Inflation and the FTX Collapse Got These Investors Talking

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In this podcast, Motley Fool senior analyst Jim Gillies discusses:

  • How inflation in the U.S. compares to other countries.
  • Why some Nasdaq stocks have been “brutalized.”
  • Sam Bankman-Fried, co-founder of FTX, being arrested and charged with (among other things) conspiracy and securities fraud.

Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp answer listeners’ questions about how many stocks to own, financial aid, and saving for kids.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Dec. 13, 2022.

Chris Hill: You’ve got questions, we’ve got answers. Motley Fool Money starts now. I’m Chris Hill. Joining me from the Great White North Motley Fool Senior Analyst, Jim Gillies. Thanks for being here.

Jim Gillies: Thanks for inviting me, Chris.

Chris Hill: The consumer price index in November rose 0.1 percent compared to the month before. That is lower than the 0.3 percent that economists were expecting. Yes, Jim, it does feel crazy to celebrate inflation rising seven percent year over year, which is what this is year-over-year. That’s pretty much what they’re doing on Wall Street. Across the board, most stocks in positive territory today and I’m OK with that.

Jim Gillies: Oh, absolutely OK with that. It’s down a little bit. It looks like it came out of the gate pretty hot this morning about seven or 800 points, I think on the Dow, now were up only 200. I do appreciate the somewhat cynical grin that people celebrating seven percent inflation does engender. But one of the articles I was reading this morning that came from a noted financial network/website. The quote is, “Prices rose less than expected. The latest sign that the runaway inflation that has been gripping the economy is beginning to loosen up.” Weimar Germany would like a word. Venezuela’s on Line 2, and Zimbabwe’s on Line 3. With all due respect, I know it’s been difficult for some folk. I know that it’s been a lot of headline ink wasted on inflation being the story of the last year.

But A, I think elevated inflation was somewhat expected given the amount of stimulus money that was dropped into the economy from 2020 and 2021 and B, in no universe is seven percent or nine percent or 10 percent, whatever, is runaway inflation. It’s the worst that we in North America has seen in 40 years. That is absolutely true. But I don’t remember a similar amount of angst written ink being spilled for the near 15-20 years where we had effectively zero inflation. Our colleague Bill Mann likes to say, there was no inflation for about 15 years there in fact, and rates were kept so low because they were looking to try to stimulate the economy and avoid the bigger sin of deflation. I am hopeful that we have passed this bubble of elevated CPI. I look forward to getting back to a level where the central banks will be happy with interest rates and everyone can make money and everyone will be happy. Yes, the sky, in my world, is very much rose-tinted today apparently.

Chris Hill: When this kind of thing happens, one thought always goes through my mind, which is OK if all these stocks are up. Again, I’m enjoying this as much as any investor’s enjoying this today. But I look at this and I look at some of the some of the stocks in my portfolio and I think you’re up 5, 10 percent today, but you’re probably not 5, 10 percent better as a business. Are there stocks or even categories of stocks that you’re looking at right now when most everything is down year to date? Are the things that you’re looking at thinking to yourself, actually that makes sense? This one really should be up the amount that it’s up today.

Jim Gillies: As we say that I just looked at my board here and I haven’t been paying much attention. But I now see the Dow is up less than 100 points and the Nasdaq is carrying the load. A little worried. I’m not worried, worried it’s bad word. Wouldn’t be shocked if we close down today. So there’s my silly bold prediction. The ones that I think makes sense, even though I don’t necessarily agree the prices are correct, is the fact that again, I mentioned the Nasdaq is up the most today, the Nasdaq, that makes sense to me because a lot of the companies on there have really been brutalized the last year, as you’ve mentioned, last year and a bit in fact, a lot of the really high-growth stuff arguably peaked in February 2021. We’re coming up on our second anniversary of those things being taken behind the woodshed.

But that makes sense to me because so much of the perceived value of those companies is really fairly far in the future. A lot of them are losing money, a lot of them are burning money, a lot of them have really high stock-based compensation and dilutive practices. But we were always promised, the growth in the future is what’s going to justify paying some of the ridiculous prices that some of these things go into. When interest rates started going up in response to this inflationary pressure that was unleashed, higher interest rates means the discount rate used to discount future cash flows is also higher because discount rates are generated or created based on you take the risk-free rates, 10-year government bond and you add a risk premium for equity. We can debate whatever. Actually we won’t because it’s boring.

