Money Talk

Episode 46

Picking Stocks

Schwab gives Twitter an F-rating. Don’t even bother selling your shares, just burn the shares that you own. Create some heat in the fireplace. Picking stocks depends on the narratives behind them, to some. What are the consistent stocks? Copy the top ten winners — a team of professional investors who are far more experienced in handling a great deal more money.

Welcome to our listener supported podcast, Money Talk. Uncompromised, absolute financial truths behind financial perceptions with hosts Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: This is Chuck.

Ed: And this is Ed.

Chuck: And this is Money Talk.

Ed: This is Money Talk. This today’s topic is.

Chuck: Well, Ed, I have a story to tell you and then we’ll just see what you have to say about it.

Ed: Oh, I’m sure I have nothing to say about it.

Chuck: I guess this is coffee clutch time where we’re just gossiping. I have this friend who came to talk to me the other day and he was all excited because of this news about Elon Musk buying apparently a fairly sizable stake in Twitter. Then there’s all this buzz about Elon Musk might be on their board, but then apparently he’s decided he’s not going to be on their board, but maybe the reason he’s not going to be on their board is because that will allow him to buy more shares and speculation that he might be doing a interested in some a hostile takeover of the company and all of this culminated in my friend saying that he’s not looking to buy meme stocks and not looking to just chase stocks just because they’re in the news, but he’s looking at Twitter and he’s excited about Twitter and so on.

I know you and I, and neither of us are really stock pickers. Although we pay attention to what’s going on and can navigate conversations like that. My recollection was and has since been confirmed, this is a company that has sort of wallowed around trying to find a business plan for a long time and isn’t necessarily losing money but isn’t really making money. I was immediately skeptical about this. I printed off the Schwab report, which is to say the least devastating. Schwab is rating Twitter as they have grades A through F and Twitter is an F. D means it’s a sell recommendation. I think F just means don’t even bother to sell it, just burn the shares that you own.

Ed: Create some heat in the fireplace.

Chuck: Right, but I think it’s interesting that people– There is this drive among people to go around and pick stocks and try to find a story that tells them that that they’re able to figure out that a stock is, or a company is about to become profitable that hasn’t in the past because of some narrative that’s going on behind it. Of course, a person who’s very good at creating those narratives, I think is Elon Musk. But we’ve never really, we’ve done a lot of talk about investing in the way investments work, but we’ve never really talked on this podcast before about individual stocks and the idea behind looking at individual stocks and how you would approach a conversation like that. I’m curious, Ed, first of all, I’m fairly certain you don’t own any Twitter stock.

Ed: That’s correct. I would sell it short if I did.

Chuck: That’s right, but I think it is a good opportunity. Good launching pad for us to talk a little bit about our thinking about these types of conversations and this type of approach to investing.

Ed: Yes. I think it’s appropriate. There are two levels. First, most people want a very warm adviser irrespective of the cost and that’s fine. Make sure you know what you’re paying for. And if you do have a warm adviser, the first question is, let’s see Mr./Miss adviser, your performance for the last three calendar years. Now dollars to donuts they will say that’s not relevant. I’m not. You go in for heart surgery. You first ask the doctor, how many times have you done this before?

Chuck: Right. And how many of your patients have lived?

Ed: That’s right. Just a little background. I want to consider the source. It’d be unusual to see that 12/31 balance sheet for the last three years. Just so you know, it’s easier to sell something that you don’t own. Stock picking, that’s a tragedy in today’s world, but there’s two reasons. One, psychological reason and the other, I guess, a qualitative and the other quantitative reason. From a qualitative point of view, to the extent you do, how do you define stock picking Chuck, how would you?

Chuck: Well, I would say, going, rather than buying, for instance, a mutual fund, or an index fund, or an ETF, that you’re looking at individual companies for the purpose of buying shares of individual stocks. I know you and I both have done some of that, even though we’re constantly talking about using ETFs and indexes. But it seems to be the– At least for myself it’s kind of a supplement to the core investment a few little dribs and drabs of some individual stocks. But for a lot of people, it’s what defines the process of investing is. I need to go pick out a bunch of companies and invest in them.

Ed: Yes. The psychological part about this is interesting. It gives you a sense of euphoria, victory, if something goes well, but if it goes the other way, you don’t discuss it. But more importantly, from a qualitative point of view to the extent you’re engaging in that activity, assuming you have a day job or otherwise occupied, that impacts on your ability to do a good job in your day job.

