Sometimes, news from the business world that sounds major at first glance turns out to carry a lot less impact. First, President Trump is asserting that he and Chinese President Xi Jinping have agreed in principle to a three-month pause in the tit-for-tat economic hostilities they'd been engaging in. The markets breathed a sigh of relief, but the burst of optimism was brief. Second, it's been revealed that the gang in Cupertino has made a deal with the folks in Seattle to bring the Apple (NASDAQ:AAPL) Music service to Amazon.com's (NASDAQ:AMZN) super-popular Echo devices.
In this MarketFoolery podcast, host Chris Hill and senior analyst Jason Moser consider both items: why markets gave back their trade-war truce gains so quickly, and how to invest in these uncertain times; and why the streaming deal is neither a big capitulation by Apple nor a big win for Amazon. They also answer a listener's question about how CEO compensation should affect investment theses.
A full transcript follows the video.
This video was recorded on Dec. 3, 2018.
Chris Hill: It's Monday, Dec. 3. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Jason Moser, where he belongs. Thanks for being here!
Jason Moser: It's my happy place! I'm happy to be here!
Hill: Thank you to any listeners who survived the bonus episode over the weekend. If you skipped it, good news: We're going to be talking about the market again. And we're going to dip into the Fool mailbag.
We should probably start with the market itself, which is up pretty big this morning on the latest trade announcement. In this case, it's that the leaders of this country and of China have said, "Hey, why don't we take a break for the holidays? Why don't we just call a little truce and get back to this? Step outside, have a cigarette. We'll get back to this sometime down the road."
Moser: Yeah, why not? You're right, the market is up today. It was funny, I think I saw something cross my Twitter feed on Saturday about this. The next step in my mind is, "Oh my God, the market is going to go ballistic on Monday with this news. It'll be so happy." Of course, futures were indicating upwards of 450, 500 points on the Dow. That's how it opened. You look at it now, as of taping, and you're looking at a Dow up maybe 150 points. The S&P, same basic thing, up just a little bit more than 0.5%. I think perhaps the euphoria is wearing off. The fact of the matter is, like you said, this is, "Let's take a break." It's not a resolution? It always befuddles me as to why you see such enthusiasm on news like this when you know essentially nothing has been accomplished. That's where we are. If anything, maybe this buys a little bit more time in that there is not some bottom line solution or compromise that has been reached that one side's not very happy with. At the end of the day, for all of what President Trump is trying to accomplish, and obviously, I think he still prides himself on being a dealmaker, this is probably just part of that, figuring out how to reach the fairest deal for both sides involved. I'm sure something will come out of all of this, but who knows when that'll be in.
This really is, in a nutshell, why we invest the way we do here. Doing the work upfront on the businesses that we want to own, understanding that you can't avoid situations like this. If you're going to be an investor, you're going to run into situations like this. You don't want to be making investing decisions based on these types of non-events.
Hill: Right. You look at the comments from President Trump, President Xi -- if nothing else, headlines like this are maybe a good opportunity for investors to pause for a second and say, "Well, wait a minute. What are the stocks in my portfolio that might be impacted by this?" And if you're, say, a shareholder of Caterpillar, if you own one of the big automakers, that situation, then yeah, this is something you have to consider a little bit more closely as opposed to if you look in your portfolio and you own, say, Home Depot or Dunkin' Brands or something like that that's not as exposed to this type of trade talk.
Moser: Yeah. I mean, good businesses are going to be good businesses regardless of this type of news. It made me think back a little bit further to Alibaba and Jack Ma. The reason why I say that is, the headline that seems to come out of here is that ultimately, President Trump is trying to get China to buy more American stuff, to balance that trade deficit a little bit. And I get that. That makes sense. You want some sort of equilibrium there. To that point, though, one of Jack Ma's goals in Alibaba, in growing that business in the retail space in China, was to make China more of an importer, to bring more stuff into China as opposed to sending all that stuff out. So, that headline today is certainly in line with what Jack Ma has been trying to do at Alibaba all along. And Alibaba matters, obviously. It's a tremendous company, and it does a lot of business, and it's responsible for a lot of the money that flows through China's system.
