If there's one thing Motley Fool Answers hosts Alison Southwick and Robert Brokamp enjoy, it's hearing from their listeners, so they particularly relish the monthly mailbag episode. But even they can be overwhelmed by the quantity and breadth of those queries, so this time around, they've invited a couple of friends to help out: Serial podcast guest Jason Moser and Answers newbie Abi Malin.
Among the topics they tackle: What's the best way to bet on digital payments? Where should a college student start investing? When should I sell my winners? And why the heck do companies put so much money into share buybacks?
A full transcript follows the video.
This video was recorded on July 31, 2018.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. Hi, Bro!
Robert Brokamp: Hi, Alison!
Southwick: So we're not alone. We have guests, today, to help us tackle the Mailbag. It's Jason Moser and Abi Malin. They're analysts, of course, here at The Motley Fool. They're going to help us answer your questions about the war on cash! And advice for college students. All that and more on this week's episode of Motley Fool Answers.
Southwick: Well, hey! Jason Moser's back!
Jason Moser: Howdy!
Southwick: It's been a little while.
Moser: A little while, but I'm always happy to be here.
Brokamp: Always happy to have you here.
Southwick: And we have a first-timer on the show today, Abi Malin! So some of our Answers listeners might know Abi from some of our Motley Fool services. You spoke at Fool Fest. For everyone else, why don't you share with them... And everyone knows you, Jason, so whatever. Abi, why don't you share with listeners your Foolish story? How did you come to be sitting across this table today?
Abi Malin: Well, I know you mentioned earlier that we're talking about college advice. I actually came here straight out of college. I was guided here by a professor and have been here about three years, now.
Southwick: It's been three years? Are you serious?
Brokamp: Didn't you start off as an intern?
Malin: Yes, I started as an intern and then was hired full-time.
Southwick: Oh, that's awesome. Well, it's great to have you. Thank you for joining us on the show and hopefully this will go awesome and we'll all agree it's a great experience and do it again sometime. I'm locking you in now...
Moser: Is there any doubt that this is going to go really well and you'll invite us back?
Southwick: That's what I was looking for.
Moser: There you go.
Southwick: Sometimes we have Oreos on the show...
Moser: I'll remember that!
Southwick: ... so if that entices you to come back, this is not one of those shows. All right.
Moser: We should do a beer-tasting episode one day, too. Instead of Oreos, we'll just do some local beer. How about that?
Rick Engdahl: I'm in!
Brokamp: Rick's in on that one. You can take my place on that one, buddy.
Southwick: Bro's out. Bro's out. Let's get into it, shall we? The first question comes to us from Jordan. Jordan writes, "I'm trying to decide between owning shares of Mastercard, Visa, Square, and PayPal or one of the following ETFs: Prime Mobile Payments [IPAY] or Global X Fintech [FINX]. If you were to choose individual stocks over the ETFs and you had $10,000 would you put 25% in each stock?"
Moser: Well, you know my answer. I mean, we've talked about the war on cash, before. I'm sure people are probably getting sick of me talking about the war on cash.
Southwick: You're pro war on cash.
Moser: I am pro war on cash. It was so funny. It said something about the war on cash on Twitter one day and in included Square in the conversation. And somebody from Square replied back and they said, "No war. Cash is cool. We just like options." So I don't think they fully knew the backstory and I was going to get into it and show them the returns and stuff like but...
Southwick: So we have hawk in the studio, Jason Moser, and you're definitely pro war on cash, but do you buy individual stocks or do you go for an ETF?
Moser: For me, personally, the point of the basket of stocks that I put together was to give investors the opportunity to have their own little kind of fund and essentially eliminate all other external factors involved, whether that be management fees or churn or whatever funds can tend to present. For me personally, I would and did go with the basket of the four stocks and I think the track record, itself, has done very well. We just celebrated the war on cash's birthday a few days back, and in the first year of existence the basket of stocks returned a total of 80%...
Southwick: Not bad...
Moser: vs. the market's 14%, so...
Southwick: Not bad.
Moser: ...obviously exceeding expectations there. I was going through PayPal's earnings call recently and there was a snippet in the call that really to me summed up why I think this basket works, so I'm going to read a quick quote from PayPal's CEO Dan Schulman to give people an idea of why I think this basket works.
