Motley Fool Money - What's on Jamie Dimon's Mind?

Episode Date: May 21, 2024

A lot, actually. (00:21) Bill Mann and Ricky Mulvey discuss JPMorgan’s investor day and CEO Jamie Dimon’s thoughts on stock buybacks and inflation. They also talk about the shift toward fast-casual dining and Red Lobster’s bankruptcy. Then, (17:05) Alison Southwick and Robert Brokamp answer listener questions about 403(b) accounts and saving for college. Check out the Range Rover Sport at www.landroverusa.com Got a question for the show? Email us at [e-mail] Companies discussed: JPM, CAVA, SG, TXRH Host: Ricky Mulvey Guests: Bill Mann, Alison Southwick, Robert Brokamp Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got a recap of the Jamie Diamond show and a look at Red Lobster. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill, man. Bill, good to see you. Hey, Ricky. How you doing, brother? I'm doing pretty well. I spent this morning watching the JP Morgan Investor Conference, which is basically four hours of presentations and then one hour of Jamie Diamond at a podium with his energy. I guess my first question is, you know, just to be fair, what are your top 15 takeaways from the first four hours of JP Morgan's investment?

Number one through 14 were basically that I was excited to get to the Jamie Diamond hour. There you go. And number 15 was that their business is in pretty good shape. There's some stories there, including some takes to bounce off of you. But the first, sort of the first section that really needled him was about stock buybacks. The analysts there, really wanted to know about what Jamie Diamond was doing about stock buybacks. Why are they so curious about this bill? Well, it's funny, because stock buybacks are really thought to be a very efficient way to return cash to existing shareholders. And in the form of, you know, there's not much in the way of tax. And every share of stock you should think of as being a perpetual claim on earnings and assets of a company. So when you remove that from the mix,

it concentrates the earnings into the remaining shares. So it should, in theory, all else being equal, be an incredibly accretive thing for shareholders. Mr. Diamond might disagree with you. He said, quote, we do not consider stock buybacks returning cash to shareholders. That's giving cash to exiting shareholders. We want to give cash to existing shareholders. What does that guy know? Yeah, what does he know?

You get a larger slice of the earnings pie. He has beef with it. He's not wrong. And the funny thing about buybacks is that you, the reason that you do it is that it makes the earnings per share go up over the long term. But if you buy them back at too expensive of a price, it's not a particularly good use of capital. All of the money that they're using for share buybacks is invested capital into the company.

So, they are making a choice, and you want your CEOs and your executives to be good stewards of capital. So they're making that decision versus other things. And so, I'm not so sure. Although, he was pretty definitive about it, so I'm not going to try and parse Jamie Diamond too much. But all else being equal, if he thought that JP Morgan's shares were cheap, I think his tune would be different.

But what he is really saying is that J.P. Morgan shares at current prices is not a good use of their capital. He was very much needling the analysts there basically saying, I'm not going to tell you when I buy back shares. However, here's a metric that I look at when I'm thinking about buying back shares and also our stock price is high right now. Jamie Diamond was sort of leaning on this tangible book value comparison, saying, you know, I'm not going to buy back stock when it's worth a lot. lot like more than two times tangible book value. I know the people in that conference room knows, know what that means, Bill. But let's start with what is tangible, like what's he talking about here? What is tangible book value here? And why is he looking at that? So back in the days of Ben Graham, book value and tangible book value used to be in an industrial United States of America, maybe the single most important component for stock analysis. Now, today, so many of our companies are like software-driven or their intangible driven or their brand-driven, that it's not so important,

but it still remains a very important measure for banks. And J.P. Morgan is a lot of things, but at its core, it is a bank. And so their tangible book value is quite literally the value of their assets once you subtract out their liabilities. And so when you have a bank that's trading above its tangible book value, the market is presuming that it will take its book value and continue to generate returns. So a company like J.P. Morgan that's trading at two times its bank, its book value, essentially means that for a bank, the expectations that are being put on J.P. Morgan from the current price, Jamie Diamond is saying, are extreme. And he said, saying this at a time where the market is very happy, I would say, about the future. And Jamie Diamond

is a bit more pessimistic explaining to these analysts that he's building up, he's saying, he's very comfortable having a very large cash position because of threats like de-globalization, the geopolitical situation, cybersecurity threats. At one point, he mentioned Ethernet Cords in the ocean getting cut. And basically, and the biggest thing for long-term stock returns is inflation. And he pointed out that the Dow Jones hit an inflation-adjusted all-time high. I'm going to change the dates because I don't, I'm changing the dates because this is the inflation-adjusted return. But basically, it hit an all-time high in 1966, and that was not surpassed until 1995. You had a 30-year period. And that was a cycle where

there was a lot of inflation. And his point was, we just had a ton of quantitative easing that really boosted the stock market. And it's hard for me to believe that years of quantitative tightening will not have the reverse effect. Yeah. Yeah. He is one of those guys. And it's easy to want to dismiss what Jamie Diamond is saying.

