Login | December 08, 2019

Rent of Buy?

Ask the Fool

Published: July 18, 2019

Q: Is it reasonable to buy a house if I plan to move within a few years? -- E.W., Flagstaff, Arizona

A: It's a risky move for several reasons. For starters, home values don't always go up over short periods. Your house might fall in value, and when you want to sell, you could end up owing more on your mortgage than the home is worth. Then there are the closing costs when you buy, and the agent commissions you'll likely pay when you sell. Those can total many thousands of dollars.

Meanwhile, mortgages typically require you to pay mostly interest in your first years of repayments, so you won't have built up a lot of equity. You'll also be paying for insurance, property taxes, maintenance and repairs while you own the home.

Renting is often the smart thing to do. Sure, you don't get a mortgage interest tax deduction and you don't build equity. But if your rent is much less than your mortgage payment would be, you can invest the difference and build a little nest egg.

Do your own math via a rent-or-buy calculator at Fool.com/calculators.

Q: How can a company's earnings grow more rapidly than its revenue? Shouldn't they grow at a similar rate? -- K.H., online

A: Revenue (also known as "sales") is at the top of a company's income statement, while earnings (or "net income") is at the bottom; a lot happens in between.

If a company's revenue holds steady but its costs (such as raw materials, salaries, advertising or research) rise, its earnings will shrink. In contrast, if a company's earnings are growing faster than its revenue, that suggests it's becoming more efficient and its profit margin is increasing.

Fool's School

Look Beyond 'Buy' Rating

If you learn that a Wall Street analyst has slapped a "buy" rating on a stock, don't immediately call your broker. Ratings from analysts are much less meaningful than you might think.

Consider that as of a few months ago, out of more than 11,000 ratings on the (500 or so) stocks in the S&P 500 index from many different analysts, only 6% were "sell" ratings. More than half -- nearly 54% -- were "buy" ratings. If you're starting to suspect that analysts tend to be overly rosy in their ratings, you're right.

One reason is conflict of interest. Wall Street analysts often work for investment banks, which have many corporate clients and want to sign up even more. Clients and potential clients will prefer banks that have given them positive ratings.

Professor Ohad Kadan of Washington University in St. Louis has offered another reason: "Analysts tend to herd. There's no big penalty if you're wrong, because everyone else is wrong. You've got cover. You're not going to lose your job. If you take a different opinion, either you get a big prize if you're right, or you lose your job. An analyst needs to be really courageous to say something different from most other analysts."

Fortunately, all is not lost -- analyst ratings can still be helpful. That's because they're often accompanied by research reports, which offer far more insight than a one- or two-word rating. Many brokerages these days allow access to analyst reports for many stocks; look into what your brokerage provides, then read the reports on any companies of interest. There might still be some bias in them, but they should also contain useful data and opinions. Don't be surprised to see conflicting opinions -- there's rarely 100% consensus about any stock.

When investing in individual stocks, gather a lot of information and do your own thinking and deciding. Or take the easy (and also profitable) route and simply invest in a low-fee broad-market index fund, such as one based on the S&P 500.

My Dumbest Investment

Stay the Course

My dumbest investment was taking a leap of faith with a financial adviser group that I saw advertised all over the place. I was charged an annual fee for their services, but I lost too much money with them. After two years, it became clear to me that they didn't know what they were doing, as I continued to lose money regardless of how the market was performing.

When I challenged the group's choices, I was told to stay the course -- their mantra. I fired them, and I have finally made enough to offset their fees and almost 50% of the money they squandered.

My advice: Listen to the thoughts of advisers you trust, but make your own decisions. -- T.K., online

The Fool responds: Not all financial advisers are created equal; it can be hard to find the best ones. You can lose money even with the good ones.

Imagine, for example, that the overall stock market gains 10% in a given year, and that your advisers earn 11% for you. If they charge you a 2% fee, your gain has fallen to 9%, below the market average. Remember that the vast majority of managed mutual funds don't do as well as the overall market -- partly due to fees.

For many people investing for the long term, it can be best to just stick with low-fee, broad-market index funds instead of professional money managers.

Foolish Trivia

Name That Company

I came to life in the 1920s and 1930s as the amalgamation of dozens of airlines. Charles Lindbergh flew my first flight, carrying U.S. mail. I debuted the first airline loyalty program in 1981. I bought TWA in 2001 and in 2013 merged with US Airways, creating America's largest airline. Based in Fort Worth, Texas, I boast about 6,800 flights daily to more than 365 destinations in scores of countries. I employ around 130,000 people who serve more than 200 million customers each year. My fleet tops 1,550 airplanes, and it's the youngest fleet among major U.S. airlines. Who am I?

Last Week's Trivia Answer

I trace my roots back to 1963, when a single mother used $5,000 to launch a cosmetics company in Dallas. It was immediately successful and generated nearly $1 million in sales in its second year. My original store employed fewer than 10 people, but I now have 3.5 million people, mostly of a particular gender, selling my wares in more than 35 global markets. I have more than 1,500 patents. I rake in about $4 billion annually, and I like to reward my top sellers with a distinctive set of wheels. Who am I? (Answer: Mary Kay)

The Motley Fool Take

PayPal for Your Portfolio?

The shift to digital payments has fueled market-beating gains for stocks such as PayPal (Nasdaq: PYPL), and there's still room for more growth. PayPal has a sizable and growing customer base of 277 million. The total value of all payments made across its various services totaled $578 billion last year, and the total payment volume continues to grow at around 25% per year, excluding currency changes.

The company's most promising long-term profit engine is Venmo, a wildly popular payment platform that has more than 40 million active accounts and is processing payment volume at an annualized rate of more than $84 billion -- while growing fast. (Its total payment volume grew at a staggering 73% year-over-year pace in the first quarter.) Venmo has been integrated into several popular platforms, such as Uber, Grubhub, Fandango and Hulu.

PayPal continues to add new users to its platform, despite its already massive size. During the first quarter alone, the company netted 9.3 million new active users and processed $161 billion in payments.

New partnerships -- with Instagram, Latin America's online marketplace MercadoLibre, and others -- have the potential to fuel even more growth.

PayPal's stock may not look like a screaming bargain with its forward-looking price-to-earnings (P/E) ratio recently near 33, but it holds great promise for patient investors. (The Motley Fool owns shares of and has recommended PayPal.)