Motley Fool Money - "A combination of fraud and delusion"

Episode Date: November 15, 2022

One reason we like Charlie Munger is he rarely, if ever, minces words. (0:21) Bill Mann discusses: - The latest PPI data boosting the market - Walmart's inventory levels (and 3rd-quarter results) catching Wall Street's attention - Charlie Munger sounding off on crypto (13:37) Alison Southwick and Robert Brokamp dip into the Fool Mailbag to answer questions about Roth IRAs, how ETFs work, and more! Companies discussed: WMT, GE, UAA Host: Chris Hill Guests: Bill Mann, Alison Southwick, Robert Brokamp Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

It's tax season, and at LifeLock, we know you're tired of numbers. But here's a big one you need to hear. Billions. That's the amount of money and refunds the IRS has flagged for possible identity fraud. Now here's another big number. 100 million. That's how many data points LifeLock monitors every second. If your identity is stolen, we'll fix it guaranteed.

One last big number. Save up to 40% your first year. Visit LifeLock.com slash podcast for the threats you can't control. Terms apply. Walmart surprises and Charlie Munger speaks his mind, which isn't surprising, but usually entertaining. Motley Fool money starts now. I'm Chris Hill, joining me in studio today. Motley Fool Senior and Les Bill, man.

Nice to see you. Hey, Chris, how you doing? I'm doing well. I'm doing well, because for the second time in less than a week, we got some lovely big macro data in the form of the, you know, last week it was the Consumer Price Index. This morning, we get the producer price index, once again, sign that inflation is cooling down. The market, not shooting to the moon like it did last week, but that's probably just as well. But this is, for people looking for clues that inflation is cooling down, we just got another

piece of that puzzle. We did, and so it came in at 7.2, and it's important to note that the producer price index includes things like food. and energy, which are wildly variable at all times. The core producer price indexed was even lower. It was essentially flat. It is really good news. But it does feel bizarre to think that like a year ago that we would have said, hey, a PPI number of 7.2, yes. Thank goodness. So it is, in fact, another piece of evidence. that inflation has peaked. We don't know for sure, but it's always interesting to me to look at big macro,

and people are very, very sensitive to its movements. This would suggest that inflation actually peaked back in March. And if you remember what was going on back in March, people, there was a debate about whether it was transitory or whether we were talking about a permanent level of inflation. Now, I would not suggest that 7.2% inflation, you would say, hey, the transitory people were right. Right. There's no, it's not, this isn't like Wigley Field. You're not putting up the W flag and saying, we've got this one in the bag. But at the same time, there is something to suggest that, once again, coming out of the pandemic and the shutdowns and everything else, that we can point to all of that and say, the weirdness had an impact, and it may be abating.

Not to jinx us. Go on. Give it a shot. Let's see how powerful Chris Hill is. I know I'm not the only investor who's looking at this today in the wake of what happened last week. week and thinking, okay, all right, we just need a couple more exactly like this, and then we can declare victory. But hearing what you said, okay, yeah, when I think back to March, one of the thoughts I think of at the time as an investor, I was thinking, and I think I was saying on this podcast, like, everybody buckle up because it's not getting better anytime soon.

If it takes that long for sort of the goodness to translate into the market, is it reasonable to assume, like, hey, we've got more favorable conditions over the next six months or so. Well, yes and no. Here's what I would say. And this comes directly from the comments of the Federal Reserve. What is it that they've been most focused on? It's been inflation. And they have quite literally said that we are willing to risk a recession to beat inflation. Right? That that is going to be a necessary evil. If inflation is, in fact, dropping, that gives the Federal Reserve a little bit more leeway to think about what they can do to help stop a recession in its path.

