Welcome to the Investing for Beginners podcast. In today’s show, we discuss:
- We discuss the mechanics of reinvesting dividends and their impact on your long-term returns
- Talk through the idea of investing in specialty ETFs, particularly the new ETF from Roundhill that focuses on sports and gambling
- Talk about the possible advantages or disadvantages to arbitrage investing, or M&A investing based on the recent Activision/Microsoft news
Today’s show is sponsored by:
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I love this podcast because it crushes your dreams and getting rich quick. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with a step-by-step premium investing guide for beginners. Your path to financial freedom starts now.
DAVE All right, folks, welcome to Investing for Beginners podcast. Tonight, Andrew and I will answer some great listener questions recently; we have three good ones. And they’re wide-ranging. So this should be kind of interesting. So I’ll go ahead and read the first question.
So we have. Hi, Andrew. This is Gladys, I started listening to your podcast recently, and the dividends topic got me interested; when you say to reinvest, are you referring to the reinvest option of the shares? Were more shares from the company or bought?
I agree that you grow your ownership of the company by doing that, but you still don’t see the money until you sell the stock? That is not clear to me. Could you please explain or point me in the right direction? I appreciate your help, Gladys. So Andrew, what are your thoughts on Gladys? Great question.
ANDREW Well, thank you, Gladys, for writing in. I’m happy to answer. So yes. When I say reinvest shares, what I mean is you take the dividends that the company pays you, and you buy more shares for that company; the benefit is like you said, you get more ownership, which means the next time they pay dividends, you’re gonna get an even bigger pile, and then the next time and even bigger, and so it multiplies its compounds.
That’s what’s great about reinvesting, you know, you can make the argument, like you were saying, well, even though you’re putting it back into the market, you’re not actually getting to, I guess, take the profits for yourself. But that’s kind of something that you’re gonna have to deal with whether you decide to hold the stock or sell a stock that’s like, that’s an eternal struggle, you’ll never get away from that, whether you’re reinvesting or not.
DAVE No, you won’t, unfortunately. And that is kind of the nature of the beast, but I guess it goes to, would you rather have your reward now, or would you rather have a bigger reward down the road. And that’s the advantage of doing what Andrew was talking about. And something that a lot of people don’t realize is when we talk about long-term returns for the stock market. And depending on who you talk to, they can range anywhere from eight to 10%, over the last 50 to 100 years, around two to 3% of that is from dividends.
So they make a big, big chunk of the money that we earn from investing in companies that pay us a dividend. And that is our air quote; the bonus for investing in a company like Microsoft or Johnson and Johnson is that they are giving us part of the profits that they have earned as a thank you for being a shareholder in that company. And the more that you can reinvest those and help you’re compounding, which is one of the great wonders of the world, the faster you’ll get to where you want to go.
Now, when you’re starting out, those numbers are going to look small and kind of beautiful, and you’re going to look at them go, what really, this is what you guys are getting all excited about. But trust me, if you look at a calculator, or if you just look at somebody returns like a Warren Buffett over a long period of time, you will see that curve accelerate up very, very sharply as you get farther into the game. And so it’s like a snowball as it rolls down the mountain; it gets bigger and bigger and bigger. And that’s why people use that analogy to talk about these kinds of things because it does benefit you in the long run.
So it kind of goes back to do you want the money now? Or do you want the money later? And for me, I’d rather have the money later. And hopefully Gladys, that’s what you’re hoping looking for as well. And if you’re looking to make a lot of money quickly in the game, then investing with dividends is maybe not the way to go. But if you’re looking at long-term stock returns as a way to build your wealth, that is absolutely the way to go. And that’s what Andrew has been preaching since day one when we started four years ago. So I definitely would listen to what he has to say about this.
ANDREW I’ll give one example. Just because, you know, just because I get excited about the small little pennies doesn’t mean everybody else does. The very first company I ever bought was Microsoft, I bought it at $27 a share, and I bought just one share. So at the time, I was getting like 20 cents in the dividend. Hard to get excited about that. Right. So when you reinvest that, though, you start to pick up ownership of that.
So what ends up happening is now once I had, I think basically a year or two worth of dividends, basically to give me more of like a 10% share. So I’ll try not to get too much into the numbers, but okay, so instead of one share, it was 1.1 shares, okay? So that extra point one share from the 20 cent dividend, whatever it was, now that the company the stock’s worth over $300 that’s worth $30, which if you remember I bought one share for 27.