I think that makes a lot of sense. For an economy like China's to continue to evolve and advance, they're going to need to become more of an importer. That's bringing things in from places like the United States or Brazil or Russia. Those are the countries that Ma has even called out. That's in line with what we're seeing today. I'd like to believe they can get to that point some time or another. It's going to take some time, obviously. I tend to look at these types of headlines and think, OK, it's nice when the market pops on news like this. It doesn't make me want to do anything differently. I kind of like it when the bad news comes out and you see the market overreact to the downside, because then there is an opportunity to add a company or two to your portfolio that you don't own.
These days, you have to be ready to pull that trigger. News travels so quickly, the market adjusts a lot more quickly than it did 10, 20 years ago.
Hill: To go back to something I've said before, one of the things I've learned in my investing lifetime is -- and when I say I've learned it, I've learned it the hard way -- don't fall in love with a price. Don't fall in love with an exact price, where you look at a stock and you say, "Well, I want it to fall to this point." To what you just said, we are seeing these types of drops, and they show up in individual stocks in the form of a 5% discount. That's really the question you need to be ready to pull the trigger on. "I like this, it's on my watchlist. Now it's 5% cheaper." What are you going to do?
Moser: I go back to a lesson that my father taught me years ago as a kid, learning how stocks worked. He always said, and he says it even today, listen, you're never going to buy at the bottom and sell at the top. It's just not going to happen. When you buy a stock, be ready for it to go down and be worth less than what you paid for it at some point. And at some point down the road, you're going to sell. And you're going to look back there later on, and that stock will probably be higher at some point, too. So, to your point there, yeah, don't get too married to a particular price point. Understanding the company, it's general worth, the longer that you stretch that timeline out, the less that price at that moment really matters.
I'm a big believer that price matters. Don't get me wrong. I'm not saying buy at any price. But don't get too anchored when opportunity presents itself. Sometimes you just have to go ahead and take the plunge.
Hill: Let's spend a minute or two on a story that broke late last week. This is not one of those stories that really moves stocks in any significant way, but it does move the landscape of an industry. In this case, we're talking about the entertainment industry, and more specifically streaming music. That is the announcement that Apple Music is now going to be available on Amazon Echo devices. I'm curious what you think about this. Anytime there's a partnership, any kind of a deal, one of the ways to think about it is, who are the winners and losers? Are they both winners? That sort of thing. I haven't really decided where I come down on this, except I think this is a win for anyone who believes that smart speakers are growing as an industry and will continue to grow. I don't look at this necessarily as a big win for Amazon or a big loss for Apple, although I do think it is a slight win for Amazon and... maybe not a loss for Apple, but certainly an admission that HomePod, which is their smart speaker, those things aren't flying off the shelves.
Moser: Yeah. I think that's it. You have to take the wins and losses in context. It's not something where Apple's going to be going out of business. But this is a clear sign of a couple of things. I think it makes a lot of sense. I really do applaud Apple for seeing the forest for the trees here and recognizing that if you don't own an Apple device, there's really no incentive to use Apple Music. Now, you may say, "Well, half the country owns an Apple device." And you would be right. Basically half the country here has an iPhone. But Android is the operating system around the world. That's the operating system that dominates the landscape globally. From that perspective, thinking outside of our domestic box here, Apple Music has a lot of hurdles to clear. That's why Spotify has done so well for so long.
To me, we've seen Apple looking to make this move toward becoming more of a services company. They're not going to be reporting units sold when it comes to hardware going forward. On the flip side, they are going to give us more transparency into the costs involved with building out that Services business. I think that'll be really helpful.
For me, this is a sure sign that HomePod is not flying off the shelves. I don't know anyone personally who has one. I had a hard time ever making the leap that the masses would be going out to buy one. It's priced at a level where you can't even really have it in the same conversation with an Amazon Echo or Google Home. There are going to be plenty of Apple fanatics who want to have a HomePod because they want a premium speaker, but frankly, if you want a premium speaker, Bose has a pretty good brand out there.
