In this episode of Market Foolery, host Chris Hill and Motley Fool analyst Bill Barker chat about some listener questions, the weekend box office, and baseball. What precipitated the fall of the IPO, and what happens to growth stocks now? How should we evaluate companies that haven't turned a profit yet? What can new investors learn from the painful lessons of other new investors? And why should new investors actually want their stocks to drop?
Plus, Bill shares what he's watching this earnings season. Double plus, discussions on the long line of Addams Family adaptations, hints at an upcoming Apropos of Nothing episode, predictions about 2020's World Series, and more.
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 Oct. 14, 2019.
Chris Hill: It's Monday, October 14th. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, and thank goodness he's in the building because it's a quiet day here at Fool Global Headquarters, from MFAM Funds, Bill Barker. Thanks for being here!
Bill Barker: Thanks for having me!
Hill: Schools are out in the Commonwealth of Virginia, or at least in our neck of the woods. Not a lot of people here at the office. Again, thank you for coming in! We're going to dip into The Fool mailbag. We're going to get a little bit of an earnings preview. We've got to talk a little bit of baseball.
But let's start with the mailbag. You can always email us -- email@example.com is our email address. Question from Caroline in New York City. Wrote in regarding a New York Times article on start-ups in Silicon Valley maybe starting to focus a little bit more on turning a profit. This is in reaction to a host of so-called unicorns going public in 2019 and, let's just be charitable and say not faring so well initially in the public markets. Caroline asks, "Do you think this focus on profitability over growth will affect the stock prices of companies that have been out there and trading for a while? I'm wondering if I should expect a crash in my growth tech stocks soon." What do you think?
Barker: I think that over the long term, profitability is always going to be the thing that dictates where a stock ends up. Growing indefinitely without producing profits or producing a credible story -- and the credibility of a story changes with the sentiment of the market. I think a few months ago, everything was getting the benefit of the doubt. There was excitement. People were looking at where growth stocks had gone, and sketchier and sketchier things were able to go public. But once you're evaluated in the light of the market, the longer you go out, the more the true economics of any company are going to dictate its stock price.
Hill: We talk from time to time about the concept of leash, and having your stocks on a leash. How long is that leash? I think, to Caroline's question, particularly for growth companies that maybe aren't showing a profit right now, it's fair to assume that they probably are on a little bit of a shorter leash. I think there are some growth companies out there that, if they're not turning a profit, then it's all the more important to pay attention to, what is management saying? One company that leaps to mind is Shopify, where people look at the business and say, "You know what? They're not turning a profit, but I believe in this management team. I don't want them turning a profit right now. I want them investing in growth for the next five years," or whatever the relatively short-term timeline is. Compare that to other companies, where it's like, "OK, management, what's your plan? If you don't have a plan to invest in growth in a smart way, then sorry, you're not getting my investment dollars."
Barker: Yeah. I think that where the enthusiasm has been, and continues to fuel a lot of these stock prices year to date, the software-as-a service companies, you've talked about a lot of those on the show -- the things that are getting more crushed are the ones that really don't fit into that category and try to play along with, "Look at how fast we say we can grow."
Whether you're talking about Uber or Lyft, or whether you're talking about WeWork and its failure to ultimately go public. The simple "we can grow like those places, kind of like those ones, those software-as-a-service companies," OK, but your costs grow along with that in a way that isn't the case for the software companies. So, they're still on a pretty long leash, because I think the growth story still is getting a lot of enthusiasm from the market because it makes sense that profits will follow in a way that it doesn't for these other, more asset-heavy companies.
Hill: And there's absolutely a ripple effect going on. It's somewhat analogous, I think, to the automobile industry. I remember talking years ago with a friend who worked for -- I'm not going to say which one -- an automaker. I said, "Hey, anytime there's a safety recall, whether it's your company or not, is it safe to assume that all the automakers roll their eyes because you all get dinged a little bit? If one company issues a safety recall, and half a million cars are part of it, then all of you get dinged?" And he basically said, "Yeah. Obviously, the worst scenario is if we're the ones who have to issue the safety recall, but if any of them do it in a big way, then we all get dinged for it." And I think, where it shows up in growth stocks has played out over this calendar year, where, as you said, you go back six months, everything was great. [laughs] Everything showed a lot of promise. And then you had almost this steady drumbeat of Uber and Lyft going public, and it's like, the demand isn't there. Beyond Meat. Even with the success of the opening day for Beyond Meat, you had people looking at it and saying, "Really? It's going up that much? That seems a little crazy," and then culminating in WeWork -- there was no scandal at WeWork. Let's always remember that about WeWork. There was never a major scandal of any kind. They simply just put their financials out for the public to see, and absolutely everyone grimaced and said, "No, thank you."
