Motley Fool Money - Getting Kids to Invest

Episode Date: December 6, 2022

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

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If you're 45 or older and at average risk, ask your health care provider about the Coligard test. Coligard is available by prescription only. Learn more or request a prescription today at colagard.com slash screen. Europe's got an energy crunch and AutoZone keeps driving along. You're listening to Motley Fool Money. Welcome to Motley Fool Money. Today we're looking at the impact of energy prices as cold weather gets real here in North America.

We're checking out more retail results and we'll be talking about kids and money. I'm Deidre Willard sitting in for Chris Hill and I'm joined by Motley Fool Senior analyst Jim Gillies. Hi Jim. How you doing? I'm doing all right. I'm a little bundled up today. I know you are probably a lot more bundled up than I am because you live in. in Guelph, Ontario, Canada, where I don't think it's very warm right now.

So we're getting close to winter. Energy is a huge problem this year. How bad could it get and what areas are you looking at? I mean, we're not that cold up here. Unfortunately, Ontario is very natural. It's pretty much all natural gas-fired housing heat plus a lot of energy. It's all very natural gas or nuclear. So, we actually live in a pretty decent area for energy, but that is not energy pricing.

That's not the case for a large part of America and Europe, even Canada, for that matter. My approach to energy is basically this. There's a certain amount of demand worldwide for energy of all sorts. We're talking about heating. We're talking about electrical power. We're talking about driving your car. But there's a certain rather large number that kind of represents the amount of aggregate demand. And that number is growing just shy of about two percent. percent annually. And it has for the last seven decades or something like that. So it's probable that that trend will probably continue for the foreseeable future as much as we want to get on efficiency. And I think that's a great thing. As a former

environmental engineer, a big fan of energy efficiency. I think it's driven as well by the move to renewables and the move to more sustainable energies sources. than just burning hydrocarbons. I think I'm a big fan of that. I've got solar panels on my roof. When they work, they're great. But, you know, that giant bowl that we need to fill every year is growing by about 2% a year. And the number, the amount of that bowl, the portion of that bowl has been filled by fossil fuels, the big three fossil fuels, coal, oil, and gas, tends to run between 75 and 80%. It's about 77%, I think.

But say 75 to 80. And that amount has not been changed for the better part of my lifetime, the last four decades plus. We can say, oh, you know, cold weather might pretend higher heating bills or higher energy bills or higher cost of gasoline, although it's coming down. I kind of step back and go, like, you know, one hot summer where everyone's running their see one cold winter. That doesn't change what I kind of look as the bigger drivers here. The bigger driver is gradually 2% of your expanding ball that you have to fill. And here to

four, we fill it mostly with fossil fuels. And while I'd love to see that change, and I think it's important to drive as much change as possible towards the renewable side of things, or even towards the nuclear side of things, my investing dollars, the present value of investing dollar does tend to be more focus on what's working now and what will probably be working for the foreseeable read less than the next decade foreseeable future. And that does tend to be oil and gas plays for me. And so especially when you're looking at a lot of the oil and gas plays today after kind of a lot of them kind of lived a little, shall we say, liberally in the last oil boom, when

oil got up to about a hundred bucks, kind of averaged around a hundred bucks from 2012, 2014. Those companies didn't make a lot of money because they were, you know, spending it all over the place and paying big dividends and kind of living on company credit cards. Oil fell. Those companies got destroyed. And they're kind of now coming back and it's more of it's more, they're kind of living within their means more now. They're really focused on shareholder returns. So dividends, share buybacks living within their means in terms of cash flow. They're not like willy-nilly borrowing. And so I kind of, I know it's not very popular as certainly not where I thought I'd be as an environmental engineer. From an investing perspective,

I kind of like the oil and gas plays. And with some nuclear stuff, but oil and gas plays are kind of for me, if I can get 5% and I know, 5% yield and I know you're going to probably buy in between 5% to 10% of your stock or your shares this year. And, you know, you're going to make a lot of money with basically oil prices above $55. That's kind of where I'm putting my money. Well, that makes sense because what you talked about, how long this cycle is. It's exciting to have renewables. We want to have more renewables. It's where things are going. But as you pointed out, it's not where things are at right now. And this year especially, we're facing this, you know, the geopolitical concerns have been dramatic. We've got, you know, on last week, the EU agreed to cap the Russian seaborne prices at $60. And so that's led to all of this concern of, about, is this process going to work? Are they instead just going to go to China, India, anyone else and sell their oil there? There have been some tanker problems happening. This is all short-term stuff, but is it anything that we should keep an eye on?