Hill: Sonos, as well.
Moser: Yeah. So, to me, an implicit admission that HomePod isn't really working out so well. Not a big surprise. I don't think this is anything that moves the needle for either company. This is something that people who have Apple Music, it's one more way for them to get it. Speaking as someone who has a few Echo devices in the home along with an iPhone in my pocket, I don't use Apple Music, I can't imagine I ever will, so generally speaking, this is less about acquisition and more about engagement and retention of those who do have Apple Music here domestically.
Hill: As you said, they're not going out of business. They're still attempting to sell the HomePods. It does, however, seem like this is one more step toward the investments that Apple is making in Apple Music. You look at what they did with Beats, there are numerous reports in trade publications that Apple is in talks with iHeartMedia, which is the largest broadcast radio company in America, about possibly either making an investment or flat-out acquiring iHeartMedia. So, they do appear to be looking to build out that ecosystem even more.
Moser: If you want to be a services company -- and by services, I mean distributing media content -- then you want as big of an audience as you can possibly have. That means that you have to cross platforms. If you're going to just maintain that that walled garden, then you're going to do fine here domestically -- again, you've got half the country's attention. I don't know that you're really ever going to get much more than that. And globally, clearly, you're not going to ever come close to that. So, if you want to be a services company, and you want that to become a bigger part of the business, then you've got to reach out to as many partners as you can. And Amazon's a great partner. Apple's a great partner, too. I love to see two companies like this come together. I'm a big fan of Tim Cook and Jeff Bezos. To see these two companies doing stuff like this... I hope we see them doing more together, because I think ultimately, consumers can only win.
Hill: Our email address is email@example.com. Question from Ed, who writes, "I saw an article written by Dan Kline about 30 CEOs making more than $30 million a year. It got me thinking. When analyzing a company and putting together your investment thesis, how much consideration do you put into CEO pay? Thanks for all the insight, love the podcast." Thank you, Ed, for the kind comment and for listening. Good question. You go first. How much does that factor into your investment thesis?
Moser: It's not something on its own that determines the ultimate action to be taken, but it matters. It can tell you a lot about the individual running the company. With that in mind, it can be squishy. You have to figure, how old is the company? How long has it been a publicly traded company? Is there a track record? What are the types of things that incentive bonuses are based on? Under Armour is a good example. A project I did a number of years ago here at The Fool, looking at Under Armour and the incentive bonus program that they had, what were the metrics that that incentive bonus was based on. And it was net revenue growth, operating income as a percentage of revenue, and inventory turn. And to me, those were very relevant metrics. They tell you the business is growing. They can't really be manipulated too much. It was nice to see something like that.
There is a form that investors can look at to get a better idea of exactly how executive compensation is laid out there. If you look at the table of contents of the schedule 14-A, and that's an SEC form. If you go to EDGAR, you can pull up the 14-A. There's a table of contents entry there for executive compensation. You can read through that to get a better idea of who's making what and how all of that is determined. I like, further, to look for companies where executives have big ownership stakes. I always make sure to tell people, that's not something that determines yes or no, but it does tell you exactly where their interests lie. If someone owns a lot of the company, then that's a lot of incentive to make sure it's performing well. But, it's not always necessarily a good indicator. You can look at Amazon as a mature company, and Snap, we can pick on Snap a little bit here. Even though it's still brand new, the fact of the matter is, when Snap went public, co-founder Evan Spiegel got somewhere around $600 million for a CEO award which was based on just taking the company public. Nothing more than just IPO-ing! Now, we could argue that Snap isn't even worth $600 million at this point. The market's telling you it is, but hey, let's be clear, the math ain't really making sense here yet.
Hill: I don't think you and I would technically argue about that.