Barker: Yeah. And the reason that the grimacing turned into no IPO was because the profit's story just didn't stand up to any testing. To just say, "Look, we're going to grow. We're confident in ourselves. We'll figure it out. If you squint your eyes this way and you ignore costs that are real, but can be waved away by a mental agreement that we don't count for some reason, then look, there are profits," and it's just too convoluted a story.
To the auto point, yes. There's sector sympathy movements in the short term to a story like that. Over the long term, if you don't have recalls of your own vehicles, then the stock readjusts, whereas the ones who are continuing to have their cars recalled suffer the consequences, because there are real economic consequences to that.
So, short term, you're going to see stock consequences. Long term, the economics are always going to dictate the ultimate value.
Hill: Question from Edward in Maple Ridge, British Columbia. What a great name. Maple Ridge. Fitting that it's a town in Canada. Edward actually posted this question in The Motley Fool's podcast group on Facebook. This is regarding common reasons that a newer investor would quit the stock market. Edward writes, "I'd be interested in knowing some of the strongest reasons for this with the hope of either preventing those reasons or preparing to endure them." You have to like the mindset of a new investor who just walks in the door and says, "You know what? I know for a fact that there are people who give this a shot and then, after a short amount of time, they wash their hands of it and quit stock investing altogether. What are those reasons?"
Barker: Yeah. The No. 1 reason is losing money. There are any number of psychological studies that would show that your first impressions are huge. If your first experience with stocks is, you buy them and then they go up, you get more interested in them, and you get more willing to take larger risks, or, that isn't necessarily the case, but you're unlikely to quit when all that you see is your stocks going up. You are highly likely to quit if your first experience is seeing something plummet. I guess knowing that -- if you go in and say, at some point, when you invest, stocks are going to decline as a group. They're going to decline 20%. Over your lifetime, you're going to have experiences of stocks declining 30% or 50%. Over the last 20-some years that we've been here, we've seen a couple of those. So, if you go in knowing that, and then, if the first thing that happens is your stocks go down 20%, then perhaps you'll be better off to say something other than, "Why does this always happen to me? Everybody else got to make money. I just got started and of course I've lost money. It's something about me." There are lots of psychological experiments that would help people understand where their emotional reactions are to stocks.
Hill: I think along with that, it speaks to the importance of, as early as possible, when you start investing in the stock market, find a way to diversify. Spread out your risk. Don't just buy one stock. We hear this over the years. Someone is like, "I started investing. I bought this one stock. It went down 30%. I sold it, and I left stock investing forever." So, to the extent that you can buy a basket of stocks right out of the gate, that's probably going to help.
Barker: Yeah, don't fall in love with a stock is one piece of advice. If you buy something and it goes up, and then you buy more and it goes down, and you say, "I'm extra confident in this and I'm buying more now," and you put more of yourself into one stock, one company that makes a lot of sense, that's also the kind of thing that can hurt you. But for a young investor, and I think we've got a UCLA address on this email --
Hill: That was on the previous email.
Barker: Previous email, I'm sorry. Well, for any young investor --
Hill: By the way, you can be 50 years old, and if you're new to stock investing --
Barker: Fifty is very young!
Hill: [laughs] You're a young investor.
Barker: Who's calling 50 old? [laughs]
Hill: Not you and me!
Barker: No! Warren Buffet's advice on this is, if you are a net investor, somebody who is a net buyer of stocks, as you hopefully are in your 20s and 30s and 40s and 50s, what do you want? You want the stock market to go down. You don't want the stock market to go up, especially when you're in your 20s. You're buying stocks. Let's say you do everything right, and you're buying stocks in your 20s, and you're not going to sell until you're 65, just to take an old, mostly outdated retirement date number. What do you want to do? You want to buy stocks that, when you're 65, will have been really cheap when you were 20, 25, 30, 35. So, you don't want the stock market to go up, because you're mostly buying. You're not a net seller. When you're a net seller, you want the stock market to go to the moon, right? But when you're a buyer, you want the stock market to go down. So, if your first experience is, "I bought some stocks and the stocks went down," great, because you've got another 30 years of adding money to the market.
