Answering Investors' Questions About Diversification, REITs, Luxury Brands, and More

In this Motley Fool Money podcast, we answer listeners' questions about topics including:

• Adobe's planned $20 billion acquisition of Figma.
• If a cannabis REIT is a good buy.
• Luxury goods stocks as a hedge against inflation.
• Using dividend payments to pay down a mortgage.

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.

This video was recorded on October 09, 2022.

Chris Hill: As they say on PTI, "It's mail time." I'm Chris Hill, and today, we're answering your email and voice mail questions about stocks, real estate, diversification, and more. If you've got a question for the show, call The Motley Fool money hotline at 703-254-1445 and leave us a message. First up, a voice mail about ExxonMobil. Should you sell when you're receiving a 10% dividend? For this, we're going to Motley Fool's Senior Analyst Matt Argersinger.

Alberto: Hi. This is Alberto from Malibu Beach, California. My question is about the petroleum industry. I bought ExxonMobil in 2020 at its lows, around 32 bucks. I'm getting approximately 10% dividend yield. I know that right now, pretty much petroleum is at all-time highs and winter is coming, which is why I haven't sold yet. Should one simply give up that 10% yield, cash-in, and then just invest in a diversified dividend portfolio or mutual fund or ETF, or should I just keep holding it because I have that guaranteed 10% rate on a company that will not disappear? Thank you very much. I can't wait for your answer. Bye bye.

Matt Argersinger: Thanks for the question, Alberto, and congrats on investing in ExxonMobil near its lows a couple of years back. Nice work. You are way ahead of the curve when it comes to investing in the energy sector, which has really outperformed during this bear market we've had. You probably guessed my answer here, but at the Fool, we rarely think you should sell a winner. ExxonMobil, as you mentioned, it's not going anywhere, it's not a fly-by-night company or a technology stock that just happened to catch fire. This company has been a leader and innovator up and down the energy sector going back over 150 years. By the way, you mentioned the 10% yield you're getting on your cost basis, well, that is almost certain to go higher. Exxon paid a dividend every year for more than a century, and it's raised its dividend for 39 consecutive years, and I'm sure it's going to raise it again next year. You could certainly sell and roll into something more diversified but just speaking for myself, that'd be a tough to do for a company like Exxon, which is a leading company, already highly diversified within its own sector, and just pays out a nice, consistent, growing dividend. You have what we call a wonderful problem.

Chris Hill: Next up, a tough question about diversification for my colleague, Dylan Lewis.

Deshan: Hi, Motley Fool. My name is Deshan. I'm from California. I have a question about diversification. I have been investing for the last two years and I have built a portfolio of almost $35,000, and it consists of 55 different stocks. Most of them are The Motley Fool recommendations. One of my friend, he recently invested in stock Tesla, this was in June, and he invested almost like $45,000 altogether, all at once, lump sum. His portfolio is down already almost like 6-7%. My portfolio is down almost like 25-26%. The question is, what am I doing wrong with diversification?

Dylan Lewis: Hey, Deshan. Dylan Lewis here. Great question and a tough situation. But I want to start out by saying that you're doing the right thing. If you've got over 30 stocks and you're planning on holding for 3, 5, 10 years, you're on the right path. Now, I don't specifically know what you own and when you bought it, but I think that this is a good opportunity to talk a little bit about diversification in a way that gets beyond just the number of stocks you own. We often tend to think about diversification in the sense of what you own, but it also can be thought about in when you bought it. It sounds like a lot of the money that you put into the market was a year and a half ago or so when valuations were a little bit higher, and some of the companies that we've seen and we've talked about a lot on the show are a little bit more growth oriented, and that type of business has been hit hard in 2022. As outlook has been a little bit tougher, as interest rates have gone up, these are things that tend to affect growth stocks a little bit more.

The reason I want to emphasize looking at time in addition to just what you own is, I think 401(k)s provide some of the best lessons to investors on the idea of being a net buyer of stocks. Your 401(k), if you worked for a company or a full-time employee, you have paychecks coming every two weeks or so, and every two weeks, you're investing in the market. I think it's helpful for us to think about investing on our own with that same mentality, ups and downs, we're buying stocks. The reason that that's important is we're not tying our cost basis to any one particular moment in time. It's easy to look at something where companies have gone down and you're staring at some red, but your 401(k) doesn't know that. It's just continuing to invest over time. It's a very helpful way to think about putting new money in a brokerage account that you're putting into individual stocks to work as well. One of the things I also want you to think about as you're thinking about diversification, is thinking about how diversification limits the range of extreme outcomes.

