh, we forgot the taxes. We'll tell you about those at the end. They tell you at the

beginning, and there you are. Your annoyance comes early on in the equation. I'm excited because I'm taking any win I can. If you're promising me that I'm going to be less annoyed about things in the next few months, I'll take it. I'll take that win, Bill. I am excited. I stand by that statement it wouldn't elevate it all the way up to a promise that your annoyance will be uh perfected here but i think you know their their experiences like europeans come to the u.s and they eat at our restaurants and they are truly annoyed that at the end of the meal the price that they thought they were paying uh is then you get tax and tip added onto what uh Well, the tip isn't added, although it's put in front of you rather aggressively at times.

And the tax is not included on the menu price as it is in Europe. So, they find that to be an annoying little transactional experience, whereas we are used to it. Oh, at the end, I will then also pay tax and probably tip as well. So, it doesn't really change, I think, any of the prices that anybody is going to end up paying, but your annoyance will come when you see how high the price is right away rather than thinking, oh, this is a pretty good price and being surprised later that no, it is not. The fact that it's just disclosure and not changing prices, that's why I guess I'm putting

words in your mouth. I'm guessing a take. We're not seeing a lot of change in hotel booking stocks like Expedia, Booking.com. They're down a little bit, so is the broad market. Also, none of the major hotel chains have really reacted to this news including hilton and marriott they're just they're just kind of shrugging it off bill yeah it's just a presentation issue they're they're not going to change their bottom lines as as a result of this but uh at the margins maybe you know that when you show a higher price uh maybe people spend a little bit more time maybe they think oh you know i'll look at airbnb a little harder uh on this one uh than than the hotel because airbnb i mean they add some price in on top of what you first thought you were paying

but it's not a resort fee yeah i'll see if i get in trouble for this one i'll be curious if this affects any car makers if they want to move forward with that in the years ahead a while back i was looking at uh like leasing i was just looking at different car leases because you get a big like tax benefit if you do an ev especially in colorado i looked at tesla and it's like oh it's uh it's listed at 70 bucks a month and what they've done with that bill is they include in the estimated gas savings and they exclude the taxes and fees involved with paying for the car and then it goes up by about twice the amount at least for like the lowest end model i wonder if that will be affected in the years ahead tesla itself i wouldn't expect that the uh incoming

administration is going to go hard on Tesla's transactional choices, but we'll see. Bold statement. You heard it here first. Let's look at this Kroger and Albertson story. I want to catch up on it. Last week, a federal judge in Oregon blocked what was going to be a massive merger, $25 billion merger between Kroger and Albertsons. Kroger and Albertsons were saying that this would help them compete against Walmart and Amazon. The judge saying, not so fast, my friend you are a grocery store and that is distinct from other grocery retailers because you can go to a walmart and buy a tv and a winter coat that kind of thing we also have this mess now where albertsons is suing kroger saying it didn't do enough to get the deal through you didn't

divest from enough enough stores maybe you were just sandbagging the whole time whatever we're mad and we want six billion dollars starting with the first story though bill were you surprised to see this deal fall apart? No. Not under the current administration. Well, it fell apart. The FTC lodged a complaint and the judge sought the FTC's way. And that is in part something that one might have expected given how poorly the divestiture of, I think, Albertson's acquisition of Safeway was. And the divestiture there, the number of units that were spun off, it was handled very badly. A lot of them did end up closing because they, sort of, spun off the poor performing ones to somebody that wasn't really a good enough operator to keep them going.

So, it did result in less competition. And so, that was something to keep an eye on this time around. I think there is a case that Kroger did not do everything it could to make sure that this ended up going through by divesting a higher number of units. I think that there's not that much surprise that it didn't go through. I think there's at least a case that Kroger has some of the blame for that. The money intended for the merger on both sides is going to be used for stock buybacks. Kroger said it will repurchase $7.5 billion worth of shares after a two-year pause. Albertson saying that it's going to repurchase about $2 billion worth of shares. In both cases, that's a little less than 20% of their respective market caps, and that is

