Ask the Fool: Golden parachute
Q. What’s a “golden parachute”? — D.M., Sioux City, Iowa
A. A golden parachute guarantees a top executive a very generous payout should they be forced to leave the company (perhaps due to a merger). It might include cash, stock options, health insurance, bonuses and more. It’s often included in an employment contract to attract top talent, offering a hefty payment and benefits if the exec loses their job.
Some golden parachutes are reasonable, but plenty have been criticized, going to CEOs who only worked a short period or who performed poorly. As an example, back in 1996, Michael Ovitz was dismissed from his position as president at Walt Disney after only 14 months — receiving a severance package valued around $140 million. Shareholders weren’t happy; they sued — and lost. He kept his golden parachute.
Q. Are secondary offerings and subsequent offerings the same? — F.S., Hickory, North Carolina
A. Not exactly. Companies often “go public” via an initial public offering, or IPO — selling shares on the open market and collecting the money paid for them. (After the IPO, the shares trade between investors, with the company not receiving any more payment.)
Since only a portion of a company’s shares are typically sold via an IPO, the rest remain in the hands of insiders or private investors. When those folks cash in their shares — with the proceeds going to the sellers, not the company — it’s generally referred to as a secondary offering.
If the company decides to raise more money later, it can have a subsequent offering. Either it creates and sells new shares, which dilutes the value of existing shares, or existing shareholders sell some shares, which does not. This is also called a follow-on offering — but, confusingly, some people call it a secondary offering as well.
Fool’s school: The psychology of money
Morgan Housel’s book, “The Psychology of Money: Timeless lessons on wealth, greed and Happiness” (Harriman House, $20), offers countless insights that can help you be a better saver, spender and investor. Here are some:
- “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” Housel explains that a good plan acknowledges that the future is full of unknowns and therefore builds in room for error: “If there’s enough room for error in your savings rate that you can say, ‘It’d be great if the market returns 8% a year over the next 30 years, but if it only does 4% I’ll still be OK,’ the more valuable your plan becomes.”
- “The first idea — simple, but easy to overlook — is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.” In other words, if you’re able to sock away a meaningful portion of your income by living below your means, you’ll be able to invest significant sums over many years, which is a powerful wealth-building move.
- On why he invests much of his family’s money in low-fee index funds: “I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one.”
- “Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.” “The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.”
- “You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.”
My dumbest investment: Overlooked promising stocks
My most regrettable investment move was not buying more stock in companies I owned over time. — C.C., online
The Fool responds: That’s a mistake many people never realize they’re making. Lots of folks will fill their portfolios with various stocks they believe in, and when they run across other promising stocks, they’ll invest in them, too. They’ll just keep adding to their portfolio, ending up with scores of stocks.
If that’s your style, it’s problematic because you’ll end up with more stocks than you can keep up with. Ideally, aim to hold a manageable number of stocks so that you can follow their progress and notice if and when they’re struggling. Our Motley Fool Investing Philosophy (Fool.com/about/investing-philosophy) recommends buying 25 to 30 companies that we can help you identify, aiming to hang on to them for at least five years.
Also, be sure to invest your money in your best ideas. When you have new money to invest, think about which companies you think present the best value: those with great growth potential and attractive stock prices. Remember that you might already own shares in some of those companies — so consider adding to that investment.
If owning 25 or 30 stocks seems like too much to manage, consider opting for a simple, low-fee index fund, such as one that tracks the S&P 500.
Foolish trivia: Name that company
I trace my roots back to 1833, when a German immigrant crafted his first guitar. Six generations of his descendants have now led me. In the mid-1800s, I innovated “X-bracing” to strengthen guitar bodies and improve tone. By 1915, I was selling more mandolins than guitars. I introduced a guitar that became iconic in 1916 — named after a British battleship — and debuted a ukulele catalog in 1917 (I still sell ukuleles today). My guitars have been played by Civil War soldiers and by Willie Nelson, Bob Dylan and Joan Baez. Privately held, I’m based in Nazareth, Pennsylvania. Who am I?
Last week’s trivia answer
I trace my roots back to 1941, when six craftspeople banded together to make beautiful wallets and billfolds. I began as Gail Leather Products and was later renamed Coach. I was sold to dessert specialist Sara Lee in 1985, but it spun me off in 2001. In 2017, I changed my name to reflect my multiple luxury brands — such as Kate Spade and Stuart Weitzman. I’ve recently agreed to acquire Capri, which has brands such as Versace, Jimmy Choo and Michael Kors. I employ around 10,800 people and was recently valued at $7.5 billion. Who am I? (Answer: Tapestry)
The Motley Fool take: Poised to profit from AI
The chipmaker Advanced Micro Devices (Nasdaq: AMD) has its sights set on becoming a more powerful force in the explosive artificial intelligence (AI) market.
AMD’s chips are widely used in industries such as personal computers, gaming and data centers. CEO Lisa Su sees the market for AI accelerators — cutting-edge processors that help to reduce the time it takes to train AI models and run other machine-learning workloads — expanding to more than $150 billion by 2027. And that’s in the data center market alone.
Estimates for rival chipmaker Nvidia’s share of the machine-learning graphics processor market reach as high as 95%. Cloud infrastructure leaders like Amazon, Microsoft and Alphabet rely heavily on Nvidia for chips to power their data centers, but they don’t love being so dependent on one supplier. AMD’s forthcoming processors are thus likely to be met with open arms by the major cloud platforms and other key chip buyers.
AMD is also developing software that integrates with its chips to further optimize AI workloads. Its open-source approach could prove popular with developers and end users, and perhaps give it an edge over Nvidia’s software. Long-term investors should take a closer look at AMD. (The Motley Fool owns shares of and has recommended Advanced Micro Devices.)
— distributed by Andrews McMeel Syndication