It goes, "First of all, obviously we respect all of our competitors. We learn from them, but we are really focused on our customers and what their needs are. And that's what we pay a tremendous amount of attention to and we feel if we can solve their pain points better than anyone else, we'll continue to win and be a leading platform in the digital payment space. Secondly, I'd say it's obviously not a zero-sum game. We're operating in what we think is a $100 trillion total addressable market."
Now this is to give you an idea of the reason why I think that basket works. One, it's not about picking just one winner. There are going to be many winners. Two, it's a massive market opportunity. I tend to discount that $100 trillion just to be a little bit more conservative, but the point still remains that this gives you excellent exposure of two companies that are really guiding the way there. For me, I'm going war on cash over the funds 10 times out of 10.
Brokamp: And would you split up the investment equally?
Moser: Yes, and that was the point of the basket, was to keep it simple and just do 25% in each holding. It doesn't mean you can't add to positions as time goes on and find the companies that perhaps are outperforming and build those positions up a little bit more over time. You can just continue to add to them equally, but I think it really works and I think it's going to be something that lasts for a long time.
Southwick: Do you think we perhaps made the mistake with this question but Jordan heard Jason on another show talk about this and then he wanted a second opinion? But instead of getting a second opinion he still put that to Jason.
Moser: We're just hammering the point home here.
Southwick: Jason Moser. Several weeks ago Jason Moser said that you should buy these four stocks. Do you agree that that is still the right way?
Brokamp: Does Jason Moser know what he's talking about?
Moser: And let's be clear here. A lot of this depends on the individual investor's risk tolerance. Coming from my perspective, I would say I had a much higher risk tolerance vs. other people who may not have quite as high a risk tolerance.
There's no question that this basket of four stocks is more concentrated than most funds out there, and that's going to be the nice part of having a fund is it will be more diversified. Probably less volatile. Perhaps that caps the returns. Maybe the basket of stocks outperforms because it's a bit more concentrated. You have to weigh that and it's going to be different for each individual investor.
Southwick: But bottom line Jason Moser agrees with Jason Moser.
Moser: Well, of course. As always. But I also think the bottom line is that this payments market opportunity is tremendous, I think it's long-lasting, and I think it's one that every investor needs to have exposure to.
Southwick: The next question is for Abi and it comes from Clay. "What is the best money investment advice you can give to a college student? I have some money that I would like to invest, but I don't know how, where, when, or if I should?"
Malin: This is a really good question that I think a lot of people face. Just taking it step by step there, should you? Yes, you should. When? I would say sooner rather than later. Now, if you're thinking about it, data shows that because of compounding returns you'll actually set yourself in a stronger financial position by starting sooner. Clay is obviously on top of it. He's still in college and already thinking about it, so I commend him for that.
And then for an answer as to how, I would recommend the first place you start is by comparing brokerage account options and opening one. I personally use TD Ameritrade. I think they have a lot of flexibility. They have options trades and plenty of research which I use. But for young adults I recommend at least looking at Robinhood. They were previously a mobile-based app but now they do have a website.
They offer commission-free trades and they recently launched commission-free options trading, as well. I think it's pretty interesting and I think it's a low cost. When you think about opening accounts a little bit smaller, keeping those commission costs in check or zero is ideal. Again, there's a lot of options so I think just starting to research and pick one.
And then after you've opened your brokerage account where to put your money is obviously the million-dollar question. If I had a succinct answer to that I would be running this company.
I think there's a couple of different strategies to start. You could start by buying ETFs or just index funds for an instantly diversified portfolio. Another effective strategy is to buy high-quality companies that you're interested in holding for the long term and just build out your portfolio, so starting with one or two and then maybe adding over time. Again, keep your commission costs at a minimum, so making sure that you don't wipe out any returns before you even get in your position is really important. And then maybe taking some sort of combination of the two ETF and maybe some concentrated positions and particular equities that you like.
One strategy that I used and I felt really helped me was to make a list of companies that you want to buy and then add money and invest on a schedule rather than being so price conscious at the beginning, because over the long term it's not really going to matter that much as long as it's within a reasonable range. This can help you build good habits as you become an adult investor with a larger portfolio.
Southwick: Probably as a college student Clay is going to have some debt hanging over his head at some point. Do you feel it's OK to have that student debt and start dipping your toes in investing or do you want to pay that off before you start investing?
Malin: I was helping my sister with this because she went to PA school and she is sort of in the same situation and was asking me. I think that there's obviously reasonable limits on both of those, but if you can manage that investing, now will really help you down the long term. With interest rates where they are and as low as they are, it's probably in your best interest to invest as well as pay down debts.