Now, they are not all-powerful. There's no levers that they can pull to make things to be a sure thing. But to me, the really good news is that they don't. don't necessarily at this point have to have the same level of Sophie's choice of, we have to go after inflation, and everything downstream is just going to have to take care of itself for a while. If inflation is, in fact, continuing to drop on a producer level, and I would suggest that the producer level is in some ways a lot more important than the consumer level, that gives the Federal Reserve some leeway to take on some other challenges that they have

just simply up till now had to say, we can't worry about. You know how you and I and other people who sort of do this for a living, we get signs of how pervasive a topic is when people in our lives who have nothing to do with the stock market, just bring it up out of the blue. The most recent example of that is last night, I got a DM from a friend on Twitter who's like, hey, are we in a recession? Yeah. I was like, well, you know, it's possible, but it's also possible that it's going to be a very

mild recession just because it doesn't look like any recession in my adult lifetime. Yeah. It's really important to tell your friend that the Federal Reserve doesn't have really precise instruments. And most of the moves that they make take months to get into the economy. economy. And they know this. So, when they are making moves, like, for example, the incredible string of interest rate rises that they have had, they're guessing a little bit about the downstream effects. But at this point, if inflation is coming down, it lowers the probability that

they're going to continue to keep jacking up interest rates. Let's move on to Walmart, because... Woo! Yeah, Walmart. Third quarter results, profits and revenue, both much higher than expected. Stock up 8 percent at one point this morning, which for Walmart is billions. It's a huge move for a business like that. I was also struck by the inventory levels at Walmart coming down pretty significantly.

They're obviously not as low as Walmart would like to see. But if you're looking for signs of how are inventory levels, well, at the biggest retailer in America, they're coming down. Are they sitting on millions of G.I. Joe's with Kung Fu G.I.G.G.G.R. So a lot of people were pointing to the inventory levels of this quarter versus last quarter and saying, hey, they're higher. It is really important to note that inventories, particularly for retailers, you should compare on a year-over-year basis because we are gearing up for the holiday season.

So the fact that they are higher now than they were three months back is not to me necessarily something to be worried about. Chris, do you remember back in May, way back in May, and Walmart came out and reported results that scared the market to death? I mean, it was truly one of those reminders. The results that sent the entire retail industry just running scared. Yeah. On a tailspin. So, it does bear remembering just how functionally important Walmart is.

These results, and they earned $1.50 per share, way higher than estimates. Their cap-ex was still a little high. Their inventories are still a little high. I do point, Once again, to the weirdness. We've just come out of a time in which there were something on the order of 930,000 ships waiting to be offloaded off the coast of California. That might be a little high. No, it's directionally correct. It's directionally correct. It's directionally correct. So, $64 billion in inventory is a much more appropriate level, and that reflects in their

cash conversion cycles and their earnings for this quarter. So, delightful from Walmart, also announced a $20 billion stock buyback, which, I mean, I kind of wish they'd started that before they announced, but that's, you know, that is what it is. And I think that that's a sign. Walmart has been a very good reacquireer of its own shares over time. So to me, that is a sign from Walmart's executives that they believe that those shares are undervalued.

Even though, with today's move, shares in Walmart in positive territory for the year, which is pretty incredible. Yeah. Charlie Munger. Charlie Munger, who never fails to be interesting or entertaining, and oftentimes both, sat down for an interview with Becky Quick at CNBC and made comments about Tesla. When you got Charlie Munger, you ask him about a wide-range. of things. Sure. You tee them up, is what it comes down to.

And one of the topics she asked him about was crypto. And in typical fashion, he did not hold back Munger calling crypto a bad combination of fraud and delusion. And I'm quoting here, it's good for kidnappers. Which, you know, and there are some people who say, you shouldn't kick someone when they're down, but Charlie Munger is happy to kick crypto while it's down. He's happy to kick kidnappers while they're down, I guess. Yes. And it was an incredible conversation, and it was brought up after a really incredibly wild week

for crypto with the implosion at FTX. A lot of people, and Charlie Munger, it must be said, has been very negative on Bitcoin and the entire crypto segment for years. In 2018, he called it an noxious poison. And one of the really easy things to do for someone who is on the other side of the argument is point to the fact that this was, at the time, a 94-year-old guy and currently a 99-year-old guy, and say, well, he doesn't understand he's too old. He doesn't get it.