I do like how it was worded. The EU agreed to cap Russian seaborne oil prices. Did Russia agree to this cap? Not so much. Not so much. No, not so much. And I think that's always kind of where I come down on these things is, you know, if you foist something upon a person, if you voice something upon a country or a company or whatever,

you should expect they're going to work around it. You know, like if, it's probably a terrible analogy, but if there's a specific type of tax, it's leveled upon you as a citizen, regardless of it's some sort of income tax. or they change the tax bracket, where the higher income tax bracket might apply. What's going to happen to the people upon whom that tax is expected to fall? Well, those people are going to start shifting money around to try to report lower taxable earnings

or take advantage of tax shelters. They're going to react. And so such taxes when they come in never quite raise the tax revenue that they initially thought they're going to do. And I kind of look at this going, okay, so we've got this price cap on seaborne Russian oil that is $60 a barrel. I did see that your old crude, so kind of the Russian oil price. It was like $70 a barrel two weeks ago.

Now it was about $80 a barrel a month ago. Now it's barely over $60. So certainly the pricing market seems to think that, oh, yeah, okay, great, it's going to be $60. Yeah, if I'm Russia, I'm just selling, like, okay, fine, screw you to the EU. I'm just like, you know, I'm going to China. and India. And to the degree that the West and Europe can put pressure on China and India to not buy, I suppose that could hurt Russia a little bit. But, you know, I, and this sounds horribly cynical, and I'm sorry for that, but I think most countries, most people are going to act in their

own self-interest pretty much all of the time. And so you've just imposed this upon Russia. they're going to act in their own self-interest, which means, yeah, pick up the phone and calling clients in China and India. And so I don't have to like it, but I think it probably does flow in the direction, no pun intended that you suggested. Well, let's take your contrarian point of view to retail. So we had two very different companies reporting earnings today and both did really well. We had AutoZone and we had Signat Jewelers.

So different companies, but definitely specifically. Specialty retailers. Let's start out with AutoZone. Good quarter for them. Net sales of $4 billion. They're same store stills. You always got to look at that for retail. That's up 5.6%. In the short term, it seems like AutoZone great for if in the procession, people are repairing their cars or cars staying on the road longer. Is this a long-term play? I think AutoZone has been one of the great long-term plays of the past couple decades. And I've never owned a share, which more fool me, I suppose. I think AutoZone has been probably one of the best managed companies and one of the best capital allocation

strategies the past few decades. Because what do they do? They basically have a market space that not a lot of people come into or going to be chasing them down. Their distribution network is already a prohibitive, I think, competitive advantage for potential interlopers. I think there's probably some argument that the rise of electric vehicles, if it does kind of play out the way certain people think it'll play out, probably could be a bit of a detractor to AutoZone's business because a lot of the parts that we replace on our internal

combustion engine vehicles, a lot of those maintenance items may migrate away or cars with regenerative braking so you're not using, you know, you're not slamming on the brakes a lot as much because you're and the car's natural, you know, gender braking to slow yourself down, might extend, say, the life of your brake pads and your brake rotors and whatever. So maybe you replace them less. And if you replace them left, it weighs on AutoZone or competitors like O'Reilly. You probably still use the same amount of windshield of wiper blades. But, you know, but I think that this company, you know, has been, and probably for the foreseeable future, probably continues doing what it's been doing.