Brokamp: I'd agree with that. Most student loans are in the mid-single digits. Ideally your investments would earn more than that. But if you're talking about credit card debt, where the average rate is 17%, in that situation I think I'd be more inclined to pay that off first than start investing.
Southwick: The next question comes to us from Anthony. "My question is about financial reports, specifically balance sheets and income statements."
Southwick: And you mean that as a compliment, I know, from one nerd to another.
Moser: Hey, listen. I am extremely self-effacing when it comes to this and yes, I am extremely nerdy when it comes to this stuff.
Southwick: Then it sounds like this question is coming to you. "I want to sound like one of the smart folks when it comes to explaining my stock picks, but I never feel confident when it comes to reading their financial filings. Is there a quick reference guide that breaks down the categories? PS. One of my wedding couples told me they listen to all The Motley Fool podcasts so, Noreen and Ryan, this letter is from me." Hello, Noreen and Ryan.
Moser: Well, a tip of the cap to Anthony. Nerd jokes aside, that is a great question. If you're going to invest, particularly in individual stocks, this is a great skill set to have. It's not necessarily an easy one to get. I had the good fortune of going through an analyst development program here at The Fool eight-and-a-half years ago, and we focused a lot on learning how to read financial statements. It can seem very boring and dry to a lot of people but understanding how the numbers work gives you a better understanding of how the business works and what kind of growth may be there, and that all relates to the stock price.
There are a lot of different places you can find this stuff. You can go to Google and just search "financial statement education" and find a million different resources. That's one way to look at it. Specifically, there is a good page on the SEC website with a nice, succinct rundown of the three main statements, there,income statement, balance sheet, and cash flow statement. Now I can't give you the link, because it's really long and I can't rattle off all these letters and numbers, but I can tell you if you Google the phrase "SEC Guide to Financial Statement," that will take you to this page and we'll send out the link on the Motley Fool Answers Twitter feed.
Southwick: Oh, man. Now I've got to put out a reminder.
Moser: Don't worry. I've got your back already on this. I was going to remind you.
Southwick: You're going to do it?
Southwick: I have homework!
Moser: This is a great resource to go through and learn the basics of those three financial statements. And I think, Anthony, that's what you're really gunning for, here, is a nice introduction that will give you, then, the opportunity to dig a little bit deeper, ask some more questions, and try to figure out what is more important. They are very important statements to understand how to read if you're going to invest in individual stocks.
And one other resource I'll just throw out there is the SEC has a neat, little educational Twitter feed and that is @SEC_Investor_ED. They throw a few tweets out every day. They run all over the place with investor education. I think it's a fun one to follow. I always learn something new when I check that out.
Malin: I would add to that a little bit. If you are new, I think something that would help you gain confidence in what you're looking at is to read other people's pitches or stock ideas. I would recommend starting in one industry -- something you may know a little bit better or something maybe a little bit easier -- like consumer goods. A familiar company like Starbucks, Target, or whatever it is. Just reading through other people's pitches so you can get familiar with what people are looking for and what people are looking at.
Southwick: What do you mean by other people's pitches?
Malin: Motley Fool has them or Seeking Alpha. If you read someone's opinion about a different company, I just think looking at what people are using for metrics in particular industries can be a little bit more comforting than just taking in a lot of information about metrics.
Moser: That's a really good point. If you think about it, a lot of businesses focus on very different markets, which means their financial statements account for different things. You might have a subscription service that has deferred revenue involved. Then you may have a straight-up restaurant which is fairly simple. They're selling food to people. So understanding the market that you're focusing on is going to help dictate what is more important to folks on one of those financials.
Southwick: It sounds like the point of his question is how to also sound like he knows what he's talking about at those proverbial cocktail parties that we don't get invited to. Is there any clue when you hear someone talking about investing where you're like is this person just using a lot of accounting terms to sound smart and they really don't know what they're talking about?
Moser: Well, I was thumbing through the cash flow statement last night and I noticed that accounts receivable went up over the last year.
Southwick: Any advice for Anthony to call out the posers in the room?
Moser: Well, if you're looking to call out people, there's always ways to do that. I would just encourage you, Anthony, to know what you're talking about. If you don't know something, it's OK to not know it. Go find the answer. We do that all the time. Don't try to answer a question where you don't know the answer. Just say, "I don't know," and then go look it up and figure it out.