And we’re talking about the little 20 cent dividends of all accumulated and now are worth more than what I put in. And we’re talking about, I guess, ten years later, almost ten years later, granted, Microsoft’s done really well, and it multiplied by 10. But that’s where you get a lot of the benefit of just waiting for a long period of time and those little dividends, even if they’re small. Now, as the company gets more and more valuable, those little shares become that much more valuable.
DAVE Yep, I agree. That’s a perfect example of how beneficial those could be. Because I mean, $30 in your pocket for doing nothing. And that just gives you another portion of shares of a company like Microsoft. That’s a nice investment.
ANDREW Yeah, I mean, nice to get your money back. And then some for sure. That’s, I think the beauty of a lot of investing is if you can get the right companies on your side. I’m gonna move on to the next question unless you have anything else to add to this. All right. So this one is from Dan, and he says, Hi, Andrew, and Dave, I appreciate you taking the time to read my email. Your podcast has been very helpful to me over the past year, and learning to make good choices with investments.
This past week, I learned of an ETF called MVP by Round Hill. Since being made available, the ETF hasn’t done much it went up to 1526. At the end of the day, Friday, it was down to 1497. While I know I’m speculating on this ETF; it seems like people would be interested. It seems like something people would be interested in with no real movement here. Is there a good reason for that?
Am I overlooking something here that this may not be a good investment, do new ETFs tend to take time to catch on? But really appreciate your thoughts. Thanks again for the great work on the podcast, guys.
DAVE This is an interesting question. So Andrew and I were not familiar with this particular ETF. And so we did a little research before we came on the show to kind of learn a little bit about the ETF, and Roundhill is a newer company in the ETF space. And I believe they have 88 Different ETFs that they offer right now. And they seem to, I guess, for lack of a better word, they seem to focus on guessing a more of a specialty type of ETFs instead of a broad range of like a market factor or a particular industry.
They seem to be more specialized in, for example, just to kind of give you a flavor of kind of the different ETFs that this company offers. They have two Metaverse ETFs. So ETFs focus on companies that are involved with the metaverse. They also have a meme ETF. So that has, you know, more than meme stocks that are focused in there. And then they have several other ones. And then the MVP one that Dan is talking about is more focused on sports. So just kind of uncovering some of the companies that are followed in the MVP ETF. There are some interesting ones in there; there are definitely some ones that I probably would never touch with a 10-foot pole.
But there are also some interesting ones like there’s a couple of soccer ones. So Manchester United. So menu, which is probably arguably the most famous soccer club in the world, is probably going to get fired for that. So the football-slash soccer folks are pretty passionate about their soccer. And there’s also you Ventus, which is based out of Italy; I know that one, and those are pretty popular. There’s also a company at Liberty, which owns the Braves, the Atlanta Braves, so that I would definitely be interested in, but there’s also some, the WWE, and then I think there’s some gambling as well.
So it has kind of a wide range of different ETFs in or different companies that are followed in the ETF. So if you look at some of the more particulars of the particular ETF, the companies that are in the ETF, or are their average P E, which is their price to earnings, which is a good proxy for, I guess evaluation, or how expensive or how cheap those particular companies may be, is negative. And so that’s not a good sign. So that means that the companies in ETF, on average, are losing money.
And that’s obviously not something that Andrew and I would advocate for; the expense ratio is low, but the credit rating, if you will, for the ETF is on the lower end. And so that’s something that would give you pause. And the reason for that is because it indicates that the companies that the ETF are tracking are low liquidity, which means they don’t have a lot of cash, and they’re not traded a lot. It also means that the credit quality of the companies is probably not the greatest either. And so that means that there’s a higher risk for potential bankruptcy for some of the companies that are the ETF follows.
Now, on average, most ETFs are going to follow hundreds if not 1000s of different companies. This one has 37, So it’s very limited in accompanies that it follows in the ETF. We also noticed that the trading volume is very, very light. We saw that it said 969, not an ETF aficionado, so I don’t know if that means that it averages 969 trades a day or if that’s 969 million. So I admit I don’t know that answer.