It's kind of taken over. It's a saying I got from our colleague, Bill Mann, and I think it's a really good one. Companies that take over mountains, no one else know they want until they become, until it's almost impossible to dislodge them. And so, you know,

AutoZone's kind of one of a, I'll argue, is a duopoly in the auto parts space, replacement parts, accessories, that sort of thing with O'Reilly. And as a result, they can have, have a distribution network second to none, and they can leverage this whole thing to make a great amount of cash. And then what do they do with that cash? And I'm a cash flow-based

investors, probably a little too obsessively, to be honest with you. But it is what it is. And the amount of cash that they have generated has led them to buy back their, you know, just relentlessly buying back their own stock. And, you know, when they've done what they've done, relentlessly buying back their own stock, it ratchets. I think the market cap today is about $45, $47 billion. And I think over the past, I'd have to go look up the number of years, but over the, since they started being very aggressive with the buybacks, I think, oh, here it is, since 1998, So just over two decades.

Again, $45 billion market cap today, roughly $47 billion. They bought back $31 billion worth of stock. They bought back almost their entire self. And what that's done is it's taken the share count from back in the day. It's gone from the share count from like in 150 million shares, I think. Yeah, like in 1998, there was 152 million shares outstanding. Today, there's 19 million shares outstanding. They've just been eating themselves.

And then you go look at, okay, well, what's that done to the share price? Because you just rel, as a company buys back its own stock, if you're not selling, you own a greater proportionate amount of the company because you didn't sell while the company bought in and took it out. So, just over the past decade, looking at the last 10 years, you know, it's gone from $360 a share ballpark to $2,500 a share. So just by doing nothing and letting this company generate cash and then return that cash back to you in the form of a very aggressive share buybacks, you know, you've got what, an eight-bagger?

It's not a very exciting story. It's more exciting. Cybersecurity is a much more exciting, e-commerce, a much more exciting story. But it's these quiet little, you know, non-exciting stories, these stories where, again, it's, you know, essentially I took over, about a seven-bagger, I took over a mountain no one else knew they wanted, and I've treated myself to 21% annualized returns, which is roughly what AutoZone has given you for the past decade. So I always kind of want to, I'm not very exciting myself, so I try to avoid the really exciting investing stories. And I kind of, again, it's kind of remarkable to me. I've never owned a share

of AutoZone, even though I respect the hell of them. You're plenty exciting. Oh, I am not. Well, and I think you talk about it being a quiet play, but I think it's also a visible play. I mean, if you're driving around, you see them. There's thousands of stores all over, you know, they're definitely visible. And I want to talk about one more that's visible, probably not your area of interest, but Signate Jewelers, they also reported parent company of Zales, Jared, K-Julers, they also recently bought Blue Nile. So they've kind of got, they've got a lock on consumer

jewelry. And, you know, we're headed into a recession, potentially. It's inflation's high. You might think this is a bad time to be them, and it hasn't been. They had a great quarter. They raised their forecast. What is happening here? The consumer discretionary, seems to be doing a lot better than I would have thought. Can I be contrarian? Oh, please. I'm not sure we're heading into a recession. Yeah, I'm not so sure either, but everybody likes to talk about it.

Well, that's just it, right? Everyone likes to talk about it. If there is a recession coming, and there might be, but I think it's kind of primed to be fairly mild, and my evidence I'll cite against that is, again, the unemployment numbers don't say don't say recession. Yes, a lot of the big tech companies are doing some layoffs. But, you know, the more blue-collar companies are, as of yet, not following along. And then, you know, the other pieces of evidence I would point to is, have you tried to travel recently? Boy, people are spending a lot of money to do practically anything. And then the third piece is just what you've just said here.