Understanding what line items are on what financial statement probably makes the most sense because they don't all have the same things. Whether you're talking about cash flow or net income, understand the differences between the two because they are different.
Some investors like to focus on cash flow because they feel like there's some noncash charges involved. They give you a better idea of how much money the company's actually making vs. net income, which accounts for things a little bit differently. So just getting in there and understanding how all of the parts work to the whole on each financial statement, because they are different and they each serve their own purpose.
Southwick: I found that I really have to treat learning accounting terms like learning a new language. It's like learning a whole new language...
Moser: It is...
Southwick: OK, what is that again? And I have to stop and think. It's like having to remember, "OK, a put is..." It's me having to remember options terms, too. I have to pause. "OK, so I think the stocks going to go..." I'm not fluent.
Moser: Well, it's not easy, and the only way to really be good with a language is to study it.
Southwick: The next question comes from John. "My dad helped me open a Roth IRA when I was 16 by cashing in a U.S. savings bond I was given as a baby. It started off at around $2,000. In 12 years of depositing what I could and with the help of Motley Fool Stock Advisor, my Roth has grown to over $60,000. At this point my account has 12 stocks and two index funds.
"At the beginning of 2016 I bought into Vail Resorts based on a Stock Advisor recommendation. Since then the stock has more than doubled and is now more than 15% of my portfolio. This has me wondering. How much is too much to have in one stock? Does it make sense to sell off some of a winner in order to get closer to the recommended 15 stocks?"
Brokamp: This is a tough one.
Moser: It is. The answer is going to be different for everyone, John. Personally, I feel like if your goal is to get to this recommended 15 stocks in your portfolio. That's fine. I don't know that I necessarily would want to sell a winner in the name of getting there. It's OK to not have 15 stocks in your portfolio.
Southwick: It's not like a golden number where something clicks in.
Moser: Exactly. You don't get a prize. We use that as a benchmark for a lot of folks because most people don't invest in just individual stocks. They tend to invest either in 401(k)s or funds or whatever, so 15 is just a nice number that we use. You may have fewer. You may have more. It depends on what helps you sleep at night.
Regardless, if you're asking would I sell off a winner in order to get to that 15, no I wouldn't. I tend to feel like if one stock is making up at least 20% of your portfolio, you better know what that company is doing and you better feel pretty confident about where it's headed. That's still OK if you're hanging onto a really good company. I just don't want to sell winners unless I have a really good reason to do it. It's really fun to let those winners run.
Southwick: Unless you have a better place for it.
Moser: Right! A very good point -- unless you have a better place for it. And again, you could sell that winner, but then you also have to remember that you better be right on the companies where you're putting that money, because you could be wrong and then you feel kind of foolish that you sold off some of a winner just to get to some arbitrary number like 15 stocks.
Malin: I think it's also worth noting. Usually we say 15 just for diversification, but if you own funds you're already getting a little bit of diversification. I would second Jason's answer on this.
Brokamp: And I'll just commend John and his dad for opening a Roth IRA when he was 16.
Brokamp: His saving for retirement is definitely off to a good start.
Moser: The right age to get it going.
Southwick: The next question comes from Guillaume from Quebec, Canada.
Brokamp: I love Quebec.
Moser: Mais oui.
Southwick: I've never been!
Brokamp: Oh, you've got to go.
Southwick: I've never been to Canada anywhere. I think I would get along with Canada very well.
Moser: We had to fly through Toronto in March. Stopping through Toronto to get to the Bahamas going in the opposite direction.
Moser: I know. Cheaper tickets. We ended up sleeping in the airport. People were very nice, though. Way to go, Canada. Thanks.
Southwick: Thank you, Canada. Here's the question. Guillaume writes, "Thanks to podcasts like yours, I went from don't talk to me about personal finance to woo-hoo, a new episode just got released over the course of a year." Aw!
Brokamp: That's nice.
Southwick: Isn't that nice? "I have two questions that are somewhat related. One is I recently heard the following analogy. If you put all the active fund managers into a single room, they are basically the market. In every transaction one of them makes a good deal and the other doesn't. Since it's very hard to identify in advance who will win and who will lose, you are better off just buying the market; using an index fund and getting the average performance of all the folks in the room.
"Of course, this came from an advocate of passive investing strategies, but how accurate is this analogy? Are market values really just a result of transactions between active fund managers? What about retail investors buying their own stocks or companies buying shares in other companies?" We'll get to part two later.
