Wall Street is paying the price for stingy interest rates; Netflix's blowout earnings – and the importance of letting your winners run; 'China is experiencing a complete financial crash'
1) I'm glad to see the U.S. Securities and Exchange Commission ("SEC") cracking down on one of the biggest scams financial firms have been pulling on the American public...
I'm talking about how some wealth-management firms are screwing their customers by paying them minimal interest on their cash when the market rate is greater than 4%.
As regular readers know, I've also been pounding the table on this issue since April. And now, here's the latest news from an article in yesterday's print edition of the Wall Street Journal: Banks Scrimped on Customer Interest. Now They're Paying for It. Excerpt:
Wells Fargo (WFC) and Bank of America's (BAC) Merrill Lynch unit agreed to pay a combined $60 million to settle Securities and Exchange Commission probes into the accounts that hold cash for some of their wealth-management clients, the agency said Friday.
Investors often have some incidental cash in their brokerage accounts, including from dividends and interest on their holdings. Many firms automatically put that money into so-called sweep accounts that pay very low interest rates. The settlement over these sweep accounts follows a period when brokerages paid clients minimal interest even when broader rates were rising.
When the Federal Reserve started raising its benchmark rates in 2022, banks kept paying very little on sweep accounts. That allowed them to increase profits, since they were able to raise the interest rates they charged on loans to keep pace with the Fed's hikes. Similar products such as money-market funds reached around 5%.
However, if you think this problem has been addressed and you don't need to pay attention, think again... because the headline of the article is misleading.
It's not banks that are coming under scrutiny, but rather their wealth-management units and their financial advisers, who "are generally required to make decisions that are in clients' best interests."
So not only aren't all brokerages doing the right thing – most notably Charles Schwab (SCHW), as I've written about previously (see links below) – but banks are still paying you little or no interest in your checking or savings accounts.
I'm going to keep writing about this topic because it's scandalous what many of these big firms are doing – and because moving your excess cash to an account (or a firm) that offers market rates is the biggest no-brainer I've ever seen.
It's easy to do, you'll earn free money, and – depending on how much you're keeping in cash – it could be big money.
For more, see the seven e-mails I've written about this:
- Schwab was screwing me over (April 18)
- My readers' comments on Schwab, Vanguard, and Fidelity; Why my banking-expert friend is short Schwab (April 19)
- Transferring my accounts from Schwab to Fidelity; Call with my Schwab rep; A look at Vanguard and Interactive Brokers; A reader disagrees with my characterization of Schwab (April 22)
- Reader feedback on Vanguard versus Fidelity (April 29)
- My readers thanked me for inspiring them to earn higher returns on their cash (September 26)
- Make sure you're earning the maximum return on your cash (November 19)
- Another reminder about how Wall Street is trying to profit from you (January 9)
2) On a different note, shares of streaming giant Netflix (NFLX) soared as much as 15% this morning to an all-time high after the company reported fourth-quarter earnings and subscriber growth that blew away expectations.
Here's Yahoo Finance (via Bloomberg) with the highlights: Netflix Shares Soar to Record After Huge Gain in Subscribers. Excerpt:
The company added 18.9 million customers in the fourth quarter, according to a shareholder letter Tuesday. That was more than double what Wall Street expected and brought global subscribers at Netflix to more than 300 million. The company's previous best was 15 million in the first quarter of 2020 – numbers driven by the onset of the coronavirus pandemic...
The company reported revenue grew 16% to $10.2 billion for the quarter, the biggest gain since late 2021, and said sales will grow faster than predicted in 2025.
And that's not all – as the article continues:
Netflix will boost sales by increasing prices in its home market. The company is raising prices in the US, Canada, Portugal and Argentina, with the most popular US plan going to $17.99 a month, an increase of $2.50. Netflix is also increasing the cost of its cheaper advertising-supported plan.
For the year, the company projects revenue of as much as $44.5 billion, a gain of 14% from the year just ended, with an operating margin of 29%.
Netflix is an incredible company with a bright future. But it's hard to argue, especially after today's jump, that the stock doesn't reflect this... It's now trading at more than 10 times revenues.
So I wouldn't be chasing the stock here. But my advice if you own it is different: Ride it!
As I wrote in my June 7, June 10, and June 11 e-mails, I nailed Netflix back in 2012 and even went on national television on CBNC to pound the table on it the very day it hit a multiyear low of $7.78 per share on October 1, 2012.
That day, I had pitched it as my favorite idea to the 500 attendees of my Value Investing Congress (you can see the slides I presented here).
So why am I not sitting on hundreds of millions of dollars in gains today? Because I sold way too soon.
As I concluded in my June 11 e-mail:
The key to long-term investment success isn't just being smart – and lucky – enough to own a few huge winners. You must let your winners run.
Looking at the math behind long-term investment success, take any portfolio of 20 stocks or more, and you'll see that it isn't usually driven by a high batting average (e.g., 80% of the stocks go up), but a high slugging percentage (a few huge winners) instead.
But of course, this math doesn't work if you sell those winners – that cuts off the long right tail of the distribution.
And as I continued, while you can handle big winners in various ways, that comes with a caveat:
As an investor, you could maybe sell 10% of a monster position if it has become so oversized that it's disrupting your sleep at night. And you could put in stop losses to protect half of your gains – for example, sell 10% if the stock drops 10%, another 10% if it falls another 10%, etc.
But keep in mind that there's no "right" answer here... It's more art than science.
However, don't make the mistake of taking all your gains just because a stock doubles.
I'll sound like a broken record again, but I keep saying this because I don't want to see other folks make the same mistake I did: Let your winners run.
3) I've long put investing in China in my "too hard" bucket...
As I've said many times, it's the Wild West over there – so I think most outsiders are likely to get fleeced.
But it's a fascinating country – I've been there a half-dozen times since 1992 – and, as an investor, it's important to at least keep an eye on what's happening in the world's second-largest economy. As such, I read this recent Reuters article with interest: Chinese overnight rate spikes to 16% as cash tightens ahead of holiday. Excerpt:
Overnight borrowing costs for some Chinese financial institutions jumped as high as 16% on Wednesday, according to traders, due to tight cash supplies in the market ahead of the week-long Lunar New Year.
In addition to seasonal factors, some market participants said the country's central bank has been cautious with cash injections due to concerns about sliding bond yields and a weak yuan.
My old friend, investor Kyle Bass, posted on X last week that he thinks "China is experiencing a complete financial crash":
I'm not sure I would go that far, but I'll be following events in China and will report back to my readers if I see anything that will affect investors here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.