Chuck: Right.

Ed: If you’re thinking about how Twitter does, or Tesla does, you’re looking at, and they say, it’s been said, look at it only once a month. But if you are trading stocks, picking stocks, as I would define that, you’re looking at it about every day, if not two or three times a day. Chuck: Right.

Ed: The impact on you psychologically may serve to reduce your day job function to near zero or negative.

Chuck: Right.

Ed: First address that, do you want to do that? That’s great. Second, how do you, “decide which companies you should invest in,” aside from asking your adviser, let’s see what you’ve done, which you’re not going to learn. I come at it a little differently and first the strategy is buy and hold. Second is to buy good stocks. Stocks that have a business, not for example, Tesla. You had some thoughts about Tesla, but the number of the price per car produced is pretty significant as a function of market value of the stock.

Chuck: Right.

Ed: We’re seeing it with Rivian and all these electronic startups. But my favorite opportunity or approach is to go, for example, to Vanguard and pick out the funds that are most interesting to you, high dividend yields whatever stocks that appeal to your mindset. And then look at, so makes you do three or four or five of different funds and not only Vanguard, but someone else’s funds.

Chuck: Right.

Ed: They must report the shares that the top 10 holdings.

Chuck: Right.

Ed: So schedule the top 10 holdings of each of those funds. What are the consistent stocks?

Chuck: Right.

Ed: So, you’re not going to buy the entire index fund or entire mutual fund, because you’re going to get some losers in there. But if you get the top 10, then you may know what the winners are.

Chuck: Well, and at least you’re in good company. Right. You’re following essentially the advice of a team typically of professional investors who are far more experienced in handling a great deal more money than the investment adviser who’s down on the street corner who’s talking to you making recommendations. Right. These are professional investors.

Ed: Yes. They’re not holding your hand. And by the way, just to make sure everyone understands, I’m not saying there’s no such thing as an honest, reputable value created and conferred adviser. I’m just saying, what’s the cost of that? Is it a percentage of the fair market value? Well, I’m sorry, I don’t buy that. But let’s talk about those stocks. I did those analyses.

Chuck: Right.

Ed: And I did a spreadsheet with the loyal assistance of my loyal staff member, Loretta. Who’s been here over 30 years and so she knows how to deal with my idiosyncrasies and so we do these spreadsheets.

Chuck: Where did Twitter fall on that?

Ed: Oh, I didn’t put, I didn’t because I only have the good ones. I went to the prices picking them out. Here are the stocks that came up. I’m going to give you the five-year return of these stocks. First of all, Alphabet 239%.

Chuck: Formerly known as Google.

Ed: Formerly known as Google. Amazon 287.1%. Apple, guess what, Chuck?

Chuck: The return?

Ed: Yes, return.

Chuck: Oh, It’s over 200%, right?

Ed: Thank you. It’s 424% over a five-year period. Home Depot a mere 140%. Microsoft guess on that one too?

Chuck: Oh, that one’s way up there these days too. Isn’t it?

Ed: 401%.

Chuck: Yes.

Ed: United Health Group?

Chuck: I wouldn’t even want to guess on that one.

Ed: Yes, 235%.

Chuck: Okay.

Ed: Dominant players in that subset,

Chuck: Right.

Ed: Walmart–

Chuck: Oh, that’s got to be another one up there like Amazon and Apple. I’m going to guess under 400% though.

Ed: Yes, you guessed right. It’s 126%.

Chuck: Oh, okay. Merely.

Ed: Nearly. It’s just a little. But my point is there only two stocks of these selected terrific companies that have performed over 400%. They are Microsoft and, of course, Apple.

Chuck: Right.

Ed: I’m sure they’re “overpriced,” ah, whatever, but the five-year information. On a five basis we have Apple ranking at number one. We have United first on the two-year return, one year return and there was Apple, United Health, and Amazon, and Microsoft. I’m not going to bore you with the detail, but if you do the spreadsheet, you can do it manually, although we’ll sell Loretta’s time here at $2,000 an hour. No, but the point is it’s the selection process that you’re looking at, how do others rate it?

Chuck: What you’re doing would be something that I would call screening, right?

Ed: Yes.

Chuck: You’re running a screen through starting with what these other investors have selected and then you are further filtering that by other criteria.

Ed: How do I feel about it? I would– I like to read. I subscribe to the Wall Street Journal and read it every day without exception. That is mandatory reading! Forget about anything else. Excellent publication, no ax to grind.