Malin: I spent a lot of time this morning researching this one and looking for up-to-date figures, and it's actually kind of hard to find. The most recent thing I could find was from 2009 and it was from the Virginia Law Review. Just for a couple of metrics around those questions, retail investors own less than 30% of stock in US corporations and according to data from the New York Stock Exchange, trades by individual investors represent, on average, less than 2% of New York Stock Exchange trading volume for New York Stock Exchange listed firms. Basically what that means is not only do retail investors have less to invest, but they do it less frequently. It's not that they're not relevant, but it's not as market moving as some of these institutional investors. But I think it's really a nuanced analogy with the second message, which is that it can be really challenging to outperform "the market." I guess when you think about that, there's a couple of other things I just want to throw out.
According to J.P. Morgan, only 10% of all trading is regular stock picking. We define regular as "fundamental discretionary trades." That means basically looking at what the company is doing and where they predict that those numbers can go. What remains is a mixture of things, but 60% trade on quantitative investing based on computer formulas and machines or passive means. I've actually seen that number in a various range of things from like 50% to 90%.
When you think about people using these automated strategies or these quant-based strategies, you see a large number of people performing at an average level. If you think about returns as a bell curve, you have a lot of people in the middle and then those tails get even smaller. So in some regards that would make it harder to outperform as most people encounter mean reversion.
Then there's another layer of outperformance. According to Goldman Sachs, as of June 28 this year the top 10 stocks in the S&P 500 have contributed more than 100% of S&P 500's year-to-date returns. If you took out the top 10 stocks, we would have actually had a down market for that first six months. Within that, Amazon was 45% of your year-to-date return and contributed 36% of the index's total return. You have a really high concentration of very few stocks, which also means that if you're a retail investor you're severely disadvantaged if you don't own those stocks and outperformance, I would say, is borderline impossible.
I think that analogy is relevant and I think it's something to keep in mind, but I don't think it is the end-all, be-all consideration. If you take our approach of buying good companies and holding them over the long term, I think you can still do it because there are companies that we're obviously less confident in and to make an average some are below the average and some are above, and then you meet in the middle.
So hopefully if you're finding good companies, you can still outperform, but I would acknowledge that that is a very relevant analogy.
Southwick: And if most of the market is just looking at what tickers blip on a screen...
Malin: It's money following money.
Southwick: It's just a totally different way to invest.
Southwick: The second part of the question. "Besides the active vs. passive debate, there is another debate among retail investors, and that is indexers vs. dividend lovers. Would you please explain the pros and cons of each strategy and if there is a way to combine both without being overexposed to some stocks?"
Malin: Dividend investing across a long period of time has proven to be a strategy for outperformance in comparison to market indexes think S&P 500. There's a couple of ways to do it, but the question of whether this trend continues is a significant question just because right now they're demanding a higher valuation with comparatively lower outlooks. Generally speaking, if a company pays a sizable dividend, they're likely more mature and less growth-oriented.
The benefits of index investing is that you generally have a wider exposure to a variety of industries, but the drawback, there, is that you're going to have a high concentration in large-cap tech, which has been successful in recent times but could prove a weak point in the case of a market downturn just given their rich valuations.
I know you mentioned it but investing in an index and investing for dividends are not necessarily opposing strategies; but, if you invest in both you will find yourself overexposed to some large-cap payers; i.e., J.P. Morgan, ExxonMobil, Johnson & Johnson, P&G, Coca-Cola, and the list goes on. In my opinion, my answer to that question is that I personally wouldn't do a 50-50 split between those two. It varies by person. If that's how you feel most comfortable, typically dividend payers are thought of as maybe a little bit more stable. A little more recession-proof. If that's where your mind is at, I think there's an argument to be made for that, but I don't know that I would necessarily recommend that.
Southwick: A lot comes down to the risk tolerance, right?
Southwick: Our next question comes from a couple of people. Alex Lindblad sent the question over Twitter and then Brian sent a similar question over email. Before we get to Brian's question, let's start with Alex over on Twitter. Alex wants to know if we could explain the mechanics of share buybacks. Does the company buy on the open market? Do they buy it from private firms? Are the shares no longer available to the public?