But he is one of the greatest capital allocators in American industry today, perhaps all time. and he is absolutely correct that we have just gone through a period of time, which, oddly enough, you know, we had $17 trillion of sovereign debt around the world. That was negative interest bearing. That meant that you had to pay to hold that debt. And the reason that that was the case was that everybody was worried about inflation. Inflation was what was was the great worry. So, he's not wrong. He's really not, but it doesn't feel very great in a period of time in which the market is saying the exact opposite. So, yes, I mean, he's a cautious guy. He is a cautious CEO, and he's a very, and he is a very deliberate manager of JP Morgan shareholder capital. And for me, my hat's off to him for that, even if I disagree with some of the things that he is focusing on first and foremost.

You like to see a cautious person running a large bank. And he did bring up, he brought up a few more. And there were parts of this where you feel that a, Bill, I'm going to say either a political career or a podcast could be in this gentleman's future riffing on the U.S. debt and other sort of geopolitical issues in ways that were not necessarily related to the analyst asking him a question. He did go out of his way to make some points. Yes, he did. he also went out of his way to not give an answer on the CEO succession plan. I'll call it Sphinxian because I would say the headlines are basically saying like a J.P. Morgan's CEO departure is really close. And all he said was that succession was not

five years away, which could mean it's like two years away, six months away, or 10 years away. What did you make of sort of the comment and also sort of the influx of takes on what this means? It means to me, well, so basically what he said was that he's more towards the end than the beginning. And he has been in the chair for going on two decades now. So that's, I don't know, the actuarial tables would suggest that that is a kind of an obvious statement. I don't think that he owes the market certainty in that type of decision. I just, I don't think he does, which is not what the market thinks. The market loves certainty. The market wants to know this is going to happen on X day or, you know, or the earnings in 2026 will be this number. So I don't mind at all. What he is saying at this point is not, hey, I am staying here forever because that is a move that CEOs of the stature and, let's just say, singular importance of Jamie Diamond.

have been want to do. He is saying that there will be a time definitive that he's going to be stepping down. But next question, or even better, let's talk about, you know, the Middle East. Yeah. How about you? And also, hey, analysts, how about you start looking at the people around me and start studying them and then you can go analyze that? All right. Speaking of next question, I sent you an article in Bloomberg about how more people are sort of

trading up, like fast casual and fast food is basically the same price. This is helping fast casual brands, hurting fast food brands. And then you responded to me on Slack with Red Lobster conspiracy theory. So Red Lobster declared bankruptcy. It's gone through sort of, it was a part of Darden restaurants, which is a publicly traded conglomerate that owns Olive Garden and then sort of went through a series of private equity owners until now where it is selling whole restaurants at auction. It has gone bankrupt. I will remind listeners that, We are not journalists. We are podcasters and analysts. So, Bill, the floor is clear for your Red Lobster conspiracy theory.

So Red Lobster was owned for a number of years by private equity, and then it was sold a couple years ago to a Thai company called Thai Union. And Thai Union is a bunch of things. It's a conglomerate. But one of its big businesses is that it is a provider of shrimp. and one of the primary reasons that Red Lobster has filed bankruptcy is they had this endless shrimp promotion that they've had on for a long time, and it has cost them so much money that they're going bankrupt. Now, I ask you, if I am both the provider of shrimp and the owner of a maybe failing business, what is one of the best ways for me to get my money, ahead of any debtors or creditors. Well, one way to do it would be to put endless shrimp on the

menu forever until it takes down the company. Because at the parent company, I'm getting paid to sell this dying, struggling business shrimp. So what is more important to me that I get my money or that I protect that equity? So I think maybe Thai Union has trimmed its way into, Red Lobster's bankruptcy. Well, didn't they, they had other suppliers of shrimp that they basically cut out over the past few years, right? Yeah. So it's not, it wasn't a competitive bidding process, if you will, for this endless

shrimp promotion, which also, I think, didn't, didn't Thai Union blame this specific promotion for basically running the, running the company at an operating loss? Yeah. Yeah. And what's crazy about that, this is because Thai Union is the owner of the company, they, the CEO of Red Lobster and the board of Red Lobster are their appointees. Oh. Right?