Chuck: It is.

Ed: Anyway, and by the way, I’m comparing all these numbers with the S&P and that over the five-year period is 92%.

Chuck: Yes. They all outperform the S&P. Most of those now I think Amazon was on that list, but most of them are dividend paying.

Ed: That’s the other criteria.

Chuck: Right.

Ed: Now, Amazon doesn’t pay a dividend.  But I go to the ratings, the Schwab ratings: Alphabet Google, A; Amazon C; Apple A; Home Depot A; Microsoft A; United Health A; Walmart B. Then look at the Morningstar ratings, Credit Suisse, Argus, Reuters, Market Edge. And so you can see what others are looking at, but you’re not listening.

Chuck: Right.

Ed: You’re reading, you’re not emotional.

Chuck: Right.

Ed: You go through it and you read. Then you read the reports of each of those rating systems. How is this? Does this make any sense? If you’re going to buy a stock, you must have a mindset – I’m going to hold it for 10 years.

Chuck: At least.

Ed: At least.

Chuck: At least. Now, I think that is important. When I used to have a lot more of these professional investors in my orbit, so many people would say the following to me, they would say, “Chuck, I know how to find a stock. I can pick a stock. It’s the easiest thing in the world. I don’t know when to sell it.” Seriously that makes the more I get into this, the more sense that makes to me.

The solution to that quandary is buy stocks that you don’t anticipate a sell date. You’re just thinking, okay, this is something that really is going to be maybe someday something will happen, and I’ll want to sell it. But the point isn’t to run this up to some goal and then get rid of it. I’m just going to buy this because I want to own it.

Ed: It’s like picking a spouse. You’re getting married forever.

Chuck: Right.

Ed: Theoretically, it’s not going to– I’m not going to flip spouses every six months.

Chuck: Many lawyers would disagree with you, but–

Ed: We don’t handle divorce cases, but I think people make a lot of money. But you’re getting serious about this. It’s the buy and hold. It’s a good business. It’s the dominant business in that sector.

Chuck: Right.

Ed: And marketability, the flow is just fan– You can click on a button, and you sell your entire position.

Chuck: Right. You also, like for instance, if you find yourself getting swept up in these stocks that because they’re in the news or whatever and you’re starting to think about it. You have to find the narrative that the naysayers are telling about the stock. You have to search that out. You have to test it before you pull the trigger on anything. I’ll give you an example. I was doing exactly what you described, and I bumped across IBM. I think you and I had a conversation

Ed: Yes, we did.

Chuck: about this at the time and because the dividends were quite high, I found that intriguing. But I also found it in whenever I see a dividend that’s really high above the average, I always think, well, wait a minute, does that mean that the stock is everyone’s anticipating that the dividend’s going to get cut, right? Why wouldn’t the price be higher? I spent about a month really just kind of trying to find the negative stories about IBM because I just thought someone out there knows something that isn’t apparent to me. I wanted to make sure that I wasn’t just getting caught up because I saw a statistic that appealed to me. In the case of Twitter here, the narrative is that, look, they are neither number one, nor number two, when it comes to social media. These social media platforms, they drive their revenue from advertising. Google and Facebook own that entirely. You don’t need to read an analyst report. You just know because you live in the world that Google and Facebook are the companies that own that space. If you’re going to advertise on the internet in social media, you’re going to advertise in Google and you’re going to advertise on Facebook. You’re going to do it even if you hate both of those companies with the seething heat of 10,000 suns because otherwise you get no exposure. Having advertised on those two platforms, why would you also put an ad on Twitter? Think about it from a prospective customer and what is Elon Musk going to do to change that? That’s the problem with this particular stock, before you even know it’s got an F-rating from right from Schwab.

Ed: It should be intuitive. By the way, this I’ve been looking at stocks and been involved in financial matters for over 50 years. This isn’t something I started yesterday. So you have to grow with it. I think one of the difficulties is the qualitative side, blocking it off, focusing on. In this case, I focus on eight stocks.  These stocks are replicated in various investment opportunities I have in high res and company and whatever.  But the point is, their businesses and they will probably be around in 10 years, but you’re watching. When they’re no longer going be around. I think of Facebook and Twitter, that advertising opportunity. It’s the local newspapers. I looked at the site of the local newspaper here in Peoria. The folks that have been there as editors and reporters are gone.

Chuck: Right.

Ed: So, guess what’s happened to the newspaper?

Chuck: Oh, they just pull in these nationwide feeds, right?