Moser: No, I don't think we would. Maybe a listener or two would. But, this goes back to understanding a little bit more about who's steering the ship there. And I look at that, and I just think, wow. That's really taking a lot of credit for something you haven't done yet. Just taking a company public... I'm not saying that's not significant. It is. But for an executive to make the kind of money that Evan Spiegel is making, there's a lot of success already implied there, and he's come nowhere close to proving that out.
You flip the coin over there, and Jeff Bezos, obviously, over time, has really proven out there. And his salary is actually extremely modest. I mean, extremely modest. Now, he owns almost 20% of Amazon, so he's got that going for him, too.
Hill: Which is nice.
Moser: It's squishy, but those are the types of things you want to look at. It definitely matters.
Moser: I would say for me, it's on the checklist. It's not high on the checklist, but it is one of those things that I like to see. I tend to look more at not just the straight up salary, but the combined, what is the salary, what is the ownership.
One other thing, particularly if you're buying shares of a more mature company, and this is one of those things that I don't think shows up in official SEC filings, but companies sometimes will announce this, sometimes you'll see CEOs selling shares. And it's not really put out there in any big way that they're on a schedule. For a very long time, this was the case with Bill Gates. Steve Case in the heydays of AOL was doing this, as well. And people would say, "Oh, Steve Case is selling shares of AOL!" Well, he set that up as, I guess the exact opposite of direct deposit. It's just automatic selling. That's just one more thing once you own shares. It's definitely something to look at. To your point, it really does speak to the overall ethos and culture of how the company views compensation, or certainly how the management does.
Moser: I'm glad you brought that up. Another example I like to look at, this was a fascinating story as Twitter's IPO and existence as a publicly traded company evolved over time. Obviously, there were some leadership issues there. Jack Dorsey came back a few years ago to try to help right things. These are the kinds of things that tell you a little bit more about the kind of person that you're dealing with in the executive suite. I mean, he gave a third of his Twitter stock -- which was essentially 1% of the company -- back to the employee bonus pool like. That was stock that he was able to basically give back to the company in order for the company to then be able to attract new talent, without having to go dilute the shareholder base again. He was basically saying, "I own a big chunk of this company already. I'm going to give a little bit of what I have here, knowing that this is a long-term bet on bringing good talent here, and ultimately we're going to be successful and be a lot bigger than we already are." That was a fairly selfless act on his part, I thought. I think his actions with Twitter and Square tell you a lot about the kind of person he is. I think he's a good person.
You can look at those little times throughout their existence as executives to get a better idea of the kind of people that they are. Jeff Bezos, same kind of thing. His history is littered with being able to give that money away to good causes. And we have more seasoned leaders who are coming to the tail end of their careers. Warren Buffett, Bill Gates, whoever. They're talking about making sure they give all of their money away. I think that's really respectable, too. You see those types of things, they can help you understand a bit more what kind of person you're dealing with.
Hill: Two quick things before we wrap up. First, as some may have heard, the market here in the United States is going to be closed on Wednesday, December 5th. It has been declared a National Day of Mourning in honor of former president George HW Bush, with the funeral in D.C. happening that day. Be aware of that.
Second, as mentioned in our bonus episode, it's now December, which means, for the fourth year in a row, the holiday music on MarketFoolery has begun. Producer Dan Boyd, he loves this month.
Moser: Yes he does.
Hill: And listeners love this month because of that. Tonight is the second night of Hanukkah, so we'll leave it to producer Dan Boyd to work his magic. Jason Moser, thanks for being here!
Moser: Thank you!
Hill: If you're not already listening to Industry Focus, Jason hosts the Monday episode, Banking and Financials. Check it out! One click of the button, and you can subscribe to Industry Focus.
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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, Under Armour (A Shares), and Under Armour (C Shares). Jason Moser owns shares of Amazon, Apple, Square, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Apple, Square, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short February 2019 $185 calls on Home Depot, long January 2020 $110 calls on Home Depot, short January 2019 $15 calls on Sonos Inc, and short January 2019 $80 calls on Square. The Motley Fool recommends Dunkin' Brands Group and Home Depot. The Motley Fool has a disclosure policy.