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Ask the Fool
Stocks Rising — on Bad News
Q. General Motors announced major layoffs on Nov. 26, but its stock went up. Shouldn’t it have fallen? — H.L., Ann Arbor, Michigan
A. The shares popped as much as 7.8 percent that day and ended the trading day 4.8 percent higher. Stock price movements reflect investor sentiments about a company, so the fact that GM’s shares rose means that investors liked what they saw.
Layoffs — especially GM’s huge reduction of 15 percent of its salaried workforce — are bad news for workers, and often for communities too. But sometimes they can be good for companies, if payroll costs shrink and operations can still generate growing profits.
GM’s announcement was about more than layoffs and plant closings: It’s reorganizing product-development and engineering teams to reduce new-model development costs and bring new products to market more quickly. Over the next two years, GM will double the resources allocated to electric-vehicle and autonomous-driving development. It expects the restructuring to cost about $2 billion in cash (mostly for severance payments), and another billion or two in accounting costs, while yielding savings of about $6 billion a year by the end of 2020. That’s what made investors hopeful.
Q. Can I become a millionaire before retiring, and if so, how? — N.D., Brooklyn, New York
A. Start saving and investing in earnest now. If you invest $5,000 per year into the stock market and earn its historical average annual return of roughly 10 percent, you’ll be a millionaire in about 31 years. It will take about 23 years if you invest $15,000 annually and earn an average return of 8 percent. There’s no guaranteed return for stocks, but if you invest well and for a long time, you can amass a lot.
Profiting by Breaking the Rules
Many, if not most, investors will be best served by a low-fee broad-market index fund or two. But if you’d like to try to juice your portfolio’s growth, you might add a few shares of carefully selected fast-growing stocks — aiming to hold them for many years.
Choosing the most promising potential high-flyers is easier said than done, though, and some will fall in value rather than rise. Motley Fool co-founder David Gardner developed a “Rule Breaker” investing approach to focus on innovative companies breaking the rules in their industries. To identify great companies early in their high-growth stages, he suggests:
¯ Look for the top dog or first mover in an important and/or emerging industry, such as business-to-business software, biotechnology, cloud computing, robotics, cybersecurity, social media and e-commerce.
¯ Seek sustainable competitive advantages, such as business momentum, patent protection or visionary leadership. In the biotechnology world, patents are an advantage, while retailers can benefit from economies of scale.
¯ Don’t be afraid of strong past price appreciation. The best investments can often appear overvalued, but they keep growing over long periods.
¯ Demand good management and smart backing. Companies with smart, visionary leaders and some of the best venture capital firms behind them often do well.
EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.