They're not saying, hey, those guys blew it. They're saying, those guys blew it by buying too much of the stuff that we sold them. Yeah. Well, they also, the customers weren't buying anything else that they pointed out. They said they came for endless shrimp and then they weren't buying any other items, which logically, if you get endless shrimp, I mean, this is. Do you know what you can do with shrimp? You can bake it, you can broil it, you can steam it, you can put it in a po-boy, you can pan-fry it, deep-fry it, stir-fry it.

You can do a lot of things. Okay, Forrest. Okay, Forrest. Yes. That's a good point, though. Yeah, not only that, but what do you know about all you can eat promotions is that they are almost necessarily adverse selecting, right? Like, you don't get a, you know, a person who is like, oh, I don't eat very much to go, I want the all. you can eat because I would like to pay a little bit more, even though I can barely handle a regular

size plate. I want an endless amount of shrimp as I define it. It's a gamble with shrimp. I want to move on to a couple other companies. Do we have more on the red lobster conspiracy theory? It actually sounds like really reasonable. I want to talk about this for a really long time, but yes, let's not make this a hostage situation for the listeners. It's not. They can leave at any moment. However, I will say that there's a good Bloomberg article about this. It came from Data Essential, which basically has shown just the influx of investor interest in these fast casual restaurants that have become less expensive than fast food. Kava basically saying, we want to be a place where you can get a $12 lunch or dinner now,

seven days a week, which is maybe less expensive than a lot of combos at McDonald's. Sweet Green, which is marketedly more expensive than that, has also performed extraordinarily well this year. Kava up about 100 percent, sweet green up about 200 percent. And that's just since January, not 12 months ago. Do you think this investor interest, like, what do you make of this move and do you think the investor interest in these companies are overblown at this point is a long-term trend? So investor interest and stock prices are always about predicting the future.

And so the fact that the prices to go into a McDonald's versus going into a Kava have converged means that people who were making a choice to go to a McDonald's from an economic standpoint now have a much wider set of choices. Now, a lot of people go to McDonald's because they would like those fries or they would like a shake or they go to, you know, the choices aren't necessarily entirely all-economics. There's convenience. There's a bunch of things that goes into, let's call it, consumers' share of stomach when it comes to fast food and fast casual places. But the fact is now that a sweet green or a kava, they are much more price comparable. And one of the reasons is that one of the fastest areas of inflation has been in the protein component of the food cost, whereas that hits McDonald's squarely, it is somewhat tangential for these companies. They are not as protein driven as a lot of the fast food places. Yeah, but I'm half buying that, Bill, because in a place like,

well, okay, okay, I hear that. Give me five guys. You're about to say something cynical. No, not cynical. It's actually a credit to Texas Roadhouse. If you get a burger and regular fries at five guys right now, that is basically the same price as an eight-ounce sirloin with two sides over at Texas Roadhouse. So I agree that beef, like there have been problems with droughts and beef inflation is real. However, there are companies that have managed this significantly better. To the extent that you believe that the pricing mechanism at a McDonald's is being driven by the need to raise prices, I would agree with it. Fair enough. That's a good place to end it. Bill, man, good to see you again. Thanks for being on here. Appreciate your time and insight.

All right, take care, right. The old adage goes, it isn't what you say. It's how you say it, to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort.

Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response to fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers atrange.com. If you've got a question for the show, email us at podcasts. It fooled That is Podcasts with an S at full.com. And up next, Alison Southwick and Robert Brokamp answer some of those questions about 403Bs, saving for college, and tracking stock returns. This question comes from

Abram. I wanted to get your opinion on how to think about the difference between dollar investment and the number of shares you own of different companies. Is it better to have more shares of a company with a low share price than a few shares of a company with a high price? Well, Abram, theoretically, it shouldn't make a difference, right? Let's say you invest $1,000 each in two stocks. And one is trading for $100 a share, so you buy 10 shares. And the other is trading for $500 share, so you buy two shares. And if those stocks both go up 10%, you'll have earned $100 on each investment, $10 for each of the 10 shares that we're trading for $150 for each of the two shares that were trading for $500. So it really doesn't make much of a difference. And by the way, this is why stock splits are

theoretically a non-event. With a two-for-one split, the number of shares get doubled, but the stock price gets halved, so the value of the company hasn't changed. All that said, if you're investing relatively small amounts, say with monthly contributions to your brokerage account, it can be easier to put all your money to work in stocks that have lower prices if your broker doesn't allow you buy fractions of shares. And this is one of the reasons why companies split their stocks, because they believe that the lower share price will make it easier, both practically and psychologically to buy their stock. I'm surprised you explain that without bringing up the pizza metaphor.

