Anthony Chavon (2:42)

Yeah, Barry, I think you mentioned two of the most important things for individual stock pickers to understand, and that's one, separating signal from noise and two, focusing on what really matters. And so when I think about these executive orders, really regardless of who's president, I think a lot of it is noise. An example of that is the energy sector was one of the worst performing sectors during Trump's first term and it was one of the better performing sectors under Biden's term, even though their policies wouldn't necessarily indicate that. So as long term investors, the quality of the management team and the quality of the underlying business is ultimately what is going to drive returns over the longer term. But you know, with that being said, I think an interesting story, stick with the energy theme is Trump declaring the emergency measures for the energy sector. As Trump said, he wants to drill, baby, drill. But at the same time, a lot of energy companies have made it clear to investors that they are prioritizing returning cash to shareholders through dividends and buybacks, rather than investing in new exploration or production projects. So moving forward, I think it's going to be kind of interesting to see how this plays out and if energy companies, you know, remain disciplined on the production front.

Mary Long (3:55)

Another very obviously financial industry that's likely to be impacted by the new administration is crypto. You saw Bitcoin pass $109,000 yesterday. It's now closer to about 105. But ahead of the inauguration, again, another flurry of news. Trump released two meme coins. One named after himself, that's dollar sign Trump, and another named after the first LA dollar sign Melania. These are meme coins. That's not a value statement or a judgment statement. The official website for these coins is literally get TrumpMemes.com the Trump coin shot from $10 to $70 essentially overnight. It reached a total value of five and a half billion dollars within a few hours of launch. It then lost some of that value when Melania Coin came onto the scene the eve of the inauguration. We were talking a bit before the show, Ant you're a value investor, so you mentioned to me that you've never really been too much into this crypto stuff. Do you watch any of these developments? Trump has called himself the crypto president. So we've got this more crypto friendly administration coming into office. There's stories right before the inauguration of these meme coins going to the moon and Making plenty of people, Donald Trump himself, but also other individuals rich in the process. Does any part of you watch this and think, I'm not really that into crypto, but hey, maybe I should consider carving out some space in my portfolio for this stuff?

Anthony Chavon (5:16)

Yeah, well, honestly, from a psychological standpoint, when I see like a 15 year old making thousands of dollars on meme coins in just a couple of hours, I do start to wonder, like, what am I missing? Is this value approach that I'm taking, is that still working? So I think that's a natural human thought during times like this. But the other side of that is as an individual investor, I think it's important to know yourself. I think it's probably one of the first things you should do before making an investment is just know your own biases or your ultimate goal of investing. And you know, for me, I know that I don't know anything about how crypto works. The more I try to learn that, the more confused I get. So I guess you could say crypto for me kind of falls into the too hard pile. As Warren Buffett would say, there's so many securities and stocks out there that you can make a lot of money through by owning businesses that you understand. And for me, crypto's not one of those things. So I'm not carving out any space in my portfolio. But I'm not saying that that's right or wrong for investors. It's just not necessarily right for me.

Mary Long (6:23)

I'm going to get a little philosophical for a moment. I promise it'll all come back to investing. But in an attempt to try to bring these stories, the executive orders that we saw signed yesterday, the meme coins going to the mo, even the TikTok back and forth that's played out over the past few days and weeks. The common theme that I see through all of this is that we live in a world in which your attention is everything. Kyla Scanlon, who's an economy commentator, has written really intelligently about this, not just over the past few days, but over the past several months. And I shared a Nick Maggi article with you earlier this morning because he had an essay that kind of hit on this common thread of attention being everything as well. Rather than than summarizing him, I'm just going to quote him directly. He says, quote, my only recommendation is to stay the course and focus on the things that create actual value for people. What skills generate value today and what skills will generate value in the future. That is what matters. Though the game is changing. I Believe that value creation will beat attention chasing in the long run. It might not seem that way right now because we are in an extended bull market in crypto and for assets in general. But when things turn south, value will win out. It always does. That's the end of the quote. It sounds like based on your earlier crypto comments, that you and Nick are in similar camps. We're going to get to more of this value based stuff later on in the show. Actually talk about some companies, but first I want to turn Nick's question to you. What do you think creates value today and will continue to create value in the future? And take this however you want. Can be a skill company. Fill in the blank.