aggressive. When you see that kind of aggressive buyback after a failed merger, is this a good use of cash? It probably is a pretty good use of cash. Kroger has a decent history of buying back shares, about 2% a year, more or less. That was on pause during this. But I think that, yeah, if you're not able to expand your operations and it doesn't make financial sense to try to expand them than to run them efficiently and return money to shareholders in the form of both dividends and share buybacks is often a good capital allocation by good management teams. And Kroger's done a pretty good job. So I think that given the price, I think buying back shares makes sense and is probably something that shareholders are looking forward to. Well, I'm a Kroger shareholder

myself. And on the one hand, I think it's wonderful to make my shares more valuable and give me a bigger slice of that pie as they buy back shares. It also seems to me that maybe this is going to upset some grocery shoppers and regulators, grocery store unions, especially at a time when it's easy, not easy, but you can point at high food prices. I grocery shop as well. My grocery bill has gone up. And you also have unions to deal with, especially in Kroger's case, where it might paint a little bit of a target on their back. Yeah, this is an industry where you don't really have a carte blanche to just do whatever you want with whatever cash you have on hand. This is going to be met with, certainly at the government

representative level, a response of, well, if you've got all this money, you should just be charging less. That's how we would like things to be, or paying your employees more or both. and that's not how every business runs and Kroger doesn't have margins that are obscene or anything like it. So, they wouldn't really be competitive if they did. It's just a very, very high volume business where you make a little bit on each sale and if you do everything right, you've got some money left over and I'm sure the employees and the unions would like to have as big a chunk of that as they can, but this is not unusual for a company to make some profits and do something for its shareholders with those profits. I want to zoom out a little bit on buybacks

because this is something that can, you know, it's gotten heat. It also can reward shareholders of companies for extraordinarily long periods of time. And it can be a good use of capital for mature companies. You look at a company like AutoZone, which has essentially steadily eaten itself alive, going from 150 million shares outstanding in the year 2000 to about 17 million today. That's a stock that's done extraordinarily well for the shareholders that have held it for decades. This is something that I want to find. I want to find companies that are going to eat itself alive and reward me for holding on to these companies for potentially decades to come. So Bill, what should I be looking for if I'm looking for companies that can tell me those

long-term buyback stories? Well, I think as you pointed out, the absence of regulatory or customer furor is probably something that you want to put on that list. And Apple has bought back a lot of its shares, Lowe's, companies that have good competition for their products and are not on the targets of regulators, because it's just a different way of returning money to shareholders, dividends or buybacks, it's more tax-efficient way for the long-term shareholders, but it can increase scrutiny. It puts an exclamation point on the fact that you have money that you don't want to reinvest in your business or hire more employees or pay more for those employees or reduce prices. So, AutoZone has been incredibly effective. They've got good competition.

Nobody seems to feel like AutoZone's repurchase of its shares is something that is harming its customers. And so, they've got a great history with it. As I mentioned, Lowe's, Apple, O'Reilly. I mean, companies that have good managements and are not just announcing, oh, our price is bad because we missed our quarterly guidance and our stock has been walloped by that, and so we're going to buy back shares, those are announcements that you should take with a grain of salt, because a lot of times the companies that are making those announcements are just trying to support the stock price, but have concerns that the business is going through that may not allow them to ever execute those announced buybacks. I guess the price of an

engine filter also hits a little different than the price of eggs when you see price increases for either of those. As we close out final story, James McIntosh has a column that I enjoyed reading in today's Wall Street Journal talking about just how the market feels toppy. And as we look at a lot of these, you know, take 2025 outlooks with the multiple grains of salt that you should. But I thought he made a pretty compelling case that he feels bad because everyone feels great. The shares of consumers expecting stock prices to rise next year is at an all-time high. And importantly, corporate insiders have not been rushing to buy back their own stock. He writes, quote, none of these points are proof that the market must fall, let alone that it will happen

soon. No one has a perfect record, and on some measures, such as the American Association of Individual Investors Survey, things aren't so extreme. But I don't want to be part of a crowd buying into a narrow story when prices, valuations, and hope are already extremely high, and insiders aren't willing to buy it back with their own money. This feels like a good time to take some money off the table." Do you think Macintosh is onto something here, or is this a little day tradie? I don't think it's day tradie. I think it is a good reminder that stocks do not go straight up. And the fact that people have enjoyed very healthy returns from the market in the last two years, and most of the last five, means that you're buying stocks after they've already risen.

that as a mathematical equation reduces what your total returns will be in the future, the higher the price that you buy something at, the lower your returns will be. So, I think that people get very excited when the economy is going well and stocks have been doing well and earnings are ahead of trend. It feels when earnings are ahead of trend that there might be a new trend or the trend in the future will be faster growth. What actually happens is stocks compound earnings per share at about between 6% and 7% a year, not 10%, not 12%, not 15%.