But basically the distillation of the insight there is asset prices and interest rates are inversely correlated. When you start ramping your interest rates, the asset prices should fall in response. The more, shall we say, excitedly valued among this sets would fall the most, because the more of the value is perceived out in the further period and now you’re just discounting that even harsher. Then the names on the Nasdaq and especially the higher-growth names on the Nasdaq, that doesn’t surprise me terribly much that that’s driving some of these gains. The other thing is I’d look at a lot of companies where I would perceive that they are undervalued and that’s my job, is to find securities that I think are undervalued and that I also have to justify that they’re undervalued. I think something is undervalued doesn’t mean it is.

We recommend those types of stocks. There’s a couple I can see out there today that are having pretty good days that I look at and go, this makes sense because this thing has been undervalued and all the company’s been doing has been creating value. The one I would name and it’s only traded on the Toronto Stock Exchange, which I apologize for that. I believe there’s a pink sheet listing, but a company called Stella Jones ticker symbol SJ on the Toronto Stock Exchange. Stella Jones is in the exciting business of railway ties. What my colleague Ian Butler likes to call the state tree of Nevada, that is utility poles. I know you’re getting utility poles and railway ties. Stella Jones is up about three percent today. It’s had a pretty good run this year. It’s over $50 Canadian today, I believe it bottomed around 30. In a year that where the markets have been cruddy, frankly. This is a stock that’s up by two-thirds and I think it’s still undervalued anyway.

Chris Hill: One other topic before I let you go, Sam Bankman-Fried, the co-founder of the cryptocurrency exchange FTX has been arrested and charged with, among other things, conspiracy to commit wire fraud, securities fraud, money laundering, and conspiracy to defraud the United States of America. When you watch this very quickly unfolding drama, what goes through your mind? Because one of the thoughts that’s gone through my mind over the past week I’m not a lawyer but boy, this seems like an increasingly easy case to prosecute.

Jim Gillies: You call it rapidly unfolding story. Quickly unfolding story. I’m not sure it’s been quickly unfolding enough frankly I’m a little surprised it took this long based on the allegations, I’m no crypto guy and I really haven’t followed a lot. I was cursorily aware of what they call them SBF before this all hit the fan, because crypto doesn’t interest me because there’s no cash flows and I would argue that most crypto is inherently worthless. In fact, if we were doing apropos of nothing, I might are, and it had a couple of bourbons and me, I might argue that all crypto is worthless so but no, once this started coming out and it’s commingling funds between his personal hedge fund and the business and this is not look good for Mr. Bankman-Fried.

I might argue that they have been relatively slow to charge him and arrest him because he seemed to be willing to give people more ammunition by his little speaking tour, he was just on with Andrew Ross Sorkin at us paid speaking gig a few weeks ago, he’s been on various paid spaces, or spaces on Twitter and I’m wondering if he doesn’t have any lawyers who told him, hey, the smartest thing to do is shut up, but whatever, I think Mr. Bankman-Fried is probably going to not have to worry about wardrobe choices for a few years once this is all over. Because I imagine he’s going to be permanently decked out in a lovely shade of orange. That’s just my suspicion and certainly the scale of the charges against him. Who has the power in this situation I know Porter’s five forces bargaining power. I’m going to guess that against the United States government, I’m going to say that he has a little bit less bargaining power here and people don’t really appreciate having their money evaporated in this fashion and he is going to find out that he is a small fish, I think, compared to the power of the U.S. government and I hope he has some good legal representation that’s not his parents.

Chris Hill: Well, as you said, and it’s very much a silver lining thought, doesn’t have to worry about wardrobe probably in the future. Jim Gillies, great talking to you as always. Thanks for being here.

Jim Gillies: Thank you, sir.

Chris Hill: How many stocks should you own and where should you keep them? Alison Southwick and Robert Brokamp answer your questions about investing, financial aid, and saving for kids. 

