IFB153: Cruiselines vs Autos vs Tesla

Announcer (00:00):

You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion and help you overcome emotions by looking at the numbers, your path to financial freedom starts now,

Dave (00:30):

Alright folks, welcome to Investing for Beginners podcast. Tonight. Andrew and I are going to go back to archives and we’re going to pick out some more questions. We’ve got some great questions. We recently, and we have had some great guests so we haven’t had chance to answer them, but we’re going to answer them tonight. So we have three of them. We’re going to talk about a little bit tonight. I’m going to go ahead and read the first question and Andrew will go ahead and give us the answer and we’ll kind of do our little good, give and take. So here we go.

Dave (01:04):

So I work for Walmart logistics and they offer a company stock option. If I buy $1,800 worth of stock in a year and they match me $300, I own about 13 shares before I ever  started taking investing seriously. Putting Walmart in the VTI, I’ve got a number in the mid four hundreds. Do you think this money is better off somewhere else or do you feel that extra $300 off sets a lack luster? BPI score? Andrew, what are your thoughts on his question?

Andrew (01:32):

So just to give some perspective to new listeners. When the reader, the listener is talking about VTI, that is a formula I created called the value trap indicator. Basically it takes the financials from a company and spits out an numerical value based off of that. If it’s low versus if it’s high, that signals for example, if it’s above 800, then that signals a strong sell. So the mid four hundreds that’s relatively high for a stock. So to, I guess there can be two different parts of this question. The first part, getting company stock options. In general, it’s a good thing to participate in, particularly if they’re giving you any sort of the match. So a $300 match on $1,800 of stock, that’s like a 16.6% return right off the bat. You could find out in the stock market. But I don’t think most of us can find that reliably, consistently over and over and over again, particularly when you consider that over this great economic boom we’ve had in the United States over the last 100 years, since about the 1910s and 1920s the average stock market return has been around 10% a year.

Andrew (02:54):

So you’re getting higher than that just from the company match. So I would take advantage of as much as you financially comfortably can. And you know, even if you have a stock that you feel is suboptimal compared to a different stock, you’d maybe like to buy that 16% difference is, is huge. And I think that’s, that’s, that’s the bigger win there in my opinion.

Dave (03:22):

I would agree with that. And I think anytime, like Andrew said, you can get free money from your employer to invest even in your own company. Yeah, that’s, that’s kind of a no brainer to me. I guess the question I would ask is he’s asking if he can use the $300 somewhere else. So is that an option that they’re offering him? So that would be something I guess I would want to investigate. I know that when I worked for Wells Fargo, they would match up to 6% of whatever we invested. So that was an additional, so if I put in a money then they would match up to 6%. So that was something I set up immediately and that was fantastic offer for me. So I, I was a big fan.

Andrew (04:09):

I’m not, yeah, I’m not too sure on that. I’m sure every company is different. Back in the days when I have one of those available to me it was, I would get the match in company stock and then, but you had to, there was like a six month period where you had to wait until you could sell. So, I mean in that case, if you’re maybe taking the match and then, and then investing elsewhere, I think that’s a good policy too. But to say you’re just going to not take advantage because you, maybe I misinterpreted the question, but you know, I would, you know, you can start getting down the path of like, well do I want to hold stock in the company I own? Because you can get into the situation where if you have all of your money in the company and then your jobs with that company and then if your 401k is in that company and if that company goes bust, you could be just see, you know, years and years and years of, of your work disappear from that.

Andrew (05:13):

That’s something to consider. I also think when it comes to making a decision on, let’s say I have, I own the stock, I’m looking to think about whether I want to replace it or not with something else. I think there needs to be something fundamentally about the stock that you’re selling that’s giving you a reason for selling. And then there should be a fundamental reason on the stock you’re buying that’s giving you a reason to buy. And so just because a stock is cheap doesn’t mean you should buy it. Just because a stock is expensive doesn’t mean you should sell it. You should  be looking at the underlying business and something about the numbers and the business or something about the business in should be making that decision and not so much whether it’s doing in the market.