But it looks like a trading activity. Suppose you look at the chart that’s listed on ETF comm, which is the site that Andrew and I use to look at ETFs. It kind of tells you; it’ll show you what kind of trading volume it has. And that probably explains the question of why it’s trading where it is and why there’s not a lot of activity, because it’s just not being traded much. Roundhill is a new company; I had never heard of it before Dan’s question.
And to be honest with you, when I look at the ETF, it’s not something I would touch with a 10-foot pole; it’s, it’s loaded with all kinds of things that are, as he put it, speculative, is probably a nice way of putting it. And it’s not something I would recommend anybody take a flyer on; if there’s a company or two in there that you think would be interesting, okay, fine. But as a basket of stocks, which is what an ETF is supposed to track, I don’t see much redeeming quality. And I’m not trying to be super negative, Dan, but you want my opinion, and I’m going to give it to you.
So that’s, I guess, kind of my thoughts. Hopefully, I don’t get fired.
ANDREW I don’t know who would fire you. I’m not gonna really add much to that. I think you covered it pretty well, I guess. In the last part of the question, he’s asking whether new ETFs tend to take time to catch on. I think that’s kind of an interesting concept to Dan; I think it’s great that you know, you’ve you’re checking out these different ETFs.
And you’re trying to find stuff that you find interesting that you think other people would find interesting, too. But when it comes to sustainable results, and really getting the results that you desire in the stock market does take more than just the question of doing people like this; there have to be solid fundamentals behind it as well.
DAVE Do ETFs take time to catch on? I would say yes, unequivocally; they probably do. Again, this is not a space that I follow much. But I would think that new ETFs would take time to catch on; I’m sure that when Vanguard started off, they were probably on a much smaller scale. And it took them years to grow to the level that they are now.
And the thing that can be interesting about ETFs is that you can see what companies they’re following in ETFs. For example, Andrew and I were talking about some of the other ETFs that this company offers in a couple of the metal ones had some interesting names in the ETF Nvidia, Facebook,
ANDREW Microsoft, Apple, Amazon, kind of the big tech name, right? Yeah. Which would be Roblox is in there, which was kind of interesting.
DAVE Yeah. So some of those companies would be interesting, you know, that might have potential depending on what it is you’re trying to do. I guess the biggest thing when you’re thinking about ETFs is what is your endgame? What is the goal here? Is it just to buy something just cause? Or is there a goal in mind when you’re investing, you should probably try to have an endgame in mind. You know, I want to go from here to there, you know, it’s okay to speculate and whatnot. But Super Bowl is coming up in a few days.
And I probably would rather bet on whether the rams are going to beat the Bengals or vice versa than investing in something that I don’t really, I don’t believe in, I guess, is what I would rather do. And we get more enjoyment out of watching the Super Bowl with some money on the line. I’m not doing that, by the way, compared to investing in, you know, something, I just don’t really have any skin in the game, so to speak,
ANDREW , it does make me wonder, if you know, there are potential issues with trying to fit a bunch of different themes into a portfolio. So if you like sports, I mean, the latest e leather, talk about a company like Dick’s Sporting Goods, right? That’s a fantastic way to get exposure to all kinds of sports. But it doesn’t have the crazy high valuations that you’d expect from the fastest youngest companies. So it doesn’t always have to be a huge basket of ideas or cool things. It could sometimes even be one, one idea.
But it could also not, like you said, not be something you have to put in your portfolio just because you’re interested in it. And I think with all the choices we have today, as investors, it can feel like you get that fear of missing out like, Man, I need to have every theme in here. But that’s not the case at all. I mean, you don’t have to be in the metaverse to bank really nice returns for the long term. You don’t have to be on top of all of the renewable energy companies to make a fortune, either. It’s you can build wealth in a lot of different ways.
DAVE Yeah, I think one of the better takeaways from this conversation is you can make money in a lot of different ways. And the fear of missing out is real. And you were following that fear into something that may not take you where you want to go. You don’t have to, as Andrew said; you don’t have to partake in every single thing.
That could be the next greatest big thing off it laments many many times about missing Google. Did you know he and Charlie admit that they made a mistake and they missed it? I think they’ve done okay. For themselves, and you know, investing with the things that they’ve done. And you know, there are companies that I am kicking myself for missing. And constellation software is one of them. It’s a company based out of Canada, and it 36% Last year, it’s done 30% returns over the last ten years.