That only becomes more true with time and with sample size. Now, in this case, you are talking about what you're doing and what your friend's doing and disappointed that your friend only has one stock that they own; they're not seeing the losses that you are and trying to reconcile all that. I think what diversification can help us do is limit the range of extreme outcomes, and we tend to see that as sample size increases. Your friend has bought one individual stock, and put tens of thousands of dollars into it. Ultimately, might create better returns in a few specific situations, but it is less likely to be the better option if you expand the sample size out. I don't really like to talk about gambling and investing too much, but one way to think about this is if you are at the roulette table, your friend is essentially betting a specific number, and being diversified means that you are putting your money on the color red, for example. If you're trying to maximize the returns on a single bet, you're going to put all of your money on individual number, but the likelihood of repeating success with that bet is very low.

I think it's same thing with the number of positions that your friend holds. Over short periods of time and limited sample size, it can be very hard for the business to drive the overall results and returns that the investor sees. Over longer periods of time in larger sample sizes, it's going to be very hard for your friend to consistently be right on an individual company with a lot of money in that individual stock by being so highly concentrated. I'd urge you to stay the course, continue to do what you're doing. But just remember that you can continue to put new money into the market, and then as you do, your positions will be less tied to the specific moment that you'd already invested. So you'll be spreading out your cost basis over time and diversifying not only the number of companies you own but when you've put that money to work.

Chris Hill: If you'd like to email the show, just drop a note to [email protected]. Up next, a question for Tim Beyers about a SaaS company called Domo.

Ricky Mulvey: "Has anyone at the Fool taken a long look at Domo, ticker D-O-M-O, a cloud-based platform for business intelligence? There are more phones than laptops being used on a daily basis. This one makes sense. Curious to see if there's any potential down the road on this one. Thanks, Wayne."

Tim Beyers: Wayne, fascinating question. I understand why you're referencing phones here because Domo really got famous for this idea that you could, in a simple analytics platform, you could have all the data you needed to run your company on your iPhone. It would run through the Domo app on your iPhone. To be fair, that's a legitimate argument. Domo is elegant software. It is an elegant platform. There are some big customers that have adopted it. Here's the problem, Wayne. You can have a really great product and you can have some problems in how customers adopt that product. I think that's the case for Domo here. It's hard to take the Domo platform even though there's a lot of it that's in the cloud now and adopt it across your entire business and do all the work to gather all of the data. It takes a long time to do it. It's probably easier now than it used to be. But this becomes a very long sales cycle. When you have a really long sales cycle, it makes it much harder to grow very fast.

Domo, unlike some of its peers, it's growing over 20%. Revenue is growing over 20%, but this is not one of those that's growing at 30, 40, 50%, and it's unlikely to do so in the future, Wayne. I think it's much more likely that this company that has been in transition for a while is an acquisition candidate. There are some signs that the transition that it's undergoing right now is gaining some traction. Probably the biggest news in terms of that transition is that the founder Josh James has taken a longtime colleague of his, somebody he's worked with since the days that they were both at Omniture, which is another company that James founded, his old colleague John Mellor, who'd been at Domo since 2019, is now the CEO. James is out of the picture.

He was a strange and interesting and funny character who had a little bit of a reputation for spending too much money. Mellor comes in in March, is inserting a little bit more discipline, maybe doing things a little bit differently, trying to shake things up, maybe on the sales team, and that could be a good thing. If anything, what I expect is in to clean things up a little bit, get the company in better shape so if a suitor does come along and makes a big offer for this company, it's going to be maybe a more attractive offer. I personally think if there's a great outcome for investors in Domo, it's going to be because a big company came along with a big check and said "come on in." Thanks for the question, Wayne.

Chris Hill: Hans, in our Facebook group has a question about Innovative Industrial Properties. A cannabis Real Estate Investment Trust. Senior Analyst Emily Flippen has an answer.

Ricky Mulvey: "I have my eye on Innovative Industrial Properties, ticker IIPR. I'm already invested in the company and it has an 8.1 percent yield. But the dividend growth has slowed down. Some of their customers are having trouble paying rent. I know you say add to your winners and I see IIPR is a winner with some troubles. The stock price is down a lot, but the dividend yield is up a lot and I sure like the yield. I'm considering adding heavy to the position, making it a 10% position. Besides one big tenant having trouble paying rent, are there any other red flags? Thanks."