Alison Southwick: Dear bro and the true brains of the operation, Alison, how right you are. I have a brokerage account that currently holds 28 positions. Do you have a rule of thumb as to when to seek new positions or add to existing holdings. I find this decision especially hard right now where there are a lot of great stocks currently, quote, on sale. You are great and wise wisdom is thoroughly appreciated. Thanks, Fooling in Charlotte.

Robert Brokamp: First of all, of course, you’re right about Alison and she definitely is the person who keeps the trains on the tracks here. Secondly, we at the Fool think you should own at least 25 stocks, so you’ve met that threshold. However, even that may not be enough if many of your stocks are concentrated in one industry or sector so owning more than 25 is perfectly fine by me and you might throw in some index funds as well for good measure. As a rule of thumb about when to add new stocks or portfolio, I’d say you should only invest in as many companies as you can stay on top of. That will depend on your time, interest in this stuff and whether you’re getting help from services such as, I don’t know those offered by the Motley Fool. Once you’ve reached the point where you’re buying stocks, but aren’t really able to pay attention to the important news or the earnings reports or anything like that, then you’ve probably reached your capacity.

Alison Southwick: Our next question comes from Brandon. I’d like to get a shared checking account for my unmarried partner and me, however, they are currently receiving financial aid for college and I make over three times their salary. The account would be a general checking account we’d use to pay bills, not money beyond enough to pay for immediate expenses would be kept there however, both paychecks would go into the account. Would this negatively impact my partners financial aid?

Robert Brokamp: Well, Brandon, this is an interesting question and by interesting I mean I wasn’t sure the answer, so I had my hunches, but I found conflicting answers online. I reached out to the smartest person I know on this topic and that person is Mark Kantrowitz, the author of How to Appeal for More College Financial Aid and he was also the guests on our October 11th episode discussing how to fill out the free application for federal student aid, better known as the FAFSA and here’s what Mark told me via email. Joint accounts must be reported as an asset on the FAFSA based on the account balance as of the date the FAFSA is filed so if the account does not specify otherwise, the split is assumed to be equal, so 50 percent each in the case of two account owners. Now note that this is for a real joint account, so if someone merely has signatory power over an account that is owned by someone else, it is not reported as an asset.

Now since both paychecks are deposited into the account and one paycheck is three times the other. You might want to have a written agreement that specifies the split of the account value. Or alternatively, you could just empty the bank account the day before the FAFSA is filed and generate a printout from the website to demonstrate little or no value remaining in the account. Now that’s assets. What about income? Mark says that a joint account does not in of itself caused an unmarried partners income to be reported as income on the FAFSA. But if the couple lives in a common law marriage state, they should be careful to make sure that they do not satisfy the requirements for a common law marriage. Then finally, Mark said that he doesn’t recommend using joint accounts because either account owner can basically just take all the money, especially after they break up and I have to say I agree with them, the potential problems and complications likely outweigh the benefits of having a joint account.

Alison Southwick: Our next question comes from Anouch. I am a big fan of the show and really appreciate all the knowledge you have given. Thanks. I’m glad, it has helped. I am 31 years old and have a taxable brokerage account in a Roth IRA. My brokerage account is mainly stocks. The Roth IRA is a target date fund and a few stocks. I’m considering adding more stocks to my Roth IRA, but I want to add a stock that I’ve already bought and held in my brokerage account. My thought is that the only difference is that the stocks potential gains in the Roth IRA would be tax-free, whereas it wouldn’t be the case and the brokerage account. Is there anything else I need to consider? Should I look at position sizing when combining the value in both accounts? Thank you. Foolish ones.