I didn’t invest in it. I wish I could see you know; it was too expensive. Now, you know, that’s my cross to bear. And that’s okay. I can find other things that can help me make money along the way. And, you know, maybe someday I’ll have the opportunity to buy something like that. But right now, I don’t, and that’s okay.
But I think that’s the thing you have to think about is it’s okay to miss out on something and to jump into something because you fear you’re missing out on whatever the latest trend may be.
ANDREW And don’t worry; there’s always something across the bridge that comes up like every single Oh, it seems like almost on a monthly basis now.
DAVE Yes, for sure. Yep. For sure. There are always going to be lots of opportunities. You don’t have to swing it every single pitch. And you can pass, and you’re not going to get called the First strike. If you don’t invest in some particular, you can just, you know, wait for your pitch. Alright, I think we’ve beat that horse. Let’s move on to another question. So we have Andrew, my friend Brent and Kobe. All right. Hey, Brenton Kobe recommended your podcast. I’m in Tokyo. So we got another one in Japan. This is awesome.
I have a question. So what do you think about the situation with ATVI, which is Activision? Microsoft is buying them for $95 A share unless something happens at 7925 A share right now; articles give it a 2023 close for the deal. I would have to hold it for a while. That’s a 1575 share profit or a 19.87% return. Very precise. What are the downsides to this when the situation comes up? Thanks, Katie. So Indra, what are your thoughts on Katie’s? Really good question; this is kind of an interesting situation.
ANDREW It is. So it’s a really good learning opportunity. Because I think if you’re invested in stocks, at some point, you’ll run into this where one big company is buying another company. And so what you’ll get almost all of the time, because a lot of these it’s called m&a or mergers and acquisitions, a lot of these acquisitions tend to happen at higher prices than lower. So as an example, Activision, when the deal got announced, their price shot up. I mean, if I pull up a chart, they went from, like, 65 range to like, the 80 range.
So you’ll see that a lot, you know, 20% 30% 50% 100% gains because a company is paying more for the small company. So where you see something interesting, though, is, like you said, Microsoft’s buying at $1 amount per share, but the actual stock price for Activision is less. So you could buy Activision. And then, like Katie said the question, just wait for the deal to close. And you get that difference, which is close to 20%. Right now, according to these numbers. But you know, there’s no such thing as a free lunch on Wall Street.
And so that’s referred to as like an arbitrage play. And what you get, if you’re right, is that nice 20% in a really short time period; what you get, if you’re wrong, is the stock dropping from where it was up by 80, down the back where it was before the deal was made down to like the 60s. So there is no guarantee that the deals will go through, and you’ll see deals go through, and you’ll see deals not go through. So it really depends on, you know, antitrust issues being sorted out through courts, not just in the United States, but any other countries that they’re involved in.
There could be legal drama in other ways. If one company felt that the other company didn’t act right, then they could take it to court. I’ve seen when I held Tiffany stock, something like that happens with COVID. So there is still a downside risk. So you don’t get this 20% for free if you’re buying Activision to wait for the price to rise when the deal closes.
So always keep that in mind, because that’s what you’ll see pretty much every time and if there’s not that much return. So if that spread is smaller, that means that people probably think the deal is going to go through. But the bigger the spread, the more risks there are for the deal to fall through. And so higher-risk high rewards, it’s a cliche, but a lot of times it’s true.
DAVE Yeah, it is true. And I think one of the biggest risks, which is what Andrew highlighted with this, is probably the regulatory concerns and whether the regulators are going to allow this merger or this acquisition to happen.
And you’ve seen more and more pushback recently, particularly with big tech buying another big tech, and there was a deal with Nvidia buying a company in England called arm, and there was a lot of concern that that deal was not going to go through and ended up falling apart the regulator’s kind of put a kibosh on it and then Nvidia backed out. And so, there is some serious concern about this with Activision. And the other thing that Andrew was kind of alluding to with the legal issues is Activision has had some bumps in the road, shall we say, recently with the, I guess, company culture.
And the company and rumor had it that the CEO that founded the company is going to step down once the acquisition is complete, and then the person running the gaming division at Microsoft would take over, in essence, that position, and I don’t know that, you know, I think some of the hullabaloos about everything that was going on in the company with a culture has kind of died down a little bit, probably because of the acquisition.
