Matt Krantz: Yield-Chasing Investors Are ‘Asking for a World of Hurt’
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Our guest on the podcast today is author and columnist, Matt Krantz. He is the personal finance and management editor at Investor’s Business Daily. Prior to joining IBD, Matt was a senior financial writer for Capital Group. He was also a personal finance writer and reporter at USA Today for nearly 18 years. Matt is also the author of several books, including Fundamental Investing for Dummies, Online Investing for Dummies, and Retirement Planning for Dummies.
Background
Fundamental Analysis for Dummies, by Matt Krantz
Online Investing for Dummies, by Matt Krantz
Retirement Planning for Dummies, by Matt Krantz
Work at IBD
“CANSLIM Explained: What It Is and How It Works,” by James Chen, Investopedia.com, April 2, 2024.
Investors/Strategies
“Feisty Rivals Take on Eli Lilly, Novo Nordisk on Weight Loss,” by Matt Krantz, investors.com, March 19, 2024.
“How to Make Money on Nvidia—And Take Much Less Risk,” by Matt Krantz, investors.com, March 14, 2024.
Other
How to Make Money in Stocks: A Winning System in Good Times or Bad, by William O’Neil
The Four Pillars of Investing: Lessons for Building a Winning Portfolio, by William Bernstein
The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risks, by William Bernstein
“Bernstein: ‘I Don’t Think the System Needs Nudges. I Think the System Needs Dynamite,’” The Long View podcast, Morningstar.com, May 7, 2019.
“Bill Bernstein: We’re Starting to See all of the Signs of a Bubble,” The Long View podcast, Morningstar.com, March 9, 2021.
“Bill Bernstein: Revisiting ‘The Four Pillars of Investing,’” The Long View podcast, Morningstar.com, July 11, 2023.
Transcript
Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.
Benz: Our guest on the podcast today is author and columnist, Matt Krantz. He is the personal finance and management editor at Investor’s Business Daily. Prior to joining IBD, Matt was a senior financial writer for Capital Group. He was also a personal finance writer and reporter at USA Today for nearly 18 years. Matt is also the author of several books, including Fundamental Investing for Dummies, Online Investing for Dummies, and Retirement Planning for Dummies.
Matt, welcome to The Long View.
Matt Krantz: Thanks for having me.
Benz: Well, thanks for being here. I’ve admired your work for a long time. I want to start by talking about your personal journey and how you ended up writing about investing.
Krantz: I went to Miami University in Oxford, Ohio, and I was a business major. I always worked on the college paper, and I always really enjoyed journalism. So, it dawned on me why not just blend them? It was funny because I was working at the Daily Herald, which is north of Chicago. I was working in Chicago at Ernst & Young, which is an accounting firm. And the editor in chief from Investor’s Business Daily was coming to Chicago. And it was such an exciting opportunity. We met at—Michael Jordan had a restaurant in Chicago.
Arnott: Oh yeah, that was back in the ‘90s, I think.
Krantz: And it was great. So, I met with him, and we had a great lunch, and it worked out. And he’s like, “Come and join us.” So, I moved out to LA and met William O’Neil, and it was great because I was finally able to bring together journalism and business. And it was such an exciting time to be at Investor’s Business Daily.
Arnott: Can you talk about a book or an individual that was especially influential in shaping how you think about investing?
Krantz: Yeah, a couple. I read all the time. So, I’m constantly reading things. But a couple that come to mind would be, well, O’Neil, of course. He was the founder of Investor’s Business Daily. He’s no longer with us, sadly. But he wrote a book called How to Make Money in Stocks. And at the time, it was very old sacrilege. His idea was, you don’t need to get so wrapped up about how high a P/E is. You can think about it if you want to. But stocks that go up, go higher up, they keep going up. And people thought he was nuts because at the time, everything was about value. And if you pay too much, you’re going to get burned. But as we see with, like today, it’s a great example. People who thought that Nvidia was too expensive three years ago missed one of the greatest bull market runs in history. Same goes with Apple and Tesla. Winning stocks do tend to keep going up. And granted, you have to know when to sell them, too. And he covers that in his book. But I thought that was pretty amazing, how an idea that he had that seemed to be so crazy at the time now is kind of mainstream.