He's too old. You have to pay attention. Charlie Munger, to me, is a gift for all of us. One, because he's a pretty funny guy. He absolutely positively does not care what you think. But more importantly, he is a student of human psychology, and whether or not he understands blockchain, he understands crypto, he does understand human psychology and the hubris that comes behind new technologies because he has seen it one or two or three times. before. And I realize, as young as you and I are relative to Charlie Munger, there are people listening who, rightfully so, consider us to be old men.

Yes. But one of the things I appreciate about Charlie Munger is, you never get the sense that it's personal. You never get the sense that there is anger attached. There's humor, and there are, relative to you and me, there are old men who go on CNBC and rant about things, and I watch them. And I think, boy, this really seems personal to you. This really, there's a level of negativity above and beyond whatever financial angle you are pushing.

And you never get that with Munger. No, he really does seem like the Lieutenant Commander data of commentators. This is what he thinks. It may not be what he feels. And he did, he has in the past said, there may be a use for blockchain. There actually may be a use. that good ideas carried to wretched excess become bad ideas. I think that he has looked at the mania around this, the belief that you can get rich,

quick, using a new financial instrument, has been a way for the insiders to take advantage of the gullible. And that is something that he takes personally. Oh man, great talking to you. Thanks for being here. Thanks, Chris. You've got questions. They've got answers. Robert Brokamp and Allison Southwick are answering the questions you sent to podcasts at fool.com about Roth IRAs, helping kids invest, and how exchange traded funds work. Our first question comes from Corey. I have a question about whether I should be paying off my mortgage early or maxing out retirement accounts. My mortgage interest rate is 2.875%. We took out the mortgage in 2020 for 30 years. I know we are behind.

on retirement. I am 42 and my wife is 37. We make over 200,000 a year, but we only have 60,000 save for retirement. Not sure if I should focus on only maxing out retirement accounts, or should some of that go to paying off the mortgage early. We are completely debt-free, except for the home. We also have three kids under the age of 10. What do you think, bro? Well, so the general rule of the thumb is, if you can earn a rate of return on your investments that exceeds the interest rate on your debt, then you'll likely be better off investing the money. Given the low rate on your mortgage, Corey, that would seem relatively easy to do, right? Even treasuries are now yielding around 4% nowadays.

Plus, you're probably right that you're behind your retirement savings. Firms like Fidelity, JPMorgan, T.Role Price, they publish retirement savings guidelines. According to them, folks around the age of 40 should have two to three times their household income saved for retirement by now. So I think most financial planners would recommend that you first max out your retirement accounts before you devote extra payments to paying off your mortgage. And since you have kids, I'll also add that the general recommendation is that you should prioritize your retirement savings over college savings. Your kids will have various ways to pay for a college degree, even if they decide to get one. They may not. But there's not much financial aid for people who reach their 60s or 70s with insufficient retirement savings.

All right. Our next question comes from Sir Rob. I am a fairly recent listener and also a fairly recent stock investor. My parents didn't invest in stocks, and I'd never really got the financial education related to investing and investing early. My investment journey actually started with the full ad, so thank you for that. To continue the trend, I want to teach my kids about money and investing. I have opened UGMA and Uttma accounts for them and have been transferring a set amount every month. What should be my investment strategy given the time horizon is several decades? My kids are seven and two.

One, some days I feel I should just invest in index funds as I don't have time to keep up with companies. Two, some days I feel I should invest in gross stocks as index funds will have limited growth. Let me know your thoughts. So, first of all, good for you for getting your kids started early. And we fools are happy to have played a small role in that. So thanks for letting us know. As for your question, the answer really is both. And that's what my wife and I have done for our kids. In their accounts, they have index funds and individual stocks. And they have a few index funds to track different segments of the market, such as large caps, small caps, international stocks. Our kids are older

than yours, but at some point we let them have a hand in picking the individual stocks. And and that's something you can do eventually as well. Now, in your question, you also said that index funds will have limited growth, and I think I understand the point you're trying to make, right? Because you can't beat the market if you own a fund that will just match the market. But since the majority of professional mutual fund managers, and I would actually guess probably the majority of individual investors, lose to index funds, I think just getting the market's return is good enough, especially if you, and eventually your kids won't have time to keep on top of what's going on with the companies you own. And a final point I'll make is that UGMAs and Utmas are custodial accounts that allow a minor to own an investment account.

