On the rare occasion, I visit a coffee shop, I often feel that orders are given by most patrons in a code that I haven’t cracked (venti, half-whole, half heavy, extra hot, split quad shots, two pumps…are they ordering a drink or describing their new shoes?). Coffee shop language is foreign to me; maybe that’s why I don’t frequent them very often. Is that how those same coffee-confident patrons feel about investing lingo? Do they avoid investing as a result?
I have no doubt that I use too much jargon as I wax poetic to my barber about swap spread directionality and yield curve convexity. Yuck. I’ll try to atone for my sins by providing some insight into basic investment lingo, and use Tesla for illustrative purposes. This is not a recommendation to purchase Tesla stocks or bonds, mind you; it’s just that I’m seeing more and more snazzy Teslas driving around Bend like some sort of well-heeled, tech-savvy gang.
A stock (or equity) is a fractional ownership of a business, giving the stock shareholder a piece of the assets and earnings. If you own 100 shares of Tesla, for example, you own about 0.000003% of the company since there are nearly 3.2 billion shares outstanding of Tesla stock as I write this just before Thanksgiving 2022.
Divide the stock price by the company’s earnings per share and you get the price to earnings (P/E) ratio, a common metric to gauge whether a stock is reasonably priced. Since Tesla trades at $169 per share and its most recent 12-month earnings per share was $3.24, the P/E ratio is about 52.
Is Tesla’s 52 P/E ratio reasonable? Well, the stock market’s P/E is about 21, so at first blush Tesla may appear overpriced. But keep in mind that Tesla’s stock price likely reflects investor expectations of improving future profitability as production ramps up (growing revenues) and manufacturing is optimized (lowering expenses per vehicle produced). Indeed, the expectation of strong, improving earnings is typical of growth stocks which, collectively, enjoy higher P/E ratios than the broad stock market. Conversely, many value stocks are the Rodney Dangerfields of equities; based on their low P/E ratios, they get no respect! But investors should show some love to value stocks, because they tend to be less volatile than their growth counterparts. Utility companies, which are highly regulated, slow-growth businesses that often pay generous dividends (regular cash payments to stockholders) thanks to their stability and dependable earnings, are classic value stocks. Thus far in 2022, utility stocks as a sector have lost less than 2% for investors, versus a nearly 16% decline for the overall stock market (as measured by the S&P500 plus dividends).
Like most companies, Tesla has debt (over $2 billion of it!), and investors who lend to Tesla own their bonds (also known as fixed income). Unlike the stockholders, Tesla’s bondholders are not owners of the company. But they do get regular, contractually-obligated income payments on the bonds (whereas Tesla stock does not currently pay a dividend). And, should Tesla experience difficulties and default on an interest or principal payment, the Tesla bondholders can force Tesla into bankruptcy. The company’s assets would get sold, and the bondholders would be first in line to get repaid (hopefully in full) from the proceeds. The stockholders will be left with whatever remains, quite possibly experiencing a loss on their initial investment.
As you can see, owning stock is riskier than owning a bond of the same company. The anticipated investment return from purchasing the stock must, therefore, be higher than the expected bond return. It is for this reason that, as investors approach retirement, they tend to steadily shift out of equities and into bonds; retirees value the greater certainty and income of bonds, and are willing to lose out on the potential for even greater wealth creation which results from the long-term stock ownership.
A key to growing wealth is the amount of time invested, whether in stocks or bonds; the sooner you stop fearing the lingo and start investing, the greater the likelihood you’ll amass enough savings to retire comfortably. And enjoying those delicious iced white chocolate mochas with two hazelnut pumps.
To learn more investing lingo, contact me at stu@bendwealth.com.
Stu Malakoff, CPFA, CDFA, CRPC, CFP, Founder, Bend Wealth Advisors, Certified Financial Planner, D 541-306-4325, stu@bendwealth.com, O 541-306-4324, Office: 2474 NW Wyeth Place, Bend, OR 97703; mailing: PO Box 5757, Bend, OR 97708.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
This is not a recommendation to purchase or sell the stocks or bonds of Tesla.
Any opinions are those of Stuart Malakoff and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Dividends are not guaranteed and must be authorized by the company’s board of directors.