Moser: A couple of things. Typically you'll see shares bought back either via tender offer which is where they put out an announcement to shareholders saying they'll buy back shares from them or they'll go on the open market and purchase those shares. A lot of times those repurchases will cancel those shares outright. Sometimes, though, those shares will go into what's called "treasury shares", where a company's not cancelling them, but basically putting them in reserve in case they want to use them later on for compensation or if they want to reissue shares for some other reason like a dividend or what not.
Now, when a share is in treasury, it's not calculated in earnings-per-share figures or dividends or voting rights. They're kind of sitting there on the bench like a lot of the guys on a football team. You've got 11 guys on the field and you've probably got 40 of them sitting on the bench. They're in reserve.
Southwick: Everybody gets a Super Bowl ring, though.
Moser: Exactly. Those are the general mechanics of buybacks.
Southwick: Let's move on to address Brian's question, which gets into it a little bit more. "What should I think about a company spending cash on buybacks? Buybacks decrease share count which means every share I have is a slightly larger piece of the company and it means EPS goes up because there are fewer shares to divide the earnings by, but my shares are a slightly larger piece of a company with fewer assets. Shouldn't the plus of fewer shares and the minus of less cash cancel each other out?
"Furthermore, some companies seems to make questionable decisions regarding buybacks. McDonald's took on increased debt and spent more than their cash flow on buybacks. It appears to have worked out for them, but it was a risky move and could have gone wrong. Micron issued stock at a low price and now is buying back at a high price, which sounds like a questionable idea.
"I'm also very curious about whether the velocity of money in an economy is slowed by instituting buybacks instead of investing in capital improvements, research and development, higher wages, or even dividends. Some people are dismayed that so much money from tax cuts is going into buybacks instead of moving around in the economy. SEC Rule 10b-18 is actually controversial, although I've never heard of it until recently."
Southwick: Well, Ron, I'd never heard of it until you just said it.
Brokamp: I'll start by talking about that. That was passed in 1982. Before then, stock buybacks were considered possibly illegal because it was basically seen as a company trying to manipulate its stock price, which frankly it kind of is. Then that got passed and then stock buybacks started to soar. In 1997 companies began spending more money on buybacks than they do on dividends. That's that for that rule, but I'll let Jason take the rest of this.
Moser: I feel like we could have an entire podcast just to talk about this topic, alone. It is one that generates a lot of conversation. We talk a lot about buybacks in conjunction with dividends. Dividends are cash in the pocket and buybacks are kind of theoretical. You made the point that if you buy shares back, you should in theory lower the number of shares outstanding which would make your shares worth more. That's assuming that the company is not issuing more shares to pay for compensation or whatever.
So the first thing is whenever I look at buybacks, if I see a company that makes a lot of stock buybacks, I'm going to look on their balance sheet over time and look at the actual shares outstanding, because if I see where that shares outstanding count is either flat or going up in the face of doing buybacks, then I've got a real problem with that. You're not doing me any favors by buying back shares. You should either be giving that money to investors in the form of a dividend or reinvesting it in the business, and if you feel like you can't reinvest it in the business maybe you're not the right leader for the business in the first place.
Now, with the recent tax legislation I think buybacks have become more of a point of controversy because they're seen as helping out Wall Street while not really helping out Main Street. Now, I would argue that maybe Main Street should be a little bit more invested and then at least you're being a part of that process and you're benefiting from it in some way, shape, or form.
When it comes to buybacks, there's some great FactSet data out there and I've used this in a number of Fool presentations before. It goes back a number of years. It shows without question how many companies get share buybacks wrong. And what I mean by that is they tend to buy back shares in times when markets are going up. When everything is hunky dory and your share price is through the roof, management's adding to that fire by saying, "We're feeling so good about things, we're buying back more of our shares because everything is great."
Really, they should be buying back their shares when we want to buy their shares on the cheap. But it's clearly, through this data, shown that when the market starts declining when share prices go down, these management teams then cease those buybacks. They stop buying back shares. So most management teams out there actually get it wrong. Every once in a while, you find management companies out there that do a pretty good job of it.
I think there are a few signs to look for there. First and foremost, take a look at the balance sheet. Make sure that share count is actually going down. Did they issue a dividend? Could they issue a dividend instead? They talk about it a lot in the conference calls. There's just a lot of different ways to go with it. You can't use a blanket statement and just say they're good or bad. It is very company-specific, but that FactSet data shows very clearly that of all of the S&P 500 companies, a lot of them really do get it wrong.