Hill: Last thing before we move on. This can play into the temperament, particularly if you're new to investing -- recognize that, yes, there are a lot of stock investors out there, but there aren't as many as probably should be investing. The conversations that you're going to have with people about investing are going to be somewhat limited. Where I'm going with this is something that David and Tom Gardner, when they started The Motley Fool back in the 1990s, we had discussion boards. I always loved the fact that one of the most popular discussion boards was not about a particular company. It was a discussion board called My Dumbest Investment. And it was this very vibrant community where people would go in and say, "Oh, yeah, here's a stock I bought. I was totally wrong. This was my thinking at the time. I still hold onto it as a reminder to keep me humble," that sort of thing. But if all you're doing is paying attention to advertising, all the advertising out there is going to be about the success people have in the stock market. Super successful investors are getting 6 out of 10 right, which means four out of 10 are not going the way they want. So, finding a way, Edward -- and really, for all of us -- to be part of a community where recognition of one's mistakes is part of the conversation on a semiregular basis, because it's always helpful to know -- to go back to something you said earlier -- it's not just me. I'm not the only one making mistakes here. Other people are making mistakes as well. That's normal. You're going to win more than you lose the longer you stay in the game.
Barker: To go back to one thing you were talking about, which was Canada. We need some questions out there about Canada. Questions for us to answer at some point.
Barker: We're not going to go into why.
Hill: Well --
Barker: You're going to go into why?
Hill: I'm going to go into a little bit of why.
Barker: When I said, "we're not going to go into why," I was talking about me. You're going to go into why.
Hill: [laughs] I'm just going to share that, for those... I'm not going to say dozens of listeners, but I would say, for those few listeners who have asked me in person and submitted this question via email, "Hey, when are you guys going to do another Apropos of Nothing episode?" We're hoping to do one pretty soon. And it's entirely possible that it's going to have a Canadian theme to it.
Barker: Apropos of Canada.
Hill: Apropos of Canada.
Barker: It's a new spinoff from the wildly successful Apropos of Nothing first series.
Hill: I think "wildly successful" is a gross overstatement. But, if you have questions about Canada, drop us an email, firstname.lastname@example.org. We'll also take questions about stocks, too.
Barker: Right. The less serious the questions are, the more likely we are to address them.
Barker: Although, a really good question about Canada is helpful, too.
Hill: Absolutely. Earnings season officially kicks off later this week because Alcoa reports on the 16th. What are you going to be -- actually, before we get to an earnings preview, and I am curious about that; you wanted to touch briefly on the weekend box office. We're in that in-between period. The summer blockbusters are in the rearview mirror; the serious Academy Award bait films are, I would say, a good month or so away from hitting theaters. So, we're at this in-between period. Second weekend in a row, Joker was top at the box office. $55 million in domestic box office. The Addams Family coming in at $30 million. For those unfamiliar, this is an animated version of The Addams Family. I don't know how many versions we've had. There was, obviously the classic TV series, and then the ones in the '90s with Anjelica Huston.
Barker: A couple of movies.
Hill: Yeah. Who knows? As we've seen with franchises, if the first one makes money, then you'd better bet a second one is coming. That first live action Addams Family made money. Christopher Lloyd, also in there as well. You have thoughts on the weekend box office? I'm assuming you do, because you said, "Let's hit that real quick."
Barker: No, I was counting on you to have some good thoughts about it. But I think Dan is the one who has the really good thoughts. I do have a few thoughts on The Addams Family, but I'm more interested in what Dan's thoughts are, as I'm sure are the listeners.
Hill: I'll just share my one thought, which is, an animated movie taking in $30 million, this is a known franchise, I feel like this is a timing mistake on the part of MGM, the studio behind The Addams Family. I feel like if they had come out with this in early to mid-November, getting ahead of the Thanksgiving rush, they would have --
Barker: Isn't it more of a Halloween thing?
Hill: Again, come out the 25th. I just think they came out too early. Dan Boyd, you have thoughts on The Addams Family?
Dan Boyd: Chris, I certainly do. So glad of you to ask. So, one thing you did forget to mention -- Raul Julia was in The Addams Family films in the 1990s.
Hill: The late great Raul Julia.
Boyd: He played Gomez Addams in those films. When I was a kid, I remember seeing those Addams Family films in the theater.
Barker: Oh, my goodness!