Emily Flippen: I love this question in part because I'm an Innovative Industrial Properties shareholder myself. This is right up my alley. But there's really two parts to your question here. The first one being, how do we feel about the company today? The second one being, how large of an allocation should I be putting into this business? I'll address the first part first, which is IIPR, that's Innovative Industrial Properties, has had a very challenging start to this year. I shouldn't say start, it's October. But for the first half or so this year, they faced challenges that they had not faced previously, which is why their stock price is down so much. The biggest one being, as you mentioned, issues with one of their tenants, Kings Garden paying rent. To this point, they haven't had any of their tenants default on their rent agreements. Kings Garden, unfortunately, is the first one. They are in the process of bringing this company to court.

But you can't get blood from a stone. It's unlikely that Kings Garden, which is one of the Innovative Industrial Properties' largest tenants, is going to be a tenant for this company moving forward, which is why you could say that the yield looks so cheap on a relative basis, it's because the market is pricing in a decrease in distributable cash flows in the future. You can see this with their other tenants as well. It's not just challenges at Kings Garden, but challenges across the cannabis industry as a whole. In fact, five of Innovative Industrial Properties' tenants, that's PharmaCann, Parallel, Ascend, Kings Garden, which you mentioned, and Trulieve represent 14, 10, 9, 8, and 7 percent of sales, respectively. There's a decent amount of revenue concentration with these customers. Not all of those customers are in great financial positions. This has been a really challenging year for cannabis operators at large. There's been a lot of competition. Lots of price decreasing. Margins have fallen for a lot of businesses.

While there are some strong states at large, it's been challenging for cannabis operators. Now, while it's important for cannabis operators to make payments on their leases the same way it's important for regular people to make payments on their mortgages or to pay their rent, ultimately, if they don't have the cash flows, that's cash flows that's not going to Innovative Industrial Properties, which are not flowing down to shareholders. In addition, Innovative Industrial Properties has always traded at a relative premium for what it is, which is a cannabis REIT, in part because the market expected them to continue to pull on new business and as investments in the cannabis industry have fallen this year, so has Innovative Industrial Properties' ability to get new leases, new tenants, which has negatively impacted growth. There's a lot of headwinds facing this business today.

I still like the business long term, but I would not say that looking at where the company is today versus where it was last year, that they are in a better spot. Which does bring me to the second part of that question. How should we think about the position sizing? Personally, I would never feel comfortable making this company more than 3, 4% of my personal portfolio, in part because this is an extremely risky business. They depend upon the cash flows entirely from cannabis operators. The cannabis industry is still so nascent that it can go out of business quite literally any day now and their core tenants can stop paying rents. If that happens, the yield that you're seeing today on this company is going to disappear effectively overnight. Now, that's a risk that exists really strongly in the cannabis industry that doesn't necessarily exist when you're looking at other dividend-paying investments. Personally, it's not a company that I would recommend over-allocating in, but every person's risk tolerance is different.

Chris Hill: Are luxury goods a good hedge against inflation? We're going go back to Matt Argersinger for the answer.

Ricky Mulvey: This question comes from Andy in Memphis, Tennessee. "I'm wondering whether investing in luxury companies would hold up well against inflation and or recession and perhaps reward shareholders going forward. It seems to me that a person who can afford to buy a Ferrari doesn't care if the price goes up. I'm thinking about a luxury basket of stocks, something along the lines of Ferrari, RH Inc., the Swatch Group, LVMH, Monet Hennessy, Louis Vuitton, and Capri Holdings. It seems like this would cover a wide variety of luxury items: cars, furniture, clothes, watches, and other accessories. What do you think about this concept? Are there any others you might add to this basket? It seems like luxury companies haven't performed well over the past years, like most other stocks. I'm wondering what I may be overlooking." 

Matt Argersinger: I think you're on to something here, Andy. Probably the reason a lot of luxury companies, including the ones you mentioned, haven't performed very well is because a lot of investors assume that spending on high-end discretionary items will be the first to go once we actually enter recession. Now, there's some validity to that, but I do think that wealthier consumers are far less susceptible to price inflation or a slower economy, like you mentioned. In fact, our team here at the Fool just had a conversation with Liz Ann Sonders. She's the chief investment strategist at Charles Schwab. She uses an amazing array of data to make her investment calls. One of the data points she brought up was how higher income households tend to have a lot of excess savings right now relative to lower-income households.