Brokamp: According to The Wall Street Journal, this year the companies in the S&P 500 are on record to buy back more than $800 billion worth of stock, which would be a record. The previous record was something like $560 million in 2007, which of course was right before the Great Recession and the stock market dropped by more than 0.5%.
There is certainly evidence of people getting it wrong. They buy back their shares at the wrong time. What they would say to you today is where else am I going to put it? Warren Buffett and Berkshire Hathaway came out with different guidance, recently, about when they'll buy back their shares which people took as a hint that maybe even they'll start doing more of it, because there's just not that many other great opportunities out there.
Moser: And that's a really interesting point, there, because also with Berkshire Hathaway for a very long time... I mean a lot of investors asked, "When are you going to start paying a dividend?" The standard answer has been, "Well, we feel like we can do more with that capital on your behalf as opposed to just giving it to you in the form of a cash dividend." I think at this point, when they announced that they raised that threshold for buying back their own shares, I've got to believe that question is only going to become louder among the investing community. Why not just give us a dividend now, if you feel like you're running out of places to put that cash?
Southwick: Our next question comes from Tanya. "Recently The Motley Fool's Market Pass service recommended McCormick, and in doing research I noticed two ticker symbols [MKC] and [MKCV]. After Googling I learned the difference is nonvoting vs. voting or non preferred vs. preferred. When given a choice, should we always choose voting stocks? Do the stock prices always mirror each other? If and when I learn to trade options, do the prices of the options differ between voting and nonvoting stocks?"
Moser: Tanya, I feel like the stars have aligned, here, for me to answer this question and I'm so happy that you used McCormick as an example, because it's one of my favorite companies.
Southwick: It's a spice company, right?
Moser: It is the spice company. It's in everybody's pantry all over this country.
Southwick: But it's like five years old.
Moser: Not for people like me that cook dinner every night. I'm buying that stuff hand over fist every week it seems. It's a good question.
It's funny. We talk about the privilege of being able to vote. A lot of times we're talking about it just in our democracy, but I think a lot of times that also translates to investing. And it is important, I think, to recognize that as a shareholder that means you are a part owner of the business and you have a voice.
Now with that said -- and I'm sure a lot of people will disagree with this -- I personally couldn't care less about it. I just don't care. The main reason why is because I understand the reality of the fact that I will have no say-so in what that company does.
Southwick: The principle, Jason! The principle of voting!
Moser: Exactly, it's the principle. It's the principle. But here's why I'm saying this. I do agree with you. I like the principle. I like being able to have my voice heard and I do. They make it very easy. Your brokerage will send you out the documents and you just click a few buttons and vote. It is great to get that on the record for posterity.
The problem is when you have a company and you see a disparity in the share price. I personally would not pay more for voting privileges and I think a good example that a lot of investors could relate to other than McCormick would be Under Armour. Under Armour recently split and they now have [UA] and [UAA]. One share gives you the vote and one share gives you no vote understanding full and well that founder and CEO Kevin Plank is in full control of the business no matter what you vote.
So I appreciate the ability to do it. I appreciate the principle. With that said, I would not pay more for it.
Brokamp: Do the prices track each other? It sounds to me like there is a difference sometimes.
Moser: Sometimes they do. It seems over time they get a little bit closer. It seems that delta closes over time. We've seen it with Zillow, with Alphabet, and we're seeing a bit more with Under Armour. So I think it's OK if, all things being equal, to get the voting share. I just wouldn't pay more it.
Malin: And going back to our previous question, as a retail investor your vote's not going to have a big-enough impact.
Moser: It's not that your vote doesn't matter.
Southwick: No, that's exactly what you said. You said my vote doesn't matter.
Brokamp: Why do you hate democracy?
Moser: Hey, let's not get into that, OK? I love democracy.
Southwick: Go back to Canada with Guillaume. Wait, do they have a democracy over there?
Southwick: Who doesn't love Canada? Come on. So you guys, that's going to do it for today. Thank you so much for joining us.
Malin: Yeah, thanks for having us!
Moser: Thanks for having us!
Brokamp: It's been great!
Southwick: And you'll come back?
Southwick: And you have to come back, Jason!
Moser: You know I'll come back!
Southwick: I'll corner you and make you come back in here.
Moser: You don't even have to. All you have to do is just send out that spidey sense. I'll hear you.
Southwick: Let's dig deeper into the Mailbag where it gets a little more personal.
Southwick: Well, yeah, because people send us nice things.
Brokamp: Oh, that is nice, yes, which literally makes our day.