Anthony Chavon (7:55)

Yeah. So from an investment or business perspective, I think companies that serve a real tangible economic need, they will continue to create value in the future. So I think of things like real estate and food, like, who doesn't want to live, work and plan a nice building? Who doesn't want access to quality, affordable food? Will those things ever change? I don't think so. So I have a high degree of certainty that those evergreen themes will continue creating value far into the future. More so than something like a, you know, a mean coin. Again, you know, kind of bring our talk back to the beginning. You know, focusing on what really matters is important. And as far as skills go, I think being able to hold the conversation and be personable is going to be a huge differentiator and value creator moving forward. We spend so much time in a digital world, whether it's, you know, on our phones or working remotely, that that just being personable is going to be a required skill. I think moving forward, just having that knowledge advantage or credentials might not be enough anymore as things like, you know, artificial intelligence shrink the knowledge gap between people. So, you know, as someone in their 20s, you know, that's something that I'm trying to try to improve upon personally as well, because I think that's, you know, a really important skill to have.

Mary Long (9:14)

And so with that, let's turn our attention to a company that does seem to be creating some value, which also pretty fittingly happens to be in that physical real estate space that even you just mentioned there. And we're going to talk about prologis, a REIT that released their fourth quarter earnings this morning. Ant, when I reached out to you about being on today's show, you said, yeah, you always love talking about prologis. For listeners who are unfamiliar, give us a quick refresher. What exactly does prologis do at a high level.

Anthony Chavon (9:42)

I like to think of prologis as the toll taker in the world of global commerce. That's the way that Hamid Magadan, the CEO, explained how he views his company. So prologis, they are one of the world's largest owners of warehouses in the world with 1.2 billion square feet of real estate in about 20 countries. And essentially Prologis makes money by selling space to other businesses. So like Amazon is prologis largest tenant for example. And to me, as long as humans are on earth, I think space is going to be in demand. So I think it's a business that has some staying power. So it's a very simple business, yet it's a very important business that essentially facilitates global trade and is essential to E commerce.

Mary Long (10:26)

They're essential in E commerce. But prologis is also trying to break a bit more into the data center space. In early December, they sold a Chicago based data center development to HMC Capital. But they've got plans to develop about 20 new data center projects and are putting $7 billion towards that investment over the next four years. Two part question for you here. One, why does the data center business make sense for Prologis if their focus is e commerce? And two, what are you watching to measure Prologis success in this area moving forward?

Anthony Chavon (10:57)

So I think the data center business makes sense for prologis because one of the neat aspects about owning a warehouse is that it's so simple. It's simply a concrete slab on the ground, four walls and a roof. So warehouses can easily be converted into other property types like data centers in this case. And with prologis specifically, there's a few reasons why they are a good data center partner. One is that they own 1.2 billion square feet of warehouse space that they can convert into data centers. They also have a massive land bank that can be worth more than $40 billion once it's built out. So that's a huge advantage just having that space already ready to go. They also have the most scale and the lowest and best access to capital in the REIT industry. So they can afford to build out these expensive data centers, which can cost hundreds of millions of dollars in some cases. And then third, energy is really important for data centers. And prologis already has an energy team in place because they're already one of the largest owners of rooftop solar. So I think it's just kind of a natural adjacency to prologis warehouse business. But it's also important to note that prologis doesn't necessarily plan on owning these data centers for long term, at least as of now. But right now they're mostly simply developing these data centers and then selling them to other property owners. Like you mentioned before. As far as what to watch for to measure their success, I would watch one, how much money they're deploying towards data center development, and then two, how many gigawatts of data center capacity they're developing. They plan to spend between 7 and $8 billion in the next five years to build out roughly 3 gigawatts of data center capacity. But on the earnings call, management actually mentioned that they can develop 10 gigawatts over the next 10 years. So to me, that kind of seems like the data center development is going better than expected and maybe even accelerating.

Mary Long (12:50)

So you've got the data center development perhaps going better than expected. One of the closely watched metrics on today's call was that of occupancy. After several quarters of decline, declining occupancy, Prologis went into this earnings call guiding for 96 to 96 and a half percent occupancy. They didn't meet that. Average occupancy among Prologis owned and managed buildings was 95.6%. Might sound like we're splitting hairs here, Ant, but why the continued decline in occupancy when there were a lot of other strong points that prologis put out this morning?

Anthony Chavon (13:23)

Yeah, I mean, it still is strong occupancy. I mean 95.6% compared to 10, 15 years ago. I think it's still higher than then. So we know it has come down, still good occupancy, But I think the reason why it's coming down is really just simply because of supply and demand. I mean, we saw a huge increase in demand during the pandemic for industrial real estate because everybody was buying their goods online. So that led to massive rent growth. And then that rent growth ultimately led to more supply as developers chase those high returns. So now that demand is a bit more normalized, specifically in prologis Southern California market, we're starting to see occupancy come down. But you know, importantly, since prologis is providing a better value to their tenants, their occupancy rate is actually higher than national average. So I think that's a, that's a key factor to focus on as well.

Mary Long (14:15)

At the same time that you've got this ever so slightly declining occupancy, you've also got earnings per share of $1.37. That's an increase of over 100% from the previous previous quarter. How do both of those things be true at the same time? How is it that you've got earnings per share increasing, you've got core FFO increasing, and yet you've also got this declining occupancy that we just talked about.