And there are actually some tax advantages to having assets owned by the kids. However, once the kids reach the age of majority in your state, they'll get the money and can do whatever they want with it, whether they're good with money or not. Also, because it's considered an asset of the child, it can potentially reduce financial aid eligibility when they go to college. It doesn't mean that you shouldn't open these accounts for your kids, but I just want to make you aware of the potential drawbacks. Next question comes from Nate. I am 25, and my portfolio consists of 26 stocks as well as several broad market ETFs.

I have consciously decided not to have any exposure to bonds, as historically, stocks have well-outperformed bonds. I understand that bonds are generally more stable and can counter the volatility we see in the equity markets. However, I'm not afraid of volatility, as I am in this for the long haul. I feel as though bonds may only drag down my portfolios return over time. Are there other benefits to bonds that I'm overlooking? How would you recommend allocating between stocks and bonds as you get older? Well, Nate, what you said about bonds being more stable is generally true, but not this year. The overall bond market is down 14% in 2022 as of November 14th, while the S&P 500 is down 15%.

This has been by far the worst year for bonds in our lifetime. if not the worst in U.S. history. So I think this year will change the perceptions of bonds for some people for a while. But usually, you're right, bonds are less volatile than stocks, but they've also provided about half the return of stocks since the 1920s. So as long as you can stand the ups and downs of the stock market, someone in his 20s could have most or all as retirement savings in stocks, given that it's around a 40-year holding period.

It is important to have a diversified portfolio of stocks, but it sounds like you're on the right track here too. We at the Fool generally recommend that you own at least 25 stocks, along with some index funds for added diversification, and you've checked both of those boxes. Just make sure that your stocks aren't too concentrated in one or two industries or sectors. As for how you should get more conservative as you get older, I think taking a look at the allocations of target date funds for people your age is a good place to start. So target date funds are a mix of cash, bonds, and stocks allocated according to a future year of retirement. So you'd be looking at a lot of.

at one for 2065. And it'll be 90% or more in stocks. But as we get closer to that year, the fund will gradually move its money from stocks to cash and bonds with around 50% in stocks before retirement. So these are offered by most of the big name firms, BlackRock, Fidelity, Vanguard, Tiro Price, but they do have, there's somewhat slightly different ideas about allocations. So I think it's a good idea to look at all of them just to get a range of opinions. And finally, I'll just say these allocations are for a broad audience. So, they're intended for those with maybe a moderate risk tolerance. So if you're more aggressive, you could have a bit more allocated to stocks than the general target date fund recommends, or look for a target date fund with a retirement date that's

10 years later than your actual retirement date. Our next question comes from Brad. Oh, mighty answerer of all things, financial. Brad, Brad, Brad, Brad, Brad, Brad, Brad. You could just call him bro. I think he was talking about you, Alison. Yeah. Reader of all questions, financial. That would be my title. Brad writes, my wife and I contributed the max to both our Roth IRAs last year and found out at the end of the year that we unexpectedly made too much. So we have to file an excess contribution form with Fidelity. I have a couple questions for you. One, any suggestions on how to best navigate the excess contribution process? And two, I am going to have to sell some shares to withdraw the excess funds.

I have 50 companies I'm invested in, all of which are down significantly this year. Do you have any suggestions for how to decide which stocks to sell? I would be grateful to hear any suggestions you may have. Fool on. Well, Brad, this isn't an uncommon occurrence. People think they're eligible for a Roth IRA, but then they get a raise or a bonus or get married, and it turns out that they weren't eligible. And because this happens to many people every year, the way to fix this is to reach out

to Fidelity, right? They should be able to walk you through the steps, and you should do it. as soon as possible because you'll pay a penalty for each year you don't fix it. Now, depending on your situation, you may have a couple of options with those excess contributions. You may be able to just recharacterize them as contributions to a traditional IRA or have them transferred to a brokerage account. But you may not have to sell any stocks, because while only cash can be contributed to an IRA, distributions can be in the form of shares. So check with fidelity to make sure, but you may be able to correct the excess contributions,