Robert Brokamp: Thank you Anouch. Let’s start by talking about what to put in your Roth so as Anouch suggests, the withdrawals are tax-free as long as you follow the rules, which are essentially that you’re at least 59 and-a-half and haven’t had a Roth IRA for at least five years because you want your tax-free account to grow the most. Do you use your Roth for the investments that you believe have the highest growth potential? If you think this stock fits that criteria than putting it in the Roth makes sense. Even if you already own shares in your regular brokerage account, as long as you don’t own too much across all your accounts and generally we recommend that you limit a single stock to be no more than 10 percent of your entire portfolio, that you mentioned that you have a target date retirement fund and I’m generally a big fan of these that said, they tend to be very diversified, including cash and bonds so likely won’t be the very best performer in a portfolio so you might ask, should you keep it in your Roth? I would say yes. If the only other option is a taxable brokerage account because these funds can be relatively tax inefficient since they produce a decent amount of income, interests, dividends, things like that and they do a good bit of rebalancing, which could generate capital gains. However, if someone has both a traditional tax-deferred and a Roth retirement account, I’d put the target date fund in the traditional account.

Alison Southwick: Our next question comes from, well, it’s just signed J, so we’ll let you make up a name for this person. My wife and I are both professionals. I’m in the military and my wife is a CPA doing financial reporting for accompany. I am 40 and my wife is a bit younger. If asked to simplify our financial goals, we would describe the following. One, max out our 401K, two max out our IRA, three, contribute to 529 plans. We have a two-year-old and seeded his 529 with 10K and are contributing $500 a month. Four, invest in the stock market, which we don’t do much of anymore as we took on the 529 plans. Numbers 1, 2, 3 are funded, but we don’t usually have much leftover for Stock Market investments anymore. What are your thoughts on our overall strategy?

Robert Brokamp: Well, J, it sounds like you’re on the right track, especially if you’ve been saving for retirement since your 20s or maybe early 30s. Based on what you wrote, I’m guessing you have. Plus you’re 40 and in the military, and if you’ve been serving since your late teens or early 20s, you’re not far from being eligible for a pension if you’re not already there because you become eligible after serving for 20 years. I’m guessing you’re in pretty good shape, but it always makes sense, just checking with a financial planner every once a while to make sure you get that professional assessment. Now, you say that you don’t have much leftover for stock market investments, but I’m guessing that you are investing in the stock market, but just in the form of maybe mutual funds or index funds.

Instead of choosing between buying shares of say, Apple, or Amazon, or Microsoft, or Berkshire Hathaway, you might own little pieces of all of them through an S&P 500 index fund. It’s possible that what you mean is that you don’t have money left over to buy individual stocks, but you actually could do that in your IRA if it’s with a discount broker. You can also do it in a Coverdell education savings account, which has similar benefits to a 529, but unlike a 529, you can buy individual stocks in a Coverdell. Or frankly, you could just do it in a regular taxable brokerage account, because frankly, these days with commission-free trades and some brokerages offering fractional shares, you can buy a stake in individual stock with as little as $5 in some cases, so you could start really small, but then build up your portfolio of individual stocks over time.

Alison Southwick: Our next question comes from Pepe. From the Daily Upside, US homeowners took out 66 billion and HELOCs in Q2, according to ATTOM. They can be particularly helpful for people looking to give their homes a makeover rather than look for somewhere new to live in an increasingly unappetizing housing market. That’s were the quote ends. My husband and i got approved for a 249,000 HELOC in July, but we are not planning on tapping into it. It’s just a security blanket at this point. Question, does this approved amount count as having taken out a $249,000 HELOC? Because if it does, then the 66 billion-dollar figure could include a great deal of HELOCs that were open but not tapped. Thanks for all you do and really miss the old format of the answers podcasts. Thanks.

Robert Brokamp: Thanks, Pepe. A home equity line of credit or HELOC, it provides ready source of cash on an as-needed basis. Usually it gives you a checkbook, and in some cases, even an ATM card, and serves as a revolving line of credit, like a credit card, but with much lower interest rates. These days, it’s 7-8 percent or so for a HELOC. Now, the payments begin once you start tapping your equity. But usually for the first 5-10 years, which is known as the draw period, the loans are interest-only, but then the repayment period begins, the principal gets added and the payments jumped significantly. Some people use a HELOC to maybe do a home renovation, or pay for a wedding, or pay off credit cards, not always the best decision because you are using your home as collateral and you theoretically could lose it.