Boyd: To little burgeoning goth Dan Boyd, it was just iconic, the way everything was styled and the performances. Anjelica Huston is just amazing. I named my motorcycle Morticia. I have a lot of connections to these films. They're fantastic. I haven't seen the animated film yet, but, man, when I look at the way that they've taken the art direction, I guess, in that film, and make everything just so silly and toothless... I think it's disappointing, and a little bit of a missed opportunity to maybe not make a scary movie, but put a little bit more edge into it, make it a little more appealing to, perhaps, kids over three. I don't know.
Hill: No, I think you're right. You go to something that I think is at the heart of the appeal of The Addams Family just as a story. At its best, it was humorous, and yet, you could count on every once in a while, a legitimate scare.
Boyd: Yeah. The Addams Family films, they're pretty wholesome, if you go back and look at them. They're about families and sticking together and loving each other and working together and working through problems. But it was still a little...again, not scary, but it's got a little bit of bite to it, and I enjoyed that.
Barker: I was looking up some facts about The Addams Family. Talking about seeing the movies in the '90s, as your first introduction to them in the theaters, really is likely to make some of us feel old.
Boyd: Sorry, I didn't mean to make you specifically feel old.
Barker: That was the fourth major iteration of the Addams Family. I, of course, grew up watching the reruns of the original series. I didn't see the first run, but it was certainly on UHF, for those who know what UHF is, which should be some of the audience.
Boyd: Are you talking about the Weird Al Yankovic movie?
Hill: Keep going, just move on.
Barker: I also grew up reading the original Charles Addams, Addams Family cartoons from The New Yorker.
Hill: Oh, right! Yes!
Barker: From the 1930s and '40s, which is the origin of The Addams Family.
Boyd: Which is when you were in high school, yeah.
Barker: [laughs] But I hadn't processed the way The Addams Family was credited as being such an influence on the goth culture, that the Wikipedia page talks about and Dan has brought up on his own. I never really thought of you as goth, but you've styled yourself that now, so I will always think of you that way from now on.
Boyd: I've grown out of it, but let's just say that I have some sincere goth tendencies to this day.
Barker: What would those be?
Boyd: I listen to a lot of stuff like Type O Negative and Joy Division and Bauhaus and stuff like that. It puts me in a very good October mood, if you will.
Hill: You know, just throw a little something on the end of this episode.
Hill: Mix up the music.
Barker: If you're ever in Philly, I've said that the Liberty Bell is the most overrated tourist item in America, perhaps. Take that time that you would have done that and go over to the University of Pennsylvania campus. They've got a Charles Addams Fine Arts School. One of the things there, they've got some things that you don't realize the first time you pass them by, but they're the outlines of the cartoon Addams Family -- the 1930s cartoon, not this cartoon version of the movie today. Also, they've got this big iron door that shuts and closes at night. It's adorned with about 40 hands of Thing in various motions. You can spend a little bit of time appreciating that. It's a much better tourist attraction, I would say.
Hill: Than the Liberty Bell.
Boyd: Bill, how close is the current design of the Addams Family, the movie that just came out, to the original cartoons?
Barker: I don't know. I haven't watched the commercials, despite the number of times they've been foisted upon me during the playoffs. Not close enough. I mean, influenced by, but Charles Addams...you were talking about the toothlessness of this version. The original version was a little darker but still family friendly. Well, death was omnipresent in what they found entertaining.
Hill: Before we get to the playoffs, real quick, earnings preview. Anything in particular you're watching as the final earnings season of 2019 unfolds?
Barker: I'm watching what companies say about the trade issues. I think it's at a point where they should be able to quantify some of this. I'm very interested in how willing companies are to go into that and to put some numbers on it. But earnings are going to be fine. They're going to be a little bit under, as they always are, where earnings were projected to be a little while ago. Earnings for next quarter are going to come down. As is always the case, you get a little closer to the earnings, and all the analysts have to pull back their numbers because they always start out with too much growth. Earnings per share grow at a pretty steady 6% a year. That hasn't changed in 35 years. The analysts always project 15% growth for some reason, and then they pull back and adjust.
Hill: Playoff check-in, first with Dan Boyd. Game 3 between the Washington Nationals and St. Louis Cardinals tonight, here in Washington. The Nats somewhat surprisingly won both games in St. Louis.
Boyd: I'd say very surprisingly.
Hill: How are you feeling?