Ed: It’s ineffective. Why would you subscribe other than the obituaries?

Chuck: Right.

Ed: I’ll get to know if my friends died because their heirs will call me and said, you jerk, you didn’t know that Terry died. No, I didn’t. But I avoid that because again, we get the Obits, which is the only thing I look at every day. It’s kind of sad. But nonetheless, you have to when you’re in our “business”. But in any event, it’s the qualitative side, focusing on a limited number of stocks that have huge market capitalizations that you can sell and buy easily, keep track of your cost basis. Very few, if any fees, to effectuate a trade.It makes sense because they’re all businesses are– Is Facebook going to be a business 10 years from now?

Chuck: Oh, absolutely.

Ed: You think so?

Chuck: Okay. Let’s put it this way, if something happens to them, they’re going to be absorbed into somebody else.

Ed: Okay. That’s yes, but I’m saying freestanding.

Chuck: Yes. Who knows?

Ed: That’s right. But I’m thinking the ones that I’ve described may very well be here in the next 10 years. It is not to say that I don’t think about selling these, I do. Some stocks in my IRA, I will bail out if I don’t feel good about it because I don’t have any tax issues.  But that’s the downside of this. Let’s talk about cost basis step up. Chuck, your views on that?

Chuck: Well, it’s a critically important part of the planning that we do is the idea of, first of all, knowing what your basis is and things and–

Ed: That basis, that’s your original purchase price typically?

Chuck: Typically, yes.

Ed: Okay.

Chuck: The idea is that when you pass away, then you get the basis gets adjusted to the fair market value on your date of death.

Ed: It’s been stepped up or increased, and you’ve done nothing but die?

Chuck: Yes, correct.

Ed: The best advice is die.

Chuck: Right, right. Exactly. Basically, the way to think about that is that, for instance, in a securities account, you have a free opportunity, when you die, your executor or your heirs have a free opportunity, they can just simply sell everything in that securities account, and they’re not going to incur any tax on the sales. They might incur some fees and some transaction costs. Although hopefully very few these days but there effectively is no tax on the sale. A securities account and a cash account are both completely liquid when someone passes away.

Ed: I think about the numbers. Let’s assume it’s a $1M in gain, NOT your cost basis was a $1M in gain on the stock that you’ve owned for 30 years. You’re a ghost. The new cost basis is a $1M on the date of your death. You’ve saved what 23.8% of income tax?

Chuck: That’s correct.

Ed: It’s $230,000+ that your heirs are not going to pay. What someone advanced financial person, okay, I got this $1M in appreciated securities, my cost basis is 100,000 to get up a $1M in gain. I need some money to live on, so what do you do?

Chuck: You borrow against it.

Ed: That’s right! That’s assuming that they’re good stocks and have dividends.

Chuck: Right because then the dividends will service that margin loan.

Ed: It will pay the interest. This goes on with high-net-worth people. Funny thing, I was wondering how many people in our world, the USA, have more than $100 million? How many do you guess?

Chuck: Very few.

Ed: Take a guess.

Chuck: Oh, maybe I’m going to guess 2,000. I guess 2,000.

Ed: It’s actually 20,000.

Chuck: It’s 20,000, okay.

Ed: With more than $100 million, 20,000.

Chuck: Right.

Ed: Now, how many would have IRAs with more than $25 million in their IRAs?

Chuck: Oh, IRAs with more than $25 million? That is a much smaller number, I’m sure. You’re giving me a look that no it’s not.

Ed: Less than 500.

Chuck: Okay, much smaller number.

Ed: Yes, the takeaway here is that we want to kill those with wealth. I understand that but they’re not that many of them.

Chuck: You’re not going to reduce the population by much.

Ed: No, so maybe Neture High School has 20,000 students, I don’t know. But pick a community in the United States with 20,000 people, that’s a small number.

Chuck: That is.

Ed: Even a smaller number with 500.

Chuck: Right.

Ed: Let’s focus on what’s really going on here. Are we yelling and screaming to make waves or are we yelling and screaming to make economic and tax sense?

Chuck: Right. That’s something we’ve touched on before that there just is never really a lot of revenue collected.

Ed: Because you can avoid it also.

Chuck: Right.

Ed: We’re in the business of avoiding the tax, but that’s for another time.

Chuck: Right.

Ed: Well, I think that’s it for today. Let’s reconvene and talk about some stuff that’s interesting.

Chuck: All right.

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