I feel like that's legally required. Standard, yeah. I try to get away from that. But yeah, very good point. Next question comes from Robin. I have been investing in my 401K for more than five years. When I retire in three years, can I transfer the Roth 401K to a money market or high yield savings account with no penalties or taxes?

Transferring to a Roth IRA would restart. the five-year clock. Yeah, Robin is highlighting something very important about Roth accounts, and that for the withdrawal is to be tax-free, you have to be 59.5 and the account has to satisfy the five-year rules, which can be pretty complicated. So here's the simplified version. For Roth IRAs, as long as you have had any Roth IRA open for five years, you're good. However, each Roth 401 has its own five-year clock. Furthermore, if you roll your Roth 401k over to a Roth IRA,

and that is your very first Roth IRA, the five-year clock resets. And Robin seems to understand this. So what she should do is open a Roth IRA right now and fund it, even with a small amount of money. If she earns too much to be eligible for a Roth IRA outright, she should open a backdoor Roth by contributing to a non-deductible traditional IRA and converting it to a Roth. There'll be little to no tax consequences if she doesn't

have any other money and other traditional IRAs. If she does, she'll pay some taxes due to the so-called pro rata rules, but it'll still be worth it. Just deposit like 50 bucks, convert it, pay the taxes, and get that five-year clock ticking. When she retires three years from now, just keep her money in the Roth 401K for a couple of years until that Roth IRA has hit five years. And by the way, the clock starts on January 1st of the year of the contribution. So if she just did it today, she's already got five months under a belt since we're in May at this point. Now, to answer her question about whether she can transfer her Roth 401k to some kind of savings account without taxes and penalties, the answer is yes, as long as she's 59.5.

But then she didn't have to pay taxes on the interest and miss out on all the tax-free growth from here on out. Plus, you generally use your Roth for your highest returning assets because it's the $1,000. the tax-free account and you want your tax-free account to grow the most. So transferring her entire Roth 401k to a savings account is likely not the best route for her. Next question comes from Matt. I'm a public school teacher of 26 years. Wow, thanks, Matt. Kids are, kids can be rough. Okay. I currently have a 403B with about $63,000 in it that I stopped paying into about 10 years ago because the management fees were growing. I started subscribing to Molly Fullstock. advisor to get stock advice and opened up a Roth IRA and invest through there. Since I don't

contribute anymore to the 403B, should I just leave the money there or should I pull it out and take the penalty and put it in my Roth IRA, which I have total control over and pick the stocks. Honestly, I'm not even sure if I'm able to pull it out since I'm still in public education. Yeah, as a former elementary school teacher, Matt, I salute you. I can only do it for five years, so I'm pressed you've been doing it so long. The first thing, the first thing, I would say is that if contributions to your 403B are matched, then you might want to consider at least contributing to the 403B up to that point and then move on to the Roth IRA for additional contributions. But as is your experience, many 403Bs are frankly really bad with

high expenses. It's astounding how school systems and 403B providers get away with it. So it totally makes sense to favor an IRA over a bad 403B. Maybe even if it means giving up some match. It just depends how bad the 403B is. As for the money already in your 403B, you'd pay taxes when you take the money out, plus a 10% penalty if you're not 59.5. And as you suggest, it may be difficult if you're still employed by the 403B provider, sponsor. It just depends on the rules of your plan. So I would talk to the administrator to see what your options are. But all that said, I'd be inclined to leave the money there. Look for the lowest cost options within the 403B, maybe an index fund or

a few in investment categories that are different from what you've chosen in your Roth IRA so that you get some diversification. And finally, a great resource about 403Bs is 403BWIS.org, which provides all kinds of education resources, including ratings of 403Bs offered by various school districts and suggestions for how to get out of a bad 403B. Next question comes from Tim Jay. Dear your broliness, okay, I think we may be reached peak bro there. It's all downhill from here. All right.

Dear your broliness. As a Motleyful member, I've been investing for over 15 years. One question, I never have time to research involves performance data. I often see a stock or fund price or annualized return tracked in tables and charts, but could you clarify the differences between the terms annual return versus? is annualized return versus cumulative return. When I'm trying to compare stock and ETF performance at publicly available websites, I usually see dividends listed separately as a percent.

Does any of the performance data metrics above include past dividends? Is there a service, ideally a free one, that combines stock price, fund expenses, reinvested, and special dividends all into one fancy graph. So I can see the most realistic picture of fund performance over time. So, there are a few terms to keep an eye out for when you're trying to figure out what kind of return you're looking at. One is price return, which is just the change in the price of the investment doesn't factor in dividends.