consumer discretionary and certainly the wealthy haven't noticed any inflationary issue. But for those of us, shall we say, further down the socioeconomic ladder, there's, boy, there's a lot of spending going on and on consumer discretionary and jewelry on, you know, people are still playing with cars, go to cost. I just, the pent-up demand, I think, from the pandemic from being, you know, largely shuttered, depending where you lived, I suppose, but. Having your options to go out and do things for much of 2020 and 2021, that demand has been unfettered, and I think it's still running pretty hot. And so because of that, I'm not sure we're into that much of a recession. If you're not that much of recession, then companies like what's going

on with Cigna and what have you, I think make a little bit more sense. Doesn't mean I'm buying a lot of jewelry, but some people are. So, you know, I kind of took your question about a specific company kind of went off in a macro rant, but that's more, I'm kind of like, yeah, I'm not sure. I'm not sure we're going to get the recession. Some people think we're going to get. And if that's the case, then I actually think it pertends fairly bullish things for stocks. And I think it pretends fairly bullish things for stocks that people may not, may be thinking about a recession and kind of thinking, okay, I should stay away from those stocks that are mostly discretionary and it seems like the contrary in view is maybe not. Well, I think that's a great place

to end things. Thank you so much for your time. It's always a pleasure to talk to you, Jim. Thank you very much. Want your kids to start investing? Then keep the conversation short. Motley Fool contributor Brian Withers joins Allison Southwick and Robert Brokamp to discuss how he got his kids in the market and let that compound interest go to work. The last month, Brian, you posted a thread on Twitter. And it started, My Kids will be millionaire. by the time they are 40. Here's How. And the Here's How wasn't because they will win the lottery

or because a wealthy aunt is going to suffer a sudden tragic accident. Don't ask how you know that. The answer was because you introduced investing to your kids at a young age, which is an incredible gift to give someone you love. The younger, the better. So Brian, how did this happen? So let's jump in the way back machine, back to 2004.

Ooh, fancy music. I was 37 years old. My kids were five and seven. And I had just joined The Motley Fool. And at the time, it was sort of just, I had this realization that it was, you know, investing was all about time in the market and not timing the market. And I had been investing for about six years at that point. And this realization just hit me like a ton of bricks.

And I was like, man, if I just realized this 10 years ago, 15 years ago, wait a minute, duh, I can give my kids a head start that I didn't have. And in fact, I can give them about a 30-year head start. And so that's when I committed that I was going to make this happen. However, I was going to try to make it happen. Now, your boys are now in their 20s, but you started when they were about 5 and 7. So what exactly did you do? because while I'm sure your kids were very advanced, they probably weren't ready for

discounted cash flow and EBITDA. I don't know that we've ever done discounted cash flow with the kids, but it all started with a piece of construction paper and a buzzed lightyear figurine. It was something I called the pennies game. So I took one of these 11 by 17 pieces of construction paper and broke it into six squares or made it into six squares. And then I took a buzz lightyear figurine and put it on one of the squares. At the time, Pixar was a public company, and so that represented, that square essentially represented Pixar. I drew the golden arches for McDonald's. I took a Nintendo game cartridge they had for EA sports, and I filled in the rest of the squares with other companies they were familiar with. And then I sat them around the little piece of

construction paper, and I gave them a set of pennies. And I said, invest. each, you know, as many pennies as you want into the companies that you think have the brightest future, the ones that you like the best. And they went ahead and they put their pennies down and five minutes later they were off back to their Game Boy colors, you know, playing one of their Pokemon games. They were, it was sort of quick and done. They were like, okay, whatever. Well, we'll get back to having low expectations. We'll revisit that. in a little bit here. But let's talk a little bit more then about, okay, so they put their pennies on where they wanted to. They allotted their little chit, so to speak. Then what did you do?

How did this then work? Sort of the mechanics of the pennies game throughout the year. Yeah. So for each penny, it represented $100. And I invested $100 into each of the companies that they had chosen on the piece of construction paper. And the next year, I had them sort of more involved in the process about picking the companies that went onto the piece of construction paper. We did it just once a year. And part of the reason I did it once a year so I could have enough money so that they could spread it out over a few companies. I always have a hard time just picking one stock if I can only invest in one stock today. So that allowed for multiple purchases. And the other piece that I did was I wanted to set them up for success. So I sort of picked from a

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

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

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

love with investing. They tell the story all the time. And basically, they were with their dad at the grocery store, and their dad pulled some chocolate pudding down from the shelf and said, you see this chocolate pudding? We own shares of the company that makes this chocolate pudding. So let's buy some chocolate pudding. And so from a young age, they made the connection that investing gets you something awesome like chocolate pudding. So what are some teachable moments that you've had with your kids about investing? Yeah, there was one story of the gardeners. I remember where they had graduated from high school.