But it doesn’t mean that that that’s going to stay hidden or subdued before the merger happens. And there could be some pushback on Microsoft because of some of these issues. And whether or not that legally comes up, that could be something that delays the deal getting finished; it also could really take stock of Activision before the merger. And so that’s something that you have to be cognizant of as well, which would be great if the company is able to buy it at 95. And the share drop, that potentially could be a bigger spread for you. But there are certainly some risks to consider with this.
And Microsoft, for whatever reason, seems to have gone a little bit under the radar as far as scrutiny from regulators, especially compared to Google and Twitter, and Facebook, or meta. But it doesn’t mean that Microsoft or Apple can just skate through and get what they want.
So that is a very big, real risk that you’re going to have to consider if this is something that you want to do. But as Andrew said, it would be a huge, huge return in a very short amount of time if it does happen. So again, you have to weigh the benefits and the risks and decide if that’s something you want to do or not.
ANDREW I know we say a lot, but it really comes down to do you believe in the business or not? And do believe in it long-term or not. So if you’re looking at a company like Activision Blizzard, where you have, like, if you’re gonna buy to try to make that arbitrage trade, I mean, this is the way I invest, I always try to take the worst-case scenario. And I think if that worst-case scenario plays out, how am I gonna? Am I gonna be okay with it.
So, in this case, if the deal falls through, the stock crashes back down to the 60s range, but if you’re still okay holding this company for the next 5-10 years, then no sweat off your back, right? But if you’re kind of unsure about the cultural problem that’s been very public, and the company and what that’s done to the talent pool there. And if Microsoft’s not able to come in and you know, basically, they’re taking the IP and integrating that into their, their own talent pool. So if Activision doesn’t have that anymore, is it going to be as great of an investment? Is that going to be as great of an investment if the deal falls through?
Even if you might really like the company, or you really might like the games? Again, like Dave was saying, whether if there’s more stuff that comes out about people, more people in the Activision company that makes Microsoft pull out, and then you have, and now you’re stuck with a company that could be potentially even more ugly than that. So, you know, there’s no perfect answer for anybody. And it all depends on how you feel about the companies and how you feel about their financial information.
And so those are, I guess, some things to think about when it comes to, you know, you can try to play arbitrage games all day long with the stock market, it’ll probably drive you crazy, I can tell you that really, kind of focusing more on the long term stuff is really beneficial because then you’re not stuck having to really root for one thing or the other.
DAVE Those are great points that I guess kind of follow up with what Andrew was saying; I think a couple of things that are really key to what he was saying, or think about, would you be okay, owning Activision. If the acquisition didn’t go through, if you were okay, owning a company like Activision, and, you know, that’s really a great investment for you. And the bonus is that you could potentially make this great return and an acquisition situation, then, you know, I think that’s a really easy decision.
However, if you’re buying Activision in the hopes of gaining from this potential arbitrage, merger, or acquisition situation, and you really don’t like Activision, or you don’t really care about the company, then it becomes a different calculus to figure out what kind of probability you really want to factor into making that choice. And I think that’s really what it comes down to. And if you can kind of marry those two ideas and figure out what you’re really trying to get out of this investment and weigh the risks and what you’re okay with, then I think it becomes the that becomes the question that you have to answer for yourself. For me, I don’t want to own Activision. So I would probably pass. But that’s just me. But I think that his point about owning the company or not owning the company, I think is really the key to making a decision about that.
Alright, so with that, we will go ahead and wrap up our conversation for this evening. I wanted to thank everybody for taking the time to write us those fantastic questions. We really appreciate you taking the time to send those to us. And we enjoy reading those and answering those on the air. If there’s anything that we talked about today, sometimes we talk about some things, questions, maybe different topics, metrics that you may not be familiar with. We have a website investing for beginners calm. And on that website, we answer all these very questions on the website with great blog posts, videos, other podcasts that we’ve done; there are lots of great resources. There’s also a search bar on the website.
And so if you’re not sure what the price to earnings is, you can go there type in price to earnings, and you can find your answer. So it’s a great resource to help answer any questions that you may have along the way of anything that we discuss in our podcast. So please check that out. It’ll help you a lot.
So without any further ado, I’m going to go ahead and sign us off; you guys go out there and invest with a margin of safety. Emphasis on safety. Have a great week, and we’ll talk to y’all next week.
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