Dave (06:02):

Yeah, that’s the perfect answer and I would a hundred percent agree with that. That kind of segues into the next question that we got. So hi, I’m an e-letter subscriber and listened to the podcast. I noticed that you sold CCL or Carnival cruise lines in the portfolio before doing much research. I purchased some shares of it at $12 and 30 cents with plans just to wait it out. Did the same with GM and Ford, all of which have cut their dividends. In your opinion, should someone just hold onto these or sell

Andrew (06:35):

Well, okay. So yes, I saw Carnival Cruise Lines and you know, in light of the Corona virus and something that you obviously I, this isn’t a two way conversation so I can’t know exactly how everybody who’s listening feels based off how I interpret the narrative around a lot of investors who are active online and are picking individual stocks. It seems to me that a lot of investors are kind of in denial about the fact that we’ve had a huge fundamental change and potentially consumer behavior. For quite a while. I think and, and you know, maybe this is something I’m completely wrong about. But I think certain pockets,

Andrew (07:30):

So let me be clear. I think we’re going to have an economic recovery. I don’t know what that’s going to look like. I don’t know what the timeline for that is, but I think certain pockets of the economy are not going to recover nearly as well as others are. I mean, you’re seeing a lot of technology companies and things that keep us interconnected and keep us able to work from home. A lot of those are still doing very well in the market. And have bounced nicely from the last kind of crash we had in March. And you know, the grocery and food stocks kind of have rallied and cotton, some steam, anything  contributing to that trend has done  well in the past month and a half let’s say. And so, you know, on the flip side of that, you have other stocks that have obviously been hammered, things like cruise lines, hotels, airlines, things that we’ve talked about on the podcast pretty regularly I think to now. But things were, it seems like behaviors have changed for at least for a while. I mean, I remember when they, the whole fiasco started out.

Andrew (08:50):

And you know, the first, the first thing that  made coronavirus to me was when there was an announcement that the NBA was canceling their season. And that just seems so out of left field. And then as more and more people started to, you know, people with influence started to make these decisions. Now all of a sudden you had a shutdown situation. But even with a shutdown, and even with everything, it was all understood that things would be temporary. And I remember still going out in public and not  seeing many like masks around. And then lately I feel like everybody looks at me if I’m not wearing a mask because I’m like the black sheep out in public. And so, you know, this is after recording this in the middle of may, towards the end of may. This is after a lot of things have reopened and let you see.

Andrew (09:49):

You still see, at least in my little anecdotal situation of where I’m driving around and you know, going to the grocery store and things like that. I think you still see a lot of different things, different behaviors. I mean it’s still kind of hard to find toilet paper. It’s hard to find and sanitizer. I still can’t get any disinfectant wipes. So, you know, sir, certain things have changed. I think, you know, we do have sports coming back. Baseballs sounds like it could be making a comeback, but at the same time, you know how many people are gonna get on a cruise ship where air recirculates all around you. And that place is notoriously bad at not even telling people that we’re on the ship, that there’s people who are sick and then not letting them leave the ship. And so you know, places and things that in, you know, kind of incubate a virus spread potential.

Andrew (10:50):

I think these things should be considered and you should understand that if a business is revenue streams are completely shut down with these cruise lines, we still don’t know when they’re going to be allowed to sell. So when that’s a situation, what’s a business if it’s not making money, I think you need to take a hard look and realize that when the world’s changing around you, you need to look at certain things differently. Now, you’re not changing your perception on everything, but you’re looking at it closely and you’re being honest with yourself. And I think a lot of investors who don’t want to sell, they don’t want to take that loss and they don’t want to accept it. And that’s why I say it’s almost a denial thing. You don’t want to accept the loss because now that loss is real. If you, if you hang onto the shares, then you feel like, well maybe it can bounce back and maybe it can recover and share.