Southwick: It does. The first one we messed up. Ken Ma over on our podcast Facebook page had a correction for us. Ken writes, "Just listen to The Fool Answers podcast, Credit Card Trends to Watch with Austin Smith. He points out that Austin said that the Chase Ultimate Rewards points don't transfer as well as a niche card. That's actually false. Ultimate Rewards points transfer to those like Southwest Hyatt, etc. at a one-to-one ratio. Ultimate Rewards points are actually the most valuable rewards points available out there."
So I sent that message to Austin and said, "What have you done offering bad advice?" And he said he probably misspoke, but he meant it generally that all-in-one rewards cards often don't transfer their points at as high a rate, and that does limit your redemptions to just one platform. Something to look out for, but apparently Ultimate Rewards cards are great. They don't pay me money to say that.
I want to thank everyone who left a review on iTunes in July. Let's assume these are all pronounced incorrectly. MDerzel, Chefnog, LauriLu69. I think I already thanked Ord267Fo, but maybe not. All these said some really lovely things on iTunes and it means so much to us that you guys are willing to take the time to go and do that.
I was sort of bummed that we hadn't received any postcards for a while. Didn't it seem like we were going through a drought, despite me asking people?
Southwick: So I go to Office Ops, where the mail comes in and I was like, "Hey, have we gotten any postcards lately?" And she was like, "No." And I was like, "Oh, bummer." And like sad Charlie Brown I walked away.
Brokamp: Womp womp.
Southwick: And then literally 15 minutes later she comes to my desk and she's like, "Oh, I found some and dropped a pile of eight postcards on my desk." It turns out Office Ops was sitting on a pile of them not literally, but maybe literally. I don't know.
Stocks! David sent us a postcard from Peru. Danny sent a postcard from the Super Bowl. He works at ESPN and he's getting his MBA. A postcard from Washington Irving Washington was sent from Perkins Cove, Maine. Yes, Daniel and Rachel, your postcard with the sheep from Ireland arrived. Stocks, bonds, and puffins. Anthony and Suzanna, our favorite ballroom dancers, sent us a card from the California coast. Jason sent a card from Mackinac Island, Michigan and its adorable Main Street. It was our first postcard from Michigan.
Southwick: My mom sent us a belated postcard from Malta, which is hilarious. Thanks, Mom. Some guy named Rich sent a postcard from Dollywood? Does that mean anything to you guys?
Brokamp: I don't know a Rich.
Southwick: Thank you! Thank you, Richard Engdahl, for sending your postcard!
Rick Engdahl: If it says Rich, it's just sloppy handwriting...
Brokamp: That's what I figured.
Engdahl: ... because it says Rick, I think.
Southwick: Yeah, it says Rick. So we have over the last years received literally hundreds of postcards from listeners and we treasure them all. If you want to send us a postcard highlighting any state or country, we'll take it. There's a lot of states that we haven't gotten some from like Alabama and Ohio. Maybe some of the states with less tourism.
Brokamp: We still love you. Send us your postcards from your neighborhood.
Southwick: We'll still take postcards from there. Our address is 2000 Duke St., Alexandria, Virginia, 22314.
Southwick: Let's have a disclaimer. As always, The Motley Fool may have formal recommendations for or against the stocks we talked about today. Don't buy and sell stocks based only on what you heard on this show. Please.
That's the show. It is edited Dollywoodingly -- I don't know.
Southwick: Nine-to-fiveingly... Sure, we'll do that. Joleneally by Rick Engdahl. For Robert Brokamp. I'm Alison Southwick. Stay Foolish everybody!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Abi Malin owns shares of BRK-B, FB, MA, SBUX, and V. Alison Southwick owns shares of V. Jason Moser owns shares of MA, PYPL, SQ, SBUX, UAA, UA, and V. Rick Engdahl owns shares of GOOGL, GOOG, AMZN, BRK-B, FB, MA, PYPL, SQ, SBUX, and UA. Robert Brokamp, CFP owns shares of BRK-B, FB, JNJ, and SBUX. The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, FB, MA, PYPL, SQ, SBUX, UAA, UA, and ZG. The Motley Fool owns shares of JNJ and V and has the following options: short October 2018 $135 calls on JNJ, short September 2018 $80 calls on SQ, and long September 2018 $55 puts on SQ. The Motley Fool recommends BRK-B, MKC, and MTN. The Motley Fool has a disclosure policy.