Anthony Chavon (14:37)

So leases for warehouses typically run anywhere from three to seven years, roughly speaking. And remember that we had that massive rent growth during the pandemic. So leases that were signed five plus years ago are significantly discounted to the current market rental rate. So as those leases eventually expire, perlogis is able to mark those below market rents to market prices. And that led to, I think it was 40% cash rent growth for Prologis this quarter. So that's really the driving factor in why prologis is still able to grow their cash flows despite a decline in occupancy because they've built up all this rent growth over the last couple of years because of that massive rent growth and just the time it takes for those leases to expire.

Mary Long (15:24)

That's a good place to end it. Anthony Chabon, thank you so much for the time this morning and for helping us to highlight some things of value in companies. But also just as we think about skills and how to create value moving forward. Always appreciate having you on.

Anthony Chavon (15:37)

Thanks Mary. Thanks for having me.

Mary Long (15:45)

How do you stuff a cushion? An income cushion that is. Up next, Robert Brokamp and Allison Southwick talk about how to build a solid safety net during retirement.

Robert Brokamp (16:02)

Historically, investing in the stock market has been one of the best ways to build long term wealth. But that reward doesn't come without risk. According to Ben Carlson of Ritholtz wealth management, since 1928, the stock market has experienced a 10% decline in 64% of years, a 15% decline in 40% of years, and a 20% decline in more than 26% of years. If that was a lot of percentages to comprehend, the headline is the stock market doesn't always go up and to the right.

Anthony Chavon (16:33)

Womp, womp, womp.

Robert Brokamp (16:34)

Now, so far this century it has plummeted more than 50% twice during the dot com crash, which was 2000 to 2002, and the Great Recession, which I think we can all admit was really not that great. From 2007 to 2009, the price of the S&P 500 didn't exceed its year 2000 peak for good until 2013. Now if you're still working and saving for retirement, you can hopefully ride out the downturns in the Stock market. You may even benefit since your retirement account contributions will buy stocks at cheaper prices. But it's a different story when you're retired. Your portfolio is your paycheck and you need to build in safety to offset the volatility.

Allison Southwick (17:15)

Yes, and one way to do that is by creating an income cushion of five years worth of portfolio provided income that is kept out of the stock market and invested in cash and bonds. Why five years? Well, historically speaking, it's a timeframe over which the stock market has been very likely to produce a positive return, but not always. Again, since 1928, US large cap stocks are profitable in 73% of calendar years, 83% of three year holding periods, 88% of five year holding periods, and 94% of ten year holding periods. But just because stocks produce positive gains doesn't necessarily mean they outperform cash and bonds. In the sixth edition of the classic book Stocks for the Long Run, Jeremy Siegel provided data on how often stocks outperformed bonds and treasury bills, which are essentially cash, over different holding periods since 1802. So over a one year holding period, stocks outperform bonds 60% of the time, 5 years, 69% of the time, and 10 years 74% of the time. The percentages are maybe 1 to 3 percentage points higher for when you compare the performance of stocks to cash. But the bottom line is that the shorter your timeframe, the more you should play it safe with your money.

Robert Brokamp (18:20)

So an income cushion of five years is our standard practice, but when should someone have a larger or even smaller cushion? More like a throw cushion?

Allison Southwick (18:30)

Well, you definitely should adjust for your own circumstances and your risk tolerance. Right. Some financial planning experts recommend that retirees should play it safe with money they need in the next decade. Or they might even create a bond or TIPS ladder of 30 years, TIPS being Treasury Inflation protected securities. On the other hand, retirees who are comfortable with risk perhaps have high levels of non portfolio sources of income, things like Social Security, maybe a pension, a business. They might choose a smaller cushion, especially if their essential expenses are covered by those other sources and they're really just using their portfolio to cover discretionary or fund expenses. In the end, the right asset allocation for you really is unique to you.

Robert Brokamp (19:08)

Okay, so it starts with deciding how big of a cushion is right for your situation. Then what do you do?