That tells me that their spending habits will likely hold up even if we do enter recession. I think you've got a great list. If I was to add one or two, I might add Vail Resorts or a company called Pebblebrook Hotel Trust, which is a REIT. Of course, I'm sure you've heard of Vail, but both these companies own luxury resorts around the country. Pebblebrook for example is seeing their demand surge back to pre-pandemic levels and then nightly rates are hitting new records. Maybe add some luxury travel to your list. But I think you've already got a pretty impressive basket of companies.

Chris Hill: A longtime listener wanted Jason Moser's latest thoughts on software giant Adobe. Question from Sean. "Hi, Chris. I'd love to hear Jason Moser's thoughts on Adobe. Is the thesis still strong on this one? Does he feel strongly, like Wall Street does, that the Figma acquisition is a bad call due to the price tag? Thanks." Thanks for the question, Sean. It was such a good question. Yeah. We actually got Jason Moser on this one. Jason, Adobe paid $20 billion for Figma. What are your thoughts on Adobe and the overall thesis for the business? Because Sean is right, the reaction from Wall Street was not positive because of the amount of money they were paying for Figma.

Jason Moser: Oh, no, its as negative an outlook on this business as I've seen in some time and I say that as a shareholder of Adobe, I say that as someone who has recommended Adobe in our service, and I will say I remain a shareholder. Honestly, I remain a happy shareholder. It's been a tough year for Adobe to be sure, things got worse with the recent announcement of the Figma deal and I get that. This is a big acquisition and they are paying a lot for it in the context of where Figma is in its development. Now, a few things I will add, though. As a leader, when you look at just Adobe, look at the business of Adobe as a leader in the digital media space, in most of its revenues still tied to subscription, this is a very strong business. Forget about the acquisition and just focus on the core business for a second, it's still a very strong business, generated $7.1 billion in free cash flow over the last 12 months, that's $5.8 billion if you back out the stock-based compensation. And if you assume this deal goes through, which I think it will, then it removes a competitive threat that would only loom larger as the years go by.

So when you look at the valuation today of Adobe, this cashflow metrics that put shares today at around 18.3 and 22.4 times those free cashflow numbers I just gave you, respectively. Historically, and I wouldn't say cheap, but it certainly seems opportunistic. Now, the questions regarding the acquisition are absolutely fair and right. The financials will look a little bit different in order to make the deal happen, but that will flow through in time. This is not something that just is going to pin this company down. It's got a lot of resources and it makes a lot of money in the process. If you can afford to take the longer view and think about owning these shares for the next five years or even longer, then I think this valuation starts to seem a little bit more worth paying attention to and to put it another way, we'll ask on this show often: value play or value trap?

I think that when you look at the core business of Adobe, acquisition included, to me it's very difficult to argue that this is a value trap based on the core business of Adobe. There's an old investing saw that goes something like if you want to outperform then you have to go against the herd from time to time. The market obviously taking a very glass-half-empty perspective here today, I think it's worth looking at it a little bit differently based on the strength of the core Adobe business. One final thing I'll add here, there's a thread on Twitter that I think is worth reading, it's from someone named Amal Dorai and the handle there is @A-M-A-L-D-O-R-A-I. This is a thread posted from Amal Dorai in mid-September right after this deal was announced. I would just encourage you to go read that thread for another perspective because it does seem to be a unique perspective, it does seem that Amal has experience in play here.

The thread gets a little bit into the weeds, talks a little bit more about why Adobe is making this deal. It's not just to eliminate a competitor, but it's to bring some additional capability in house. I'm not saying it's necessarily right or wrong, but it is on their perspective. I think that's always important, particularly when you see deals like these where it seems like so many are so adamantly against it and saying is just the wrong thing. Find those voices out there that are agreeing to the contrary and at least read that thread to get a little bit of a different perspective. But generally speaking, I remain very bullish on Adobe, and I frankly think that today's price represents an opportunity for folks who were able to take that longer view.

Chris Hill: When mortgage rates are rising, should you change how you invest? We gave this question to Robert Brokamp. 

Ricky Mulvey: "Hey, Fools. This may seem like a silly concepts, but I thought I would throw it out there. I have a variable rate mortgage right now, and obviously, that's not going well for me. One of my holdings is with First National Financial Corp, who I also hold my mortgage with. I believe in the company and do not plan to sell anytime soon. I've considered increasing my holdings substantially to 'stick it to the man' and use the monthly dividends from the company to pay the increased interest from my mortgage while interest rates climb. Is this a silly idea, or am I a genius for making my bank pay their own interest charges while still investing my money into a successful business?" That's from Jeremy in Saskatchewan, Canada.