Boyd: I feel good. It's Stephen Strasburg and Flaherty, I forget his first name, for the Cards on the mound tonight. It's going to be one heck of a matchup there. I think we got ourselves a nice little series going on. The action has also pivoted to Houston for the Astros and Yankees, where they have split down South. They're returning to New York tomorrow. Things are cooking right now in baseball.
Hill: Absolutely. For that, we go to Yankee fan No. 1, Bill Barker. How are you feeling? Tied 1 to 1 going into game 3 on Tuesday.
Barker: Tired. It was a long game last night. They managed to go two extra innings. Five hours, almost, to play that game, which is, I think, about an hour and a half longer than it needed to be. But, going back to Yankee Stadium, I think Yankees are still the underdogs, given what we have to acknowledge is the quality of Houston's top three starters. But I'd rather be starting the series 1 to 1 with home field advantage than 0 to 0 with Houston with the advantage.
Boyd: Austin Morgan, the producer of Industry Focus -- some of our listeners might be familiar with -- he's also a big baseball fan. He sent me something from MLB Predictions, with the chance of winning the World Series for each team. This might be interesting to you. The Cardinals are currently sitting at a 4% chance. The Astros are at 30%, and the Yankees are at 32%. Pretty even shots there. The Nationals are at 34%, and I hate it, Chris. I feel like this chart is going to jinx my favorite team into oblivion. That's what I'm feeling right now.
Barker: One of the interesting things there is not so much the breakpoints between the Yankees, the Astros, and the Nationals. It's that adding the National League percentages together, you're not getting even to 40%. The American League is highly favored at this point.
Boyd: Yeah. Both of those American League --
Barker: The American League will have home field.
Barker: There's that. They're both considered the top two teams. Going to the playoffs, they would have been the top two teams in the American League. National League does not have its top two teams, in terms of what was expected going into the playoffs.
Still seems like the National League has a better than 38% chance of winning the World Series.
Boyd: I don't know. The Astros and Yankees are really good. [laughs]
Barker: The Nationals could. Now we're counting chickens I know you don't want to count. But if they finish this off in five games, which is optimistic but possible, they end up being very rested. And the Yankees and Astros look more likely to go deep, six or seven games.
Boyd: We're going to see. But again, I just hate the fact that that chart gave St. Louis a 4% chance of winning the World Series, because now I feel like it's inevitable that they're going to come back from a 2-0 deficit, beat the Nationals, and then completely school whoever comes in from the American League.
Hill: Just to tie a bow on baseball and the movies this weekend, watch the classic film 12 Angry Men with Henry Fonda. A great film. One of those films everyone should see, in part because it's about 90 minutes and it's an amazing movie. Twelve jurors go into a room to try and determine whether someone who's on trial for murder is guilty or not guilty. Before they actually start deliberating, one of the characters is a juror who has tickets to the Yankee game, and he's looking like, "Hey, let's wrap up this trial so I can get to the baseball game tonight." It's been years since I've seen the movie, and I'd forgotten this wonderful exchange, where he's talking about the Yankees, and they have this young player, and he's great, and he's talking to this other juror, and he says to the guy, "Are you a Yankee fan?" And the guy says, "No, Baltimore." And he says, "Baltimore? That's like being hit in the head with a crowbar once a day."
Boyd: [laughs] About 162 times this year.
Hill: [laughs] And I just thought, wow, it was true in the 1950s and it's true in 2019.
Barker: Did those two jurors end up getting along?
Hill: [laughs] I'm not going to spoil the movie.
Barker: It's not a spoiler, it's in the title.
Boyd: Isn't there a play set -- I guess not the Nationals, because it's older, but where the Yankees are playing in D.C. with baseball involved?
Barker: Damn Yankees.
Hill: Damn Yankees.
Barker: Damn Yankees. Gwen Verdon and Tab Hunter.
Hill: That's a musical, award-winning musical.
Boyd: A National-Yankees series could be the Damn Yankees series.
Barker: Back in the day, when the Senators were here, yeah, that's what the play was about. That's a little before your time, the Senators.
Hill: Little bit.
Boyd: Just a little bit.
Hill: We're long overdue for ending this episode. Bill Barker from MFAM Funds, thanks for being here!
Barker: Thanks for having me!
Hill: As always, people on the program may have interest in the stocks they talked about. Way back at the beginning of this episode, we actually did talk about stocks. 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'll do it for this edition of Market Foolery! The show is mixed by DJ Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!