Ask the Fool
Q: What's a moving average? -- F.D., Norman, Okla.
A: A moving, or "rolling," average is used to smooth out data, to help reveal long-term trends. Imagine a list of a location's temperatures on Feb. 14 over 25 years. Some unusually high or low numbers would make it hard to see a trend. Instead, a moving average would show you the average temperature over subsets of those years. For example, to get a three-year moving average, you'd first average the numbers for years one, two and three. Then you'd average years two, three and four, then years three, four and five — and so on, ending with years 23, 24 and 25. You'd end up measuring 23 three-year periods. While a graphed line of the original 25 numbers might have been very jagged, the 23 three-year averages would produce a smoother line.
Some investors try to guess where various stocks are headed by studying moving averages of their stock prices. However, it's better to focus on factors such as companies' financial health and growth prospects.
Q: I know that Facebook owns Instagram and WhatsApp. How can I know if one company is owned by another? — R.B., Omaha, Neb.
A: You can call it and ask — or visit its website and click on a link titled something like "About Us." Investigating on Google can also work.
Many familiar names are owned by other familiar names. For example, among many other holdings, Disney owns ESPN, ABC and Pixar. PepsiCo owns Frito-Lay, and the brands Gatorade and Quaker Oats. Unilever owns Ben & Jerry's, and the brands Axe and Dove. Google parent Alphabet also owns YouTube. Microsoft owns LinkedIn and Skype. And Berkshire Hathaway owns Dairy Queen, Fruit of the Loom, See's Candies, The Pampered Chef, GEICO and the BNSF railroad.
Warning Signs for Mutual Funds
If you're invested in mutual funds, or are considering some, learn these red flags to watch out for:
- Underperformance: If the fund hasn't beaten its benchmark index (such as the S&P 500 for stock funds focused on large companies) for a few years, consider selling. A bad year or two can happen, but persistent lagging is worrisome.
- Steep fees: If the fund's fees are high or increasing, that's a red flag. Favor no-load funds, because it's often not worth surrendering a chunk of your investment at the outset.
- Growth in size: In general, the bigger a fund gets, the harder it will be for its managers to find great investments. A fund with $100 billion, for example, may have to spread its assets over so many holdings that most can't move the needle very much.
- A change in focus: You may have bought into a mutual fund because it focused on, say, mid-cap companies -- but over the years it shed many mid-caps and bought into large-caps. Similarly, a fund that used to seek undervalued companies may have since loaded up on not-so-undervalued ones.
- A change in management: A managed mutual fund's performance is tied closely to its managers. They're the ones who study the universe of investments and decide which stocks, bonds or other securities are most promising for the fund. If a fund loses a manager who has delivered many years of strong performance, you might want to exit it as well, unless you have faith in the new manager.
- Lack of transparency: If fund managers' letters to shareholders are not informative and don't tackle issues of interest, or if they're not candid and don't inspire confidence, that's suboptimal. If the fund stops referring to its managers by name, or is absorbed by a bigger fund, be on guard.
You can research funds at Morningstar.com. Also, read "Common Sense on Mutual Funds" by John C. Bogle (Wiley, $35).
My Dumbest Investment
Too Much Listening to Others
My dumbest investment move of the last decade was listening to too many people. Doing so kept me from investing. This decade, no more! I'm going to spend a year paper trading, and then I'll go live. -- M.J., online
The Fool responds: Many people have sound financial advice to offer, but not everyone does. A lot of people, for example, recommend avoiding the stock market entirely, seeing it only as a place to gamble and lose money. Many people do gamble with stocks and lose their shirts, but that tends to happen when they don't know what they're doing: They chase high-flying, overvalued stocks, they load up on penny stocks of companies with no earnings or prospects, or they try day-trading, frantically jumping in and out of stocks every few days or even hours.
If, instead, you take time to learn about investing and set reasonable expectations, you can build wealth. You don't necessarily need to wait a year, either. And perhaps lose the idea of "trading," in the sense of buying and selling frequently. You might just park your long-term money in a low-fee S&P 500 index fund and keep adding to it over many years -- that's all most of us need to do. Or find 10 to 20 individual companies to distribute your money across -- businesses you understand, which feature increasing sales and earnings, rising profit margins, competitive advantages and attractive prices.
Name That Company
I trace my roots back to 1850, when I was launched as a freight forwarding company. By the end of the Civil War, I boasted about 900 offices in 10 states. I debuted money orders in 1882 and travelers' checks in 1891, and in 1958 I gave my customers another way to pay for things -- a charge card. Today, with more than 110 million cards in circulation, I'm a top global payments network, with a market value recently near $107 billion and more than $43 billion in annual revenue (net of interest expenses). Who am I?
Last Week's Trivia Answer
I trace my roots back to 1997, when two guys decided to rent DVDs to people online. By 1999, I offered unlimited rentals by subscription. By 2002, I had 600,000 members, and I debuted on the stock market. (My shares then rose in value more than 300-fold to their high in 2018.) I launched streaming services in 2007, and began expanding globally a few years later. I'm now in more than 190 countries, serving more than 167 million members. I rake in about $20 billion annually and am the largest generator of internet traffic in many countries. Who am I? (Answer: Netflix)
The Motley Fool Take
With Windows 10 running on more than 900 million devices, and a market value recently near $1.4 trillion, Microsoft (Nasdaq: MSFT) is huge. It's hard for huge companies to grow as briskly as smaller ones, but for the fiscal 2020 second quarter (which ended Dec. 31), Microsoft reported revenue of $36.9 billion, up 14% year-over-year, while its diluted earnings per share soared 40%.
Microsoft has the brand recognition, network-effect advantage, and resources to continue winning in the markets it serves. Its Office software, featuring Word and Excel, is still in high demand after all these years. Office commercial products, including Office 365 subscriptions, have been growing quickly.
Under CEO Satya Nadella, the company has spread its reach well beyond the PC to mobile devices and the cloud. Microsoft's Azure cloud computing service has tremendous momentum, with revenue surging 62% year-over-year in the last quarter.
Microsoft's ability to adapt to changing environments in technology, such as via its cloud-computing offerings, bodes well for its future, and investors should also like its high profit margin and growing dividend. Owning this stock seems like a no-brainer for the 21st century. (The Motley Fool owns shares of Microsoft and has recommended Microsoft shares and also the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft.)