Andrew (11:42):

Maybe a can. But at the same time, there’s so many great businesses out there right now who are not dealing with this in any way. And so even if you, if you took, if looked at investing like a race, and I know this is probably a terrible analogy, but if you had two people running a race and it was a race where you’re, you’re getting compound interest. So let’s say you run a little bit at four miles an hour and then the longer you run at four, now you can run at five and six and seven. And so you take like a compounding interest rates like that, and you have one business that’s just kind of cruising along like it’s always done. And then another business where it goes backwards. And so it’s starting at like negative two miles an hour. And then it has to somehow get to a decent speed and then start to accelerate.

Andrew (12:31):

And so it finally does accelerate. But by the time it’s done that the, the other race, you know, the other person running the race is already at a hundred miles an hour. So I think when we allocate capital, those are types of decisions that need to be made. And it’s a tough decision. I struggled with the decision for sure, but the fact that they’ve never announced a dividend ever since this whole thing went down, they’ve always announced them regularly. So you’re not getting an income from this. You’re holding onto these, these expensive assets, which are these huge ships and you know, generally that’s okay, but if this, if the asset’s not making money, it’s not very valuable. So that’s the situation they’re at. And the fact that so many behaviors have changed and even with things reopening up, a lot of those behaviors are sticking. And so that makes a good recovery for cruise ships. I just don’t see it happening. Maybe I’m wrong, but I’m not, I’m not willing to risk any more money on being proven.

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Dave (13:44):

Yeah, that’s a great answer. And I a hundred percent agree with you. The, the behaviors are not there. They may change, but I think it’s going to be slow. And I think about some of the things that you were talking about. For example, I don’t know how you feel, but I know that when I go to the grocery store I feel, I feel pressure to do things quickly, that I don’t want to be there and I want to go. And I think everybody around me feels the same anxiety going on. And I think about places like restaurants. I was listening to one of our favorite podcasts, money show and they were talking about restaurants and I think they were right on the Mark when they’re talking about this. I think what’s going to happen is is that places like a Chipotle or a McDonald’s or Popeye’s or some of those places that are more fast casual kinds of places are going to rebound much faster than places that you go and sit down and have a half an hour, an hour and a half type meal because of the anxiety level of the people are still feeling eventually.

Dave (14:57):

I think that will change, but I think initially I think it’s going to be a long, long road to hoe for those kinds of businesses. So I think about a restaurant like capital grill, you go to the Capitol grill, you’re not in and out in a place like that there you’re there for an hour to two hours depending on your meal and I just think that place like that people are going to feel such anxiety. Of course there’s going to be people that are going to go there, but I think to expect them to do 300 covers, which means 300 people on a Saturday like they were doing three months ago I think is unrealistic. And for that to go back to normal immediately I think is unrealistic and so as this general in the e-letter is, I think having to take those, like Andrew was saying, having to take those considerations into your thoughts.

Dave (15:49):

When you’re thinking about a company, things have fundamentally changed with Carnival cruise lines for example. They’re not having customers, they’re not anticipating customers in the short term, and I think those are things that have to help form your decision. When you make a decision about keeping the company or selling the company. If the stock goes down and everything else does the same, then okay, maybe you hang on to it, but when things have fundamentally changed in the business, then those are when you have to start asking yourself questions like, do I see this rebounding? When do I see this rebounding? Thinking about even just in your whatever circle it is that you, you run in, think about how people were behaving now and then extrapolate that to, Hey, the States are opening up and we can start going back and doing those things. What are the things that you’re  wanting to do or are you  wanting to run out and get on a cruise and go for a cruise, you know, walked up with people in it for a week or two.