Others open a HELOC just to have a backup source of emergency cash and it sounds like that’s what Pepe and her husband are doing. The idea is to open the line of credit while you’re employed and things are going fine. Because if you wait until you need what you may not get approved for the loan. Now to answer Pepe’s question about whether that’s 66 billion dollar figure is actual loans or just an amount that could potentially be borrowed. I read the release from ATTOM Data Solutions and it looks to me like actually money being borrowed, not just credit lines opened. This figure has been in the news because the amount taken out as HELOCs has grown 40 percent over the past year. Add it to a big jump in credit card debt and a big drop in the savings rate, and we’re getting mounting evidence that the financial well-being for many American households seems to be going in the wrong direction.

Alison Southwick: Our next question comes from Christopher. Hey, Alison and Bro, I’ve got three kids and since around age six, we’ve had conversations about companies and investing. They own shares in a few companies they understand, Skechers, Roblox, Disney, Visa, etc, but at what age can they legally have their own investment accounts? Love the show and happy early birthday, Alison. You got a great book. It’s so funny when people say stuff back to us because I’m like, oh, yeah, that’s right. People are listening out there. They’re out there for my birthday.

Robert Brokamp: Which is coming up in a few weeks, everybody.

Alison Southwick: Thank you, Christopher. 

Robert Brokamp: Good for you, Christopher, for teaching your kids about investing. If you haven’t yet, listen to our December 6 episode during which Fool contributor Brian Withers explained how he has set up as kids to be millionaires by age 40. Now, to answer your question, any kid at any age could own an investment account and it sounds like you’ve already opened one for your kids. The trick is that while they’re minors, you or another adult, adult will have to serve as the custodian on the account. But then once they reach the age of majority in your state, which is generally 18-21 or as high as 25 in some states, the kids get total control of the account. Now, there are some pros and cons to these custodial accounts versus you just opening an account in your own name and then gifting the money to the kids when you think they’re ready, and we covered those in our December 6 episode.

Alison Southwick: Our last question comes from Daniel. Hello. I’m an investor who focuses a lot on cost basis. I’m wondering, under what conditions would you go above your cost basis to purchase a stock or ETF? Thank you very much for considering my question and I hope you both have a wonderful holiday and New Year, happy birthday, Alison. Can you tell I didn’t read the questions before we started taping? Thank you, Daniel.

Robert Brokamp: It is a nice surprise, isn’t it?

Alison Southwick: It is a nice surprise. Enough about me. Bro, Daniel’s question.

Robert Brokamp: Daniel, there’s an old saying that goes something like, a stock doesn’t care what you paid for it. The point being, don’t focus too much on your cost basis in an investment. If it goes up after you’ve bought it and you still think it’s attractively priced, well, feel free to buy more. On the flip side, if it drops below what you paid for it, avoid saying to yourself something like, well, just hold on until I get back to break-even. Research has shown that investors often hold onto losers for too long because they don’t want to lock in the loss and feel bad about themselves. But frankly, if it’s no longer a good investment, just lick their wounds and move on. Daniel, I wouldn’t focus too much on cost basis except when it comes to the tax consequences of selling investments outside of retirement accounts. If an investment makes sense for your portfolio, buy it.

Alison Southwick: Thank you, Bro, for answering everyone’s questions. If you, our dear listeners have a question, you can email it to podcasts, that’s podcasts plural, @fool.com, or you can leave is a voice mail and maybe hear your voice on the show. That number 703-254-1445. Again, email [email protected] or call 703-254-1445 and our producer, Ricky, who really keeps this show on the track.

Robert Brokamp: That is the truth.

Alison Southwick: Well, is the truth. I’ll just drop Ricky a line. Say happy birthday to him. I don’t know when his birthday is.

Robert Brokamp: He’s a good dude. When’s your birthday, Ricky?

Ricky Mulvey: January 4th.

Robert Brokamp: Oh, that’s coming up too, and Rick is in January too, right Rick?

Rick Engdahl: January 11th.

Alison Southwick: This is a Capricorn heavy show, whatever that means.

Rick Engdahl: It seems like it should be more organized than it is. 

Robert Brokamp: I’m the token cancer here, and you probably already knew that. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.



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