You may be looking at individual stocks that compound at rates like that and then some that compound currently at much more than that. But as a whole, stocks don't compound earnings per share at 10% or anything close to it. So the equations that lead people to believe that 20% returns are something that they can expect in the future are equations that have let them down in the past. So if you're a newer investor, and maybe you got involved in the market in the past few years, and I think it was basically outside of the yen carry trade fiasco, you haven't seen stocks going down that much. Whether it's next year, whether it's 2026, 2027, any future year, there will be a bear market, there will be a correction in the stock market.

What do you recommend to newer investors about how they can prepare themselves for that? Newer investors, younger, and there's a difference between younger and older on new investors. Younger investors should be rooting for lower stock prices. They should be rooting for low stock prices for a long time, so that the money that they put into a Roth IRA or a company 401 , they can buy more shares at lower prices and 30, 40, 50 years later, when they need that money for retirement, they will have much more than if they were buying at higher prices. So, it is counterintuitive when you're a newer investor to want prices to not run away. It feels good when you just start investing, you know, I just made 10%, you know,

in the last couple of months and therefore, you know, I'm getting richer. You are, but most of your investing is yet to come and it's going to hopefully have decades to compound. And in that case, your best investments will be the ones that are made at the lowest prices with the longest time to reward you. Bill Barker, appreciate you being here. Thank you for your time and your insight. Thanks for having me. All right, up next, Alison Southwick and Robert Brokamp share some tips on tax loss harvesting if you plan on cutting some losses before the end of the year. You know the old saying, when life gives you lemons, make lemonade. Well, this year has been mostly a sweet little beverage for investors as the S&P 500 has gained almost 30%. But despite

the market hitting all-time highs, you may still have some lemons in your portfolio. However, all is not lost. If those investments are in a taxable brokerage account, you can sell them and lower your tax bill. Yep, this is how it works. So if you take a capital loss, it's first used to offset capital gains in your portfolio or on your taxes, I should say. And then if there are any losses left over,

you use those to reduce your taxable income up to $3,000 a year. If you still have some leftover losses after that, you can carry those forward to future years as long as you're a living, breathing taxpayer. Now, to make the most of your underwater investments, we have five tips for you, starting with number one, tax loss selling isn't just for stocks. Yeah, really any investment you

have, any stock, bond, mutual fund, ETF, or option contract that is below the price you paid can be sold to reduce your 2024 taxes. Unfortunately, you cannot claim a taxable loss on property held for personal use like a house or a boat, but anything in your portfolio, generally speaking, is eligible. So a few possibilities are, of course, any stock that is below the price that you pay. If you bought bonds in the last few years, those are still way below their all-time highs in 2021. So you might be able to actually do some tax loss harvesting with your bonds. Small cap indexes have just recently regained their all-time highs, but not all of them. For example, microcaps haven't. I personally own the iShares microcap

ETF, ticker IWC, and that is still below its all-time high. REITs, sort of like bonds, they went down when interest rates went up. As interest rates have come back down, they've recovered a little bit, but they're still below their all-time highs. So look at your account for any investment that is underwater. You might have more possibilities than you think. All right. Next piece of advice is to sell now, but wait before buying back. Now, if you decide to sell an investment to take the loss on your tax return, you can't buy it back within 30 days of the sale date. Otherwise, the loss is considered a wash sale, and a loss that violates the wash sale rule will be disallowed. That is, you won't be

able to enter it on Schedule D to offset your gains or ordinary income this year. Now, if you lose your calendar and accidentally buy the investment back within 30 days, the disallowed loss is added to the cost basis. So you eventually do get sort of a tax benefit, but you're probably not accomplishing what you want to do this year. Also, that 30-day clock starts the day after the sale. So we're talking calendar days, not trading days. And of course, if you have no intention of buying back the investment, then you don't have to worry about any of this wash sale hullabaloo. All right. Number three, this one's disappointing. No cheating allowed. Are you about to tell me all of the ways I could cheat but won't because it's now not allowed?