Dave (16:52):

I know I personally don’t would I like to go sit in a restaurant? Yeah, I would love to, but will, I probably not for awhile just because I just don’t feel comfortable doing that. And it’s not about the fearmongering and everything that’s been going on in the news. It’s just more about my behavior has changed and it’s more prudent of me. I am diabetic and so I have to be cognizant of that and my health and other people around me. So I have to be cognizant of that. But it changes my behavior or my thought pattern. And so those are the things you have to take into consideration when you’re thinking about buying or selling a company is what is when you’re going to sell the company. Like Andrew was talking about. Yeah. He, he realized that things have fundamentally changed about the company and that’s what caused him, you know, he has rules about dividends but also the company has changed their thought patterns and what’s happening with the, I was having the same thoughts about Disney with them shutting down the parks, the, Oh the movie theaters shutting down all the revenue, completely stopping and that fundamentally changes the business.

Dave (18:00):

Now will they go back to business? I think there will be a, while there were say four months ago. I just, I think those things are all going to take time and I think those are things you have to consider into your equation when you’re making a decision.

Andrew (18:16):

That’s actually a perfect example and it shows I think, okay, it’s a perfect example because when you take a business model like Disney, yeah, they have the parks and you know obviously they have the movies that people aren’t going to movie theaters, but at the same time they also own ESPN. They also now have Disney plus. They also have ABC, you know, they have a ton of other businesses that are still making money for them. And so are their earnings going to be dramatically lower next year compared to what they’re used to? Probably. Yeah. At the same time they still have other things, keeping them afloat with something like Carnival cruise lines. They’re a hundred percent. If they’re not sailing, they’re not making money. Right. And so you can argue all day long about what the recovery is gonna look like, whether we’re going to have a vaccine or not.

Andrew (19:09):

But you know, when you  dig into the numbers and you look at Carnival situation, you looked at their liquidity. So they had a great balance sheet when they had ships that were sailing. But you know, certain balance sheets are different based off of the business model. And so cruise lines and airlines, they have ships and planes. And so, you know, either they’re going to have to sell those off if they don’t have enough cash or they’re going to have to borrow a lot. And in the case of Carnival, they, they took on quite a bit of debt just to survive this short term. In addition to having to do a lot of other things. And so you have to look at the numbers too and understand, get context on it. W what’s the scale of these numbers? What does that mean for the business?

Andrew (19:58):

$2 billion to one business is peanuts. $2 billion to another is half of their you know, bottom line. So just take, taking all those things into consideration. It just, it didn’t look good for Carnival. I think they can rebound one day. Possibly it could happen, but I’m not, I’m not throwing my money away like that on a, on a possible, I would rather see things that I’m more comfortable owning and, and feel better about the business model moving forward by liquidity situation and you know, how effected certain businesses are from either short term trends or longterm trends or both.

Andrew (20:42):

Yeah, I would agree with that. That’s a, I think that’s the perfect answer for that. So he asks about GM and Ford, you know, we kind of have taken to extremes. How would you look at an automaker like them considering they also cut their dividend? That’s, boy, that’s, those are, those are good questions. And I will, I will say this, I don’t know that much about the auto industry aside from the fact that it is very competitive and that is extremely difficult to be in. And when labor unions are involved costs are going to be higher on the payroll side of things. And that’s  about all I would know about that. Now. The fact that they have, they cut their dividend or have they just stopped it for the time period that he didn’t mention and I haven’t looked at either of those. That’s, that’s, that’s, that’s a big difference too.

Andrew (21:47):

Yeah, it is. I guess with GM and Ford, I think it’s a bit of a different situation because they don’t, I don’t necessarily know that their businesses has generally fundamentally changed in the way that Carnival has. For example, I know that there were still selling cars during this whole period. I know the car sales were down quite a bit. I believe that a lot of the, I’ll shed some light, so, yeah, shed some light, shed some. So I think it was IHS market or one of, one of the big kind of consultants that look at these industries, they’re forecasting about a 25% drop in manufacturing for all those in the coming quarter. So, you know, something, something kind of quantifiable or we can look at okay, we’re expected lower demand in the short term. I think that’s kind of across the board no matter what industry you look at.