Robert Brokamp: Well, Jeremy, I love the idea. I could see the satisfaction of getting a check from the same company you have to send a check to. That's it. You do want to invest in the companies that have the most return potential, not necessarily for just the psychological satisfaction of feeling like they're partially paying your mortgage. I'm not familiar with this company, so I can't say whether this is the best place for your money, but I can see that it has a 6.5% yield. Now I'm not an expert on Canadian Bank stocks, but if this were a U.S. stock and it had that yield, I might be actually a little concerned because it could be a sign that the company is in trouble and the dividend may get cut. You just have to do your own due diligence on whether that dividend is sustainable and maybe whether you can expect it to grow over time. I do like a company that can reliably grow its dividend year after year, especially if you're trying to pair it up with a bill that you have to pay.

But I do think it's important to note that a dividend isn't a free lunch. The company is basically distributing its assets, in this case, on a monthly basis, and the stock price would theoretically adjust accordingly. If there's another stock or ETF that you think makes for a better investment, but it doesn't pay such a generous dividend, you basically could create your own dividend just by selling off little pieces of it gradually over time. I should also add that we generally recommend that you don't invest money that you need in the next few years. I'd hate for you not to be able to pay your mortgage because you put the next few months worth of mortgage payments into a stock and then the stock plummets. Definitely play it safe with your near-term money, and best of luck to you, too, because I know there's a large percentage of mortgage holders in Canada and other countries such as England, whose rates are adjustable and the upcoming mortgage payments could be very painful. If you can make it work so that the bank could help you cover those payments with their dividends, well, then more power to you.

Chris Hill: Last up, can hedge fund techniques increase your returns? Our producer Ricky Mulvey took a crack at this one.

Ricky Mulvey: Next question comes from Chuck. He wrote us, "I divided my stocks into four portfolios: defensive, foreign equity, U.S. equity, and Motley Fool. Right now, I have 32 stocks. I'm also coursing through an MBA. However, like almost everyone, I'm pretty red this year. Here's the question, what are your thoughts about hedge fund techniques? I was thinking about having another absolute return portfolio that I don't hold for five years, but 1-2 years to maximize the return. The math behind is pretty straightforward. Suppose you have two investments. One grows at 10 years for 7.2% and another grows at 12.4% for 10 years. If the second one is down 30% in the first year, both investments will have the same absolute return in 10 years. What are your thoughts about using hedge fund techniques for, let's say, 15% of the total portfolio to improve the return? Thanks a lot, best, Chuck." Thanks for the question, Chuck, and I'm going to take a crack at answering this one. A little curious what you mean by hedge fund techniques.

That can mean a lot of different things. Could mean short-selling or merger arbitrage, could mean that you're looking at event-driven trades. But I don't necessarily think that using these techniques will help your overall return. One piece of data. Research from a company called Gins Global, it's an index provider, found that about 80% of U.S. equity fund managers underperform the Standard and Poor's 500 over a five-year period. There is also a famous bet that Warren Buffett made back in 2008. He said that if any hedge fund manager could beat the S&P 500 for a 10-year period, he would donate a bunch of money to the charity of their choice. One guy took them up on it, lost handedly. Although I will note that he said in a Bloomberg Opinion piece, "My guess is that doubling down on a bet with Warren Buffett over the next 10 years would hold a greater than even odds of victory." He didn't quite back down on it. Hedge fund techniques can certainly win.

There's some famous hedge fund managers who beat the market over extended periods of time. But that kind of market participation is extraordinarily difficult, especially for something, let's just say, that's 15% of your total portfolio. One exception, you said you're an MBA student, so maybe you're thinking about working in that realm so you want to get a little bit of a flavor of it, sure, try it out. Why not? But among the Fools I talk to, the best investments they make are not focused on trades, but it's holding businesses over a very long period of time. The good news is that there's a lot of quality businesses out there that are on sale right now, and so bear markets are where investors make most of their money even if it hurts right now. I hope that answers your question and appreciate you listening to Motley Fool Money.

Chris Hill: Thank you so much for the questions. Please keep them coming. You can email [email protected]. You can call The Motley Fool Money hotline. It's 703-254-1445. 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.