Another book that I really enjoyed is The Four Pillars of Investing, which is on the opposite side. That’s by William Bernstein. In this book, he talks a lot about building a portfolio and managing your risk and trying to get the most optimal returns for the amount of risks that you’ve taken on. So those two books are very different, but I think they both tell a complete picture of how to make money in markets.
Arnott: We’re big fans of Bill Bernstein at Morningstar. And I think he’s been on the podcast, Christine?
Benz: Yes, I believe three times. He was our first guest, and we’ve had him on a couple of times subsequently.
Krantz: He also has a book called The Intelligent Asset Allocator, which is a little more techy. But those two books together I think they’re just masterpieces.
Benz: We wanted to follow up on the O’Neil strategy. Do you think it’s safe to shorthand that as a momentum strategy?
Krantz: I think that might be a little simplistic because you can buy ETFs that have momentum factors to them. And that’s part of it. I think people like to say that because that’s part of it. But a lot of these momentum factor ETFs don’t pay a lot of attention to fundamentals. I think that’s where people get caught by O’Neil’s strategy is he doesn’t just jump into a stock that’s going up; it has to have the fundamentals, too. So, the William O’Neil strategy skipped out on that whole meme stock thing because those stocks did not have the fundamentals to back it up. So, I think that’s part of it, but that’s not the whole strategy.
Arnott: If we look at IBD’s strategy and the things that Bill O’Neil was looking for, he was looking at things like strong earnings growth over the most recent quarter and the most recent year. But also, things like profitability, revenue growth, high returns on equity, as well as some more momentum-oriented factors?
Krantz: So we have these charts that people can get through our subscription services, and it outlines all these indicators that are important. And we look at what the institutions are doing. We look at relative strength versus other stocks. So, there’s various inputs that go into it, but it’s not just simply that the stocks go up a lot.
Benz: One thing I’ve sometimes heard about IBD is a criticism that it creates this dependency. Like if you buy into this philosophy, will you also need us on an ongoing basis to tell you what to do. Because the strategy isn’t super simple to implement as far as I understand it. Can you talk about that, Matt?
Krantz: I guess that could be said about any kind of subscription, right? So, like I love music and I subscribe to Spotify. Am I dependent on Spotify? Maybe. I know when I’m having a tough day in the morning and I need to get going, I really need to turn on that high-energy mix to get me going. So, I guess, in a way. And I think even like with Morningstar, it’s a subscription service that’s worth its weight in gold. And I have never, ever met someone from a mutual fund or a financial advisor who said that I don’t get enormous value out of my Morningstar subscription and Morningstar Direct. Those tools are just so valuable. So, I guess one way of saying dependent on something is, and it’s just another way of saying it’s valuable and it’s worth. I think if you’re into music, the subscription of Spotify is worth it. There may be alternatives, I don’t know, but Spotify for me is a good value and it delivers. And I think that’s kind of the case with our subscribers with IBD.
Arnott: I’m totally dependent on Spotify now. I basically can’t write unless I’m listening to music, which can be good or bad, I guess.
A lot of people will probably be familiar with your work at USA TODAY, where you were a reporter for about 18 years. Was it a difficult transition for you to go from writing for that audience to Investor’s Business Daily, which seems to be more geared toward investment junkies who are more active traders?
Krantz: Well, so what happened is I went to college, and I landed my job, my first journalism job, my first real job really—I was hired out of Ernst & Young, but I wasn’t there that long. So, I was writing for hardcore investors and what happened was USA TODAY—this was 1999—was like, wait a second, there’s a lot of interest in people buying individual stocks. It’s not just mutual funds anymore, because they had a great columnist that wrote about mutual funds in 401(k). So, they’re like, well, where can we get some people who know about investing in individual stocks? So, they brought me over to help build that part of the business at the time that individual investors were keenly interested in buying individual stocks. So, in a way, I was carrying over some of the things I learned at IBD over to USA Today.