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

So that went over pretty well. And I love Chipotle as a starter stock because it's pretty easy to understand. But, you know, I've also had kids, the kids teach me. I remember they were buying Netflix in 2010 when I was selling. And they bought Apple multiple times. even though both of them are Android phone users. And I was like, why are you buying Apple stock when you own Android phones? They were like, Dad, didn't you just pay over $1,000 for the new iPhone X?

I'm like, well, you got me there. And also, Alex has had a tremendous conviction for Tesla from the very beginning. Let's talk about the type of account options you have for investing when you're a kid. And I know this is a topic near and dear to Bro's heart. So, Bro, you've been sitting there so patiently and quiet. Let's hear everything you have to say about this topic. Well, maybe not everything, but I do have three options for you. So the first is a custodial account like an Utmar and Upman. That's what Brian used for his kids. There are some tax benefits. So investment earnings up to 1,150 is tax free for the kid. And then the next 1,150 is tax at the kid's tax bracket now. But then gains tax after that are tax at the parents' tax bracket. And I should add that these numbers are for 2022 and they're going

up a bit in 2023. Now, anything to know about these accounts is that the kids get control at the age of majority. That varies by state, but it's generally 18 to 21, but can be as high as 25 in some states. And at that point, once they get control, they can do whatever they want with the money. It is important to know that the account is considered an asset of the child on college financial aid applications, which lowers age eligibility when compared to maybe a parental asset. And then finally, on this, it's an irrevocable gift. the money must be used for the kids benefit and you can't take it back.

A second option might be a college savings account, like a 529 or a Coverdell. These have tax benefits too, so the growth and withdrawals are tax-free, the money is used for qualified educational expenses. But this won't set your kid up to be a millionaire by age 40, as Brian is trying to do with his kids, because obviously the money will be spent on college. That said, it can still teach kids about the power of just regularly contributing to a portfolio and letting it grow over the years. And then the third option is you just own the account.

but you eventually gift it to the kid. And the benefits of this are basically more control because you can spend the money however you want. And you give it to the kid when you feel she or he is ready. And frankly, some kids aren't ready to just be given thousands of dollars when they're 21 or so. And this will lower the impact on financial aid eligibility because it's considered a parental asset. The main downside of this is that you'll owe the taxes on the interest dividends and gains while the account is yours. When you give the account to your kid, the cost bases of the investments will carry over. Brian, before we get to your final advice here for people who want to get their young loved ones

investing, how can they connect with you online? You're on Twitter. I know you're on Twitter. I know you're on Twitter. I'm on Twitter at Stocks with Brian. And then I'm also on LinkedIn. You know, look me up, Brian Withers. Look him up. He's a nice guy. He's great to hang out with. All right, Brian, what is your parting advice here? So I guess last, I'd like to encourage members to start with even a small amount. Just little math. I guess we can do math on the show, right? If you invest $600 over 10 years, say your kids between the ages of 7 and 17, by the time they're 23, they could have $18,000 built up if they achieve a 10% annual growth rate, which is the market average over the last 50,000 years. And that's, you know, having that kind of nest egg

starting out could be a huge financial advantage and a side benefit is they already have 15 years of air quotes here, investing experience, and hopefully we'll realize the power of long-term buy and hold. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have more recommendations for or against, so don't buy or sell stocks based solely on what you're here. I'm Deidre Willard. Thanks for listening. We'll see you. tomorrow. Hey, Rubol. Yeah, Bob.

You know, every year it's the same old thing. All work and no play getting these presents together. You know what that too, right? Damn straight. This year, we got a cool with that job. I'm hip. Add a little soul to this white Christmas. I can dig it, Bob.

Get a little fun. Right on, brother. Come on, Rudolph, hitch up that sled. We're going to fly down and have ourselves a disco Christmas. We're coming up. We'll be down here.