Well, I'll just say that a lot of people try to come up with ways to sort of get around the wash sale rule, like they want to take that loss but still have some sort of exposure to the stock. But the bottom line is the IRS has sort of been around this block and they pretty much outlawed anything that you're trying to think of. So here are some ways to violate the wash sale rule. So in other words, don't do these things and make sure your spouse doesn't either. So you buy the investment 30 days or less before you unload the original unprofitable investment. So the wash sale rule really covers 61 days. So it's the day you sold the investment, the 30 days after, and the 30 days before. You buy an investment that is substantially

identical. And I put that in quotes because that's the IRS language. There's some debate about what substantially identical means, but I'll just use a pretty clear example. You can't sell a REIT index fund offered by Vanguard and then immediately buy a REIT index fund offered by iShares. Those are substantially identical investments. You can't buy the investment in another account, including your IRA, another tax-advantaged retirement account, or your spouse's account. Another way to violate the wash sale rule is you buy a call option on the investment. For other option strategies, it can get a little complicated. So do your homework before mixing taxless harvesting and options. Or finally, you buy an investment that could be

converted into shares of the sold investment, such as a convertible bond or a preferred stock. All right. Next piece of advice is you may have bought more shares than you think. Yeah. You may have made multiple purchases of an investment, maybe deliberately because just over the years you've bought more shares, or you've been reinvesting dividends every quarter. In that case, your holding has more than one cost basis. So it's possible you have a mix of both gains and losses. Just as a personal example, I'm a longtime shareholder of Starbucks. I've owned it since 2008. But it is below its all-time high of around $126 reached in July of 2021. I've been reinvesting dividends all along the way. So some of those reinvestments made in 2021

and in 2023 are underwater. So when you're perusing your portfolio for losses, don't just consider it the first time you purchase shares or even the average cost basis, you might have some losses in there that you don't remember. All right. And the final bro pro tip is to specify which shares you are selling. Yeah, this is crucial, right? If you've determined which shares you'd like to sell, don't just click the sell button on your broker's website, especially if you're just selling a portion of the holdings. You want to understand your account providers' options for assigning a cost basis and holding period to the investments. And then choose the method that's best for you before you sell. It usually can be done on the

company's website, maybe in writing, generally not over the phone. And you might have chosen a method when you actually signed up for the account. It's just important to understand how you identify the shares you want to sell. Because otherwise, when it comes to stocks and ETFs, the default method is first in, first out. That is, you sell the shares you've held the longest. But chances are, if you've had shares for a really long time, those are gains. It's probably the more recent shares that are the losses. So you want to be able to choose the specific shares you're selling. Don't go with the default. It's also the same with most other investments. I'll just highlight a weird thing about mutual funds. The default for many

mutual funds is actually average cost, which is, as you guessed, the total cost of all your shares divided by the number of shares. But you don't have to go with that method. Choose another method. Again, specific shares is better. But the thing about mutual funds is once you've chosen a method, you have to stick with that for as long as you hold that holding. And then my final thought on tax loss harvesting is up until 2011, financial services firms were required to just report the gross proceeds of sales to the IRS. However, now they also have to report the cost basis and holding period. So brokers are doing a better job of keeping records. So the IRS has that information for anything that you bought since 2011. If you own investments before 2011, you

might find that your broker doesn't have the cost basis information for specific shares. So you're going to have to unearth it yourself from your account statements or just look at the historical prices. Plus, it's always possible that the info your broker has is wrong. Even FINRA, which is the self-regulatory organization run by the financial services industry, recommends that investors regularly review their account statements for potential inaccuracies. So it's important to keep past account statements and trade confirmations as well as documentation about your chosen disposition method. 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

I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.