Benz: I want to talk about educating people about stock-picking and fundamental analysis. I’ve seen you present, I think it was maybe in front of an AAII group, and I thought you just did such a fantastic job explaining things. But maybe you can talk about the case for individual investors, especially, being invested in a basket of individual stocks versus just picking an ETF or a fund. Can you talk about how you educate around that idea?
Krantz: Really it comes down to people’s willingness to put in the time and their expectations and their skill. So, I would say for most people with just a 401(k) or a retirement plan, doesn’t have a lot of time, doesn’t have a lot of interest, doesn’t really care if they beat the market or not. You’re made to order for mutual funds and ETFs. There’s just no doubt. You just buy those things, low-cost, high-quality, use the Morningstar rankings that are available—those are awesome—and just put it away and forget about it. But if you are interested, if you did find yourself reading how to make money in stocks, or you want to get a better return, or you think you can get a better return, or you have knowledge of the markets, then I don’t see any harm in moving in that direction and see how you do. Most people don’t track their performance, which is a shame, and the brokers don’t do an amazing job at that. But if you maybe start with the baby step and maybe put 10% of your portfolio in individual stocks and see how you do. And if you do great, then you might want to do more of it. If you don’t do great, it might be a lesson for you to say, stick with the ETFs and the mutual funds.
Arnott: Another suggestion that I think is helpful is before you buy the stock, get a notebook and write down your rationale for buying it, and then that’s a way of holding yourself accountable. You can go back and see if you were right or not. And I think that can also be a learning exercise for investors over time.
Krantz: Absolutely. And some of the brokers—I think TD Ameritrade, which is being absorbed into Schwab, they have this paper-trading thing. I don’t know if they still do, but you can find these paper-trading broker offerings that help you really test and see how you’re doing, which I think is really a good exercise.
Arnott: When it comes to your own portfolio, do you use individual stocks or are there areas where you use mutual funds or ETFs instead?
Krantz: I’m kind of unusual, and I’ve been used to this since I’ve been in this business. We’re highly—I don’t think regulated is the right word—but we have these strong internal rules that we can’t do certain things with trading. And this is so complicated for me that I just buy mutual funds and that’s just what I do. So, I remember when I was at USA TODAY, I wanted to write a story about Nike, and I couldn’t because I owned it. And at that point, I’m like, you know, Matt, this is not worth it. This is interfering with your job. Just buy index mutual funds and just do your job.
Benz: I wanted to ask about that index versus active question with your portfolio. Sounds like you’re an indexer. How does that square with your day job of helping people pick individual stocks? If you think that index funds are maybe better than active, aren’t active stock portfolios active too, or very active?
Krantz: My rationale is mainly because I don’t want to buy a stock that I write about. So, for me, that makes a lot of sense. Plus, we do a lot of profiles of mutual fund managers, so I wouldn’t want anyone to think that I’m only profiling this manager because I own the mutual fund that he or she runs.
With that said, you guys publish the data; S&P publishes the data. The track record for active is not great. After fees, very few, if any, can beat the market on a consistent basis. I think that’s been proven out. If you look at the flows—and you guys write about this all the time in a really, really smart way—I think the flows are just pouring into passive because I think people are understanding that a lot of these mutual funds are like sitting ducks and they have to hold these stocks and they can’t move to cash when they should. They have so many disadvantages over time versus the low fees that you can get from the index funds.
Arnott: So, related to the popularity of index funds, one criticism that has come up is that you have this handful of large tech companies that have been driving so much of the market gains. And as a result, those handful of companies have become bigger and bigger positions in most of the major market indexes. Is that something that you’re concerned about at all?