In fact, the quotes we usually hear about or read about every day when it comes to the Dow, the SAB 500, the NASDAQ, they're just the price return. Doesn't say anything about the dividends you would receive. To get the true return of any investment or any index, for that matter, you need to look for the total return, which includes dividends and usually assume that you would have to be the investment, the dividends are reinvested. In other words, you're buying more shares with each dividend. As for the terms you asked about, annual return usually just means when an investment earned in any given calendar year, like 2023, 2022, and so on. Annualized return is the compound annual growth rate,

also known as the kegher, of an investment over a period of years. So, for example, you've likely heard that the stock market has returned 10% a year since the 1920s. But the stock market has rarely returned exactly 10% in any single year. That 10% is just the compound average over the last century or so. And I don't want to get too much into the math weeds, but that 10% is not the simple average, otherwise known as the arithmetic mean, which would just be adding up all the individual year returns and dividing by the number of years. That actually would overstate the historical returns of the stock market. You need to use a somewhat more complicated formula in Excel using present value, future value, stuff like that. I personally often use the geometric mean function in Excel,

and you can find plenty of Kager calculators online. Cumulative return is the amount you earn total from the point you invested to the point you are today. So, you know, if you invested a thousand dollars 10 years ago and it's now worth $10,000, the cumulative return is not annualized. It's just the one figure that shows the growth from point A to point B over that total time period. All right, enough about those. The final point I'll make is that the reported returns for mutual funds and ETFs are always after annual costs that are taken out, captured by the expense ratio that you'll see on websites. However, they do not account for commissions or annual fees you may be paying to a financial advisor to put you in those funds. And as for where to find this information, every financial website provides most of it, including here at The Motley Fool, you just have to dig into the details to understand what

information they're presenting. But as I've mentioned on shows before, my favorite source of historical info, especially for funds, is Morningstar. All right. Next question comes from Adam. Allison and Bro, thank you for all of the work you all do to help make the world smarter, happier, and richer. Oh, thanks, Adam. I've been listening since having my own financial awakening nearly three years ago. At that time, my oldest was three, and we were planning on having our second. And while I am moving in the right direction with my finances, I am still playing catch-up from growing up in a family with next to no fiscal responsibility. About a year ago, we finally started investing in a 529 account for each of our daughters. At the time,

they were four and one, so our oldest effectively lost three years of investing time. Once my student loans are paid off later this year, some of that money will start being deposited monthly into each of their accounts. The question is, how do I allocate funding for these two accounts to ensure the older kid will have the same amount saved for college when they each turn 18? Well, Adam, I admire your desire to be fair to your daughters. And I'm going to offer two perspectives on how you should handle this. And the first is mostly what my wife and I did. And that is, it really isn't necessary to make sure each account has the exact same amount of money. Because here's the deal with 529 accounts. You're the owner, not the kids.

And while they're separate accounts, you could move money between the two because you can transfer money between accounts of qualifying relatives and siblings qualify. So if one account ends up bigger, you can just transfer some of the difference later on down the road if you feel it's necessary. But you really can just think of 529s as your money just in different accounts. But if you're going to do it that way, I think it is important to be clear with your daughters about how much you'll pay and how much they'll be responsible for. So my wife and I strongly encouraged our kids to attend in-state public universities, which

is easy for us because we live in Virginia and we have many excellent state schools. We said we'd cover all the costs of an in-state public education. But if they went out-of-state to a private school or an out-of-state school that costs more, they may have to come up with the difference. Now, just to provide a different perspective, I have a colleague here at the Motley Fool, Buck Hartzell, and he and his wife, Tiffany, told their kids how much they had in each of their accounts that their choice on schools was up to them. There was no sharing of $520,000, money, but they had to find a way to pay for school with the amount that was in those accounts,

and what they didn't use, they got to keep. When I was slacking with Buck this morning about this, he made the point that he and his wife felt it was important to let the kids make their own decisions, and that they learn how to make choices given limited resources. And if you go that route, you do indeed have to make sure that your daughters have roughly the same amounts. So, in your situation, you might add a little bit more to the older daughter's account to make up for those missed years. But then once they're in high school, you can transfer money from one account to another to get closer to an equal amount.

So which way you go is really up to you and your wife, how you want to decide to do that? And I'll close by pointing out that we'll be talking more about 529s and college savings on the May 29 episode, because May 29th is College Savings Day, because the other way to say May 29 is 529.29. Get it. And in that episode, I'll be interviewing Roger Young, Atira Price, so I hope you'll tune in. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.