Allison Southwick (19:13)

Well, here's some steps to stuffing a comfortable cushion, and we're going to assume it's for five years. So number one, you start with the amount of income you'll need in your first year of retirement or this year if you're already retired. Number two, you subtract income you'll receive from non portfolio sources like Social Security or pension, and that determines the shortfall that must come from your investments. Step three is you project income needed and received for the subsequent four years, making adjustments for inflation. Determine the future shortfalls. And then number four, add up the total amount that you'll need from your portfolio for the next five years and invest that much in cash and or bonds. So let's look at an example of someone who needs $75,000 in, in the first year of retirement. Let's just say she will receive $15,000 from a pension that does not adjust for inflation, like many corporate pensions don't, and $25,000 from Social Security, which of course does adjust for inflation. So you subtract the pension and the Social Security from $75,000 of income that she needs and you get $35,000 and that's how much she needs from her portfolio in the first year. But we're going to assume that her income needs and her Social Security benefit are going to grow at a rate of inflation of 3%. But again, her pension is fixed. So you have to sort of put all this in a spreadsheet and grow it out. So in that first year of income, it's $75,000, but year two, it's $77,250 and it grows all the way to year five and inflation will inflate that to 84,413. Pension stays the same. Social Security again, starting out at $25,000. But by year five, she's getting 28,138. So again, you take the income, you subtract the sources and you get a shortfall for each year. You add up all those shortfalls, and in this case that total is $190,457. And that's how much get stuffed into the income cushion.

Robert Brokamp (21:02)

All right, so let's say I've picked out the most perfectly sized tufted and embroidered income cushion. Now, what should I consider to actually invest it?

Allison Southwick (21:13)

So these are interesting times for fixed income investment. Since the Federal Reserve began cutting rates last September, the yields on Treasuries with maturities of two years or less have gone down, but to different degrees. Meanwhile, the yields on longer term Treasuries have gone up. The result is that in some cases, cash and really short term bonds are yielding more than intermediate term bonds, which really isn't normally the case. Once you get to bonds that mature in maybe 10 years or longer. You do get some extra yield, but not very much. So I think nowadays it makes sense to to lean toward high yield savings accounts, money markets and treasury bills for a good part of your income cushion. Maybe throw in some short to intermediate term bonds and CDs for the money you need in years 3 to 5 of your income cushion.

Robert Brokamp (21:57)

All right, so you've created your cushion, you spend it down as you pay your bills, and a year later it's now a slightly smushed four year cushion. What do I do now to sort of fluff it back up?

Allison Southwick (22:08)

Well, of course you refill it and once again you go through that process of projecting how much you'll need over the next five years and protecting that money. You know that spreadsheet you use to first calculate your cushion? Well, you might as well save it because you're going to be using it every year usually. When wouldn't you use it? Well, after a year when your portfolio has declined in value, maybe due to a bear market in stocks or bonds or both, as happened in 2022. In those years, ideally what you will do is reduce your spending so that you can live off the remaining four year cushion as well as any interest or dividends that you get from your investments until your portfolio recovers. It's really one of the best things you can do for the longevity of your nest egg is resist selling stocks when they're down as much as possible. And it may not be completely possible. On average, it takes two to three years for stocks to recover after a bear market. And there are plenty of times when it took longer, including the two bear markets in this century. The first two, they took about five years to recover. But if you have a well diversified portfolio, ideally something has held up better than the overall stock market. And that may be what you consider selling while you wait for the rest of your stocks to get back to the previous prices. And then at that point, ideally you restuff your income cushion and build up those five years again.

Robert Brokamp (23:21)

Okay, bro, it's time for your final thoughts on creating a retirement income cushion, be it tufted, embroidered, frilly, throw, bolstered or boxed. And yes, I googled cushion design elements.

Allison Southwick (23:33)

Very nice, very nice. Well, there are two main.

Robert Brokamp (23:35)

I do, I do my research here, bro.

Allison Southwick (23:38)

Two main things I would like to point out as we close out here. First, in my view, the income cushion is the bare minimum you should have out of stocks when you're retired. You still need an emergency fund like everyone does. I would say most other retirees should likely have some additional money in cash and bonds, apart from the income cushion. In the episode a couple of weeks back, I mentioned that I looked at the average allocations for the target date funds offered by BlackRock, Fidelity, T. Rowe Price and Vanguard. And for the 2025 funds or the funds for retirees, the average allocation was 46% stocks, 54% bond. It's likely too conservative for most Motley fool money listeners. You all tend to be very comfortable with risk and investing in stocks, so Perhaps the classic 60% stocks, 40% bond balanced allocation might be a more appropriate starting point. But again, it really depends on your circumstances and your risk tolerance. And finally, don't wait until retirement to begin building your cushion. Once you're within five to 10 years of retirement, gradually accelerate your allocations to cash and bonds, which you can do by directing all or portion of your future contributions to your 401 and IRA accounts to cash and bonds. Maybe stop reinvesting dividends from stocks and use that money to build up your holdings and cash and bonds and then rebalancing your portfolio once a year, moving some of your money from stocks to safer assets. That way, your cushion will be nice and stuffed and ready on the day you stop working.

Mary Long (25:01)

As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations. Recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. For Anthony Chavon, Robert Brokamp and Allison Southwick, I'm Mary Long. Thanks for listening. We'll see you tomorrow.