Andrew (22:54):

Going back to like this comparison again with, with somebody like Carnival, they might not have a demand buildup. I mean, yeah, maybe psychologically everybody wishes they were on vacation right now, but at the same time, you know, that’s different from I needed a car yesterday. And so maybe people who held off on buying a car for three months, you know, there’s more of a demand rebound versus like, well, you know, it’s not like I’m taking three vacations to make up for one loss vacation. So maybe there’s some of that involved. I would, I would if, if it was a situation where I held onto like a GM or a Ford and I was, and I knew enough about, you know, you got to have like good data that tells you why somebody would prefer this brand over that brand. Right? And what’s the competitive advantage and all of those things.

Andrew (23:55):

If I was somebody who felt that way, I think this, I think there are two different scenarios and I think there’s more resiliency with something like an auto industry versus something that’s leisure and hospitality. I mean, the jobs report came out a few weeks ago and an overwhelming majority of the jobs were in leisure and hospitality. So I think what that can kind of indicate for the rest of the economy is, you know, these management’s no better than everybody. If they have to cut costs, that means they’re  struggling. I think leisure and hospitality it was something like up to 67% maybe of the jobs lost so far. So that’s a huge, huge indicator I think for a lot of us that this isn’t going to be a very fair recovery and I don’t think it’s going to be very even. And so these are considerations again, considerations to think about.

Andrew (24:49):

Yeah, perfect. Yeah, that’s great. So I’ll get, I’ll give it a read if you don’t mind. Nope, I don’t mind. So Hey Andrew and Dave, I’m currently on episode 70 of your podcast picking up a lot of good Intel. Thanks to you guys. Brand new in the investing world and I’m soaking it all in and I’m hoping to make some smart financial decisions moving forward 35 years currently slowly to the party. But as a local bond size store says out front the best time to start growing a Bond’s Iowa’s for the years ago. The second best time is now. I like that he says, I feel the same philosophy applies to financial literacy. So he says, I was recently going through Tessa’s last 10 K and something that I never quite grasp when learning about reading. A couple accompanies filings came up in my head again.

Andrew (25:36):

He says who audits the 10K if anyone, I’m more on the financial side that’s pretty cut and dry relatively, at least in my mind. So I’ll answer that one  quick. It’s just like an accounting firm and they’ll sign their name, their company name on the 10 case. So it’s in theory supposed to be independent. I, I don’t, I don’t mean to say it like that. There’s anything that says it’s not, it’s just, I didn’t mean to be facetious. Okay. Moving on. But the risk factors, for example, now Elon Musk is mentioned as a risk factor in the filing, but the way it is, whether it is more geared toward him being such an integral part of the operation, he says, now I know that is true, but what is amended in the explanation of the subheadline is the fact that Elon is a little bit of a loose cannon.

Andrew (26:25):

It could be strongly argued that Musk’s actions on Twitter and in interviews have cost the shareholders money. So having a proven risk in the past and having that risk not mentioned in the risk factors. Whose job is that to be like, Hey Tesla, you might want to revisit this section before you submit this and then finally, or should be reading the 10 K with more of a cynical mind frame. I know it’s an investors relations guide submitted by the company regulated by the sec, but it seems so trustworthy for lack of a better word. So I have my guard up when they’re writing these things. Thanks for the advice. What are your thoughts? Well, I think Elan is a bit of a risk. At least he moves the stock prices, that’s for sure. Did you see his tweet about the stock price being overvalued? He’s like a bit, a bit high in my opinion. Stocks hot stock looks high.