Krantz: We look at it, and it’s higher than it has been. It’s not as high as it’s always been. I think a lot of people think that the S&P 500 is set in stone, and it doesn’t change when in fact it’s constantly changing. Super microcomputer is coming out of nowhere and is being added. So, I think the thing to that is that the index is dynamic and it’s evolving. And so, I think that eventually you’re going to see other companies come in and fill in the gaps. So, Apple— everyone was worried that Apple would fade, and it has. This year it’s down about 10%. But as it’s fading, Nvidia comes out of nowhere and Berkshire Hathaway and Eli Lilly. So, I think that over time our economy is so evolving and dynamic that those things kind of work themselves out. I don’t get too concerned about it yet.
Benz: We want to spend some more time talking about the current market environment. But first we just want to go over your approach to picking stocks, how you think people should go about picking stocks. You’re a big believer in fundamental analysis and you wrote the Fundamental Analysis for Dummies book. So, if someone is focusing on picking stocks based on fundamentals, what are the key ones that you think they should home in on?
Krantz: I think growth is really important. You want to look at earnings growth and revenue growth. You want to compare GAAP earnings to adjusted earnings. You don’t want to see those get too far apart. Return on equity is a great measure to see how the management is performing. There’s just a laundry list of things that you can look at that. Those are the big ones, of course. And then with the timing, you want to make sure you’re not buying stocks when we call them extended, which is when they’re basically straight up in the sky. Because a lot of times those do pull back and it’s better to wait until they consolidate. So, you combine the chart action with the fundamentals to pick the best possible time to get in.
Arnott: You mentioned the chart action and I know that Investor’s Business Daily puts a lot of emphasis on technical analysis. Do you look at technicals yourself, and are there any metrics that you think are especially helpful?
Krantz: I’m the editor of personal finance. So, I’m mainly writing for people who buy ETFs and mutual funds. And while you can try that chart action with ETFs especially, for the people that I’m writing for, that’s not really what they’re trying to do. They’re just trying to pick out great funds and hold on to them and build diversified portfolios. So, for my corner of the world, that’s not as important. But we do have, as you pointed out, a lot of our writers spend a lot of time on that. And if you visit our website and read any of the articles, they will talk about the technical levels that they’re looking at. But for my corner of the publication, we look mostly at broader sector themes and whatnot.
Benz: How much attention do you think investors should pay to what’s going on with the broad economy, whether the direction of interest rates or recession, and so on? It seems like interest rates have been super influential in the markets’ movements over the past couple of years. Can you talk about how big a role they should play and how investors approach their portfolios?
Krantz: I think it’s one of these things where it’s important to watch it and know what’s going on. Just like you would in, say, when you listen to the radio in the morning just to know what’s going on in the world, just to be an educated investor, but I also think you have to have some modesty and some reality in that. I don’t think I’ve met anyone that’s reliably predicted interest-rate changes in my life. And even if they did, it’s so random the way the markets can react to changes. There was a time when unemployment started rising, the stock market started rising because people thought, I don’t even know—bad news is good news or whatever. So, I think it’s important to monitor it, but don’t put too much precedence on it in your portfolio because the odds of you being able to cash in wisely at the right time is not great.
Arnott: I think even a lot of professional investors were caught off guard by inflation being much higher than anyone expected so quickly and then cooling off, and interest rates have been tricky too for professional investors.
Krantz: It’s really hard because news is random, and we don’t know what’s going to come out day to day. And to try to convert that into a gain ahead of time is really tough.
Arnott: We know a lot of individual investors who put a lot of emphasis on dividend-paying stocks as a way of creating cash flows for retirement. Is that a good strategy in your opinion?
Krantz: OK, that’s a tough one. That’s a great question. So, a couple of answers to that. So, I do think that people don’t pay enough attention to dividends. They account for about a third of the markets’ total return over time. That’s a powerful force. And what’s also great about them is in that down year, usually your only source of any kind of return at all is a dividend. So, in that way, it offers some buffer. And I love it when my index mutual funds pay dividends because it’s reassuring and it’s this nice kind of return when everything else is going wrong.
With that said, I’ve seen absolute horror stories of people chasing yield. Pacific Gas and Electric, is just makes me want to just cry. People were chasing…
Read More: Matt Krantz: Yield-Chasing Investors Are ‘Asking for a World of Hurt’