contributions just by moving shares from one account to another. If that's the case, then it's a question of which investments should be held in which types of accounts, what is known in the financial planning world as asset location. And the general rule is that you use your Roth for the investments that you expect to have the highest growth potential. Because it's the tax-free account, it's the one you want to grow the most. So you'd fix the excess contribution by transferring out the investments that you think have lower growth potential. Our next question comes from Bruce. I believe that the Motley Fool breaks down stock market capitalizations as small caps are less than

$2 billion. Midcaps are between $2 billion and $10 billion. Large caps are over $10 billion. All of these seem low, considering that we have companies with capitalizations of over a trillion dollars now. What would be a good, updated rule of thumb for the size of companies in each of these classes? Well, you're right, Bruce. Those market cap breakdowns were sort of standard for a long time,

but really have become outdated. And the fact of the matter is market cap is a relative designation. A large-cap stock is considered large only because it's larger than other stocks. And a small cap is smaller than other stocks and so on. So the index providers do generally update these market cap ranges for these labels. So, for example, 15 years ago, Standard and Poor is considered a large-cap stock to be one with a market cap of at least $5 billion. But as of March of this year, it has to be at least $14.6.

billion. So, a company has to be at least that big to be in the S&P 500. The current ranges for the S&P 400 index of mid-cap stocks is 3.7 billion to 14.6 billion. And the range for the S&P 600 index of small-cap stocks is 850 million to 3.7 billion. Now check back in a year or two, and those ranges will have changed. They may be higher, or if next year is like this year, they may actually be lower. And our last question today comes from Alex. We hear a lot of about how low-cost index funds are a great, diversified, low-cost, passive option for investing. What I don't understand is how the buying and selling of that index fund works over time.

If I'm purchasing an S&P 500 index fund today with lots of Google, Facebook, and Tesla, what happens when I go to cash in that index fund 50 years from now, and the index is tracking totally different front-running stocks? Am I selling the Googles and Teslas of 40 years ago, or am I selling the new companies? Well, Alex, here's a way to think of it. So, the managers of index funds take in millions or billions of dollars from investors, and they have to invest that money in a way that matches the holdings and allocations of an index at that time. So if they're managing an S&P 500 index fund, they may take a look at the S&P 500 today

and see that it's 6.7% in Apple, 5.5% in Microsoft, 2.7% in Amazon, and so on. So that's how they invest their money. Now, when they take a look tomorrow, the percentages will have changed, and they have to make sure their fund matches those changes. Some of it will happen naturally as the stock prices move up and down, but the managers may also have to sell some of some stocks and buy a little bit more of other stocks to exactly match the allocations of the SEP 500. And this likely happens more than once a day, and probably throughout the day, and I suspect

it's mostly actually done by computers nowadays. As a stock drops, it'll become a smaller part of the index, and thus a smaller part of the fund. So I came across an article that showed how the biggest company in the S&P 500 in the fall of 2001 was General Electric. Well, since then, GE's stock is down 70%. So now it's a much smaller part of the S&P 500, and it's gone from number 1 to number 80. And the committees that manage the indexes meet regularly and decide what should be included and what should be removed from the indexes. So this year, the committee at Standard & Poor has decided that Under Armour should be removed from the S&P 500 in June. So, every manager of an S&P 500 index fund had to sell

Under Armour in June. So if you buy an index fund today and sell it 40 or 50 years from now, you will be cashing in the shares of the companies that meet the indexes criteria at that time. Oh, that's all the questions for today. Thank you, almighty answerer of all things financial. If you, our dear listeners, have a question for us that you would like to have answered on the show, well, you. You can send it to us in a couple different ways. You can email us at Podcasts at Fool.com, or you can call and leave a voicemail at 703-254-14-45. Once again, that's 703-254-14-5.

And then that way you might actually even hear your voice on the show and impress your friends and enemies. 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 ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.