Andrew (27:26):

I don’t know why I’d say that. I don’t either. I don’t know. I don’t know. But I like the line that he wrote in his is wetter here. Yolanda is a little bit of a loose cannon. I think that’s probably kind of the understatement of the world. The comment that you made about him moving the markets is a, is definitely a right on the right on the money. I mean, but that answers the question a little bit because you know the 10 [inaudible] these company filings, they’re talking about the company and the underlying business ideally. So while his actions might move, the stock price, is that changing the fundamentals of the business? You know the, the core business, I mean you can argue in Tesla’s case maybe because they tend to dilute a lot of shares and so if the stock price is lower then they’re not getting as much capital for the business when they dilute those shares.

Andrew (28:20):

But you know, coming from an investors kind of hand guide standpoint, maybe it doesn’t, it, it changes stock prices where maybe it doesn’t change what’s going on in the underlying business as much.

New Speaker (28:36):

Yeah, I would, I would definitely agree with that. And at the end where he’s asking about shitty, read the 10 K with a more cynical mind frame, here’s where I guess I would come. It’s going to depend company by company. And I think when you’re reading a 10 K you have to think about it from an aspect of I’m going to put my heart and money into this company. I want to know as much about this company as I possibly can. And think about it, coming at it from an angle of trying to look for the good things, but you’re also trying to look for the things that could trip the company up. And when you think about the CEOs of the company, for example, the majority of them are salespeople. They’re charming, they’re magnetic, they’re encouraging, they’re upbeat, they’re very good about talking and encouraging people to do things. And they’re salesmen and that’s their job. And when you’re thinking about investing in the, I guess I think

Dave (29:42):

Less about the CEO’s personality, and I try to think more about their decision making, and I’m not going to pick on Tesla per se, but when you’re thinking about when you’re reading a 10 K, you  need to focus more on the fundamentals of the business and what’s going on with the business. So, for example, a Tesla, how many cars are they making? Are they selling them? Are they making them profitably? What’s involved in making the cars the think about the services that they provide beyond the cars. Think about the materials that they need to make. The cars. Batteries are obviously a very big integral part of a Tesla. And so thinking about the minerals that go into making a battery and all the different factors that go in to assembling a Tesla is completely different than it is when you’re assembling a car at GM or Ford, we were talking about earlier.

Dave (30:41):

So when you’re reading the 10 K your job, so to speak, is to learn as much about the company and be educated enough to understand what are the good things about the company and what are the bad things about the company. Because every company is going to have good and bad. They’re not all going to be, everything is awesome and Tesla has the added, I guess, benefit or curse depending on who you talk to, of having a CEO. That’s very much in the public. And I think one of the things that Warren buffet talks a lot about when he talks about management is looking for people that are more about the business and not about themselves. And one of my problems with Tesla is I always feel like Elon Musk is more about, Hey, look at me, look what I’m doing as opposed to how great his vehicle is and how great the company is doing and all the wild cannon stuff and doing all those things and his job about, Hey, who’s Tesla who revisit the section?

Dave (31:42):

The 10 K is written by the company and he is the CEO. He’s also, I think the director of the board of directors. And so he has a lot of power and I would imagine there’s probably not a lot of people telling him no in the company. And so whose job is that? I guess it could be the investors telling them, Hey, we don’t like what you’re doing and bid a stock price down, but the cult of of Ian allows that to stay, stay higher. But again, to go back to it for me, when you’re reading the 10 K maybe not cynical, but go into it with a neutral state of mind. Look for reasons you want to buy the company, look for reasons you’ll want to sell the company and then you can factor out. You can balance those and make your decision from there.

Dave (32:37):

Yeah, I have 100% agree. All right folks, we’ll, that is going to wrap up our discussion for this evening. I wanted to thank everybody for taking the time out to write, so fantastic questions to us. We  enjoy getting those and it’s a lot of fun for us to be able to answer those on the air and hopefully help you guys out a little bit. So if you guys have any, do you have any other questions, please do not hesitate to send them to you, to us and we will take the time to answer them for you guys. So without any further ado, go out there and invest with a margin of safety emphasis on the safety. Have a great week and we’ll talk to you all next week.

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