Small Nuclear, Accredited Investors, Portfolio Marie Kondo-ing

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How were the wings, first of all? Or what did you eat before we get to the golf?

Oh man, definitely the buffalo chicken dip.

It was good.

Yeah, yeah, I'd say that was the best. Someone ordered espresso martinis for the whole table. Oh no, you don't, don't do that at Topgolf.

I'm sorry.

Probably the worst drinks I've ever had. And I enjoy an espresso martini.

This was the big bachelor party that you had talked about in this podcast. And you sent me a text. I didn't know if you were just casually making a joke about slicing or if this was a cry for help. So I sent you a fairly lengthy text explaining that it's, it's not just about the position of the club face and it's not just about the swing path. It's about the position of the clubface relative to the swing path. Was that helpful or did I overanalyze?

Definitely helpful. And to provide context, I just sent a selfie with a picture of me at Topgolf and it said, call me Mr. Slice. So Jack, instead of that, haha, Jack took that to mean I need to help my friend out with his poor golf.

I took it very seriously.

You're just making a joke. You could have been drinking a slice for all I know.

All right.

Well, I'm glad you had a nice time. Hey, this is a very special listener question episode of the podcast, right, Jackson? With us, our audio producer Jackson Cantrell. We're going to— no big whoop, right? We're going to hear a few listener questions. We're going to answer them. Yeah.

I'd say definitely mid-whoop.

Okay. Fair enough.

The listener might hear the podcast and hear their voice on the podcast and hear you answering their question and might go, whoop, that's me.

Well, let's whoop someone right now. That didn't sound—

that's not, that's not what I meant. Who do we have first?

We have Pete from Brooklyn.

Hey Jack, Jackson. During COVID times, due to a mix of boredom and naivety, I bought numerous individual company stocks. Now I'm not quite a full-time member of Jack's financial nudist colony, but it kind of bugs me looking at these individual stocks taking up space. What are the upsides and downsides of reallocating everything to ETFs at once, a Marie Kondo, if you will, or choosing to slowly rebalance over time through new fund allocation? Thanks for the great podcast.

Thank you, Pete from Brooklyn. I feel like I should explain why I ended up nude in Pete's question. It's because of a column I wrote in the past and some things I've been saying in this podcast about my minimalist investing philosophy that I have called financial nudism. I don't think you need much to be a successful investor. I think you need quality stocks and bonds, and I think index funds are fine for getting those. And I could fill a book with all the stuff that I think that you don't really need— options and commodities and private equity and separate exposure to real estate and crypto and on and on and on. Also, Pete mentions Marie Kondo. She, of course, is the tidying up lady. She's the author of a well-known book called The Life-Changing Magic of Tidying Up. Millions of people bought copies of that book and went back home to their cluttered homes and I'm gonna guess never opened the book.

It's sitting there on a pile of other stuff because come on, let's face it, if you were organized, you wouldn't be in this situation to begin with. You wouldn't need Marie Kondo's book.

And then they bought her 5, 6 other books.

That reminds me of a book my brother got me one Christmas called How to Talk About Books You Haven't Read.

Which I love the title and I really haven't read it yet.

Okay, Pete, usually this question takes the form of someone who has a lot of cash and they want to invest in the stock market and they're asking, should I do it little by little or all at once? And so this is usually the part where I talk to them about dollar cost averaging, and that involves spending regular amounts of money to buy your way into the stock market or into an index fund. And if you're spending the same amount in regular increments, you're buying more shares when shares are cheap and fewer shares when shares are expensive. And in doing so, you're lowering your average cost. And that sounds like a neat mathematical trick that gets you something for nothing, but it's not really. If we went strictly by probability, the stock market is more likely to go up than down over just about any time period. It becomes more reliable when we're talking about longer time periods. You're usually better off just investing all that cash at once. But here's the problem. You're not a sample size. You're a sample of one. You only get one shot to do this, one life to live. You might not want to take the risk of sinking all this money into the stock market and then having the stock market tumble right away. Even if you could recover from that financially over the long run, it might take an emotional toll.

You only got one shot. Do not miss your chance to blow.

Are you—

that's Eminem, you're rapping? Yeah. Okay. Do we owe people money because you did that, or— So you see, there's really two answers to that question of what you should do if it were cash. One is the cold calculus, and the cold calculus says buy it all into the stock market right away. The other answer is what can you live with in terms of your risk tolerance? And for that, many people are probably better off buying that money into the stock market little by little. But that's not really what your question is about. Your question is about swapping individual stocks for ETFs, in which case you're going from stocks to stocks. You're not really taking on that much extra risk. You're probably reducing your risk because you're going from a handful of individual stocks to a more diversified basket of stocks. If that's what you think is right for you, Pete, and if you've carefully considered the tax implications, whether you would owe taxes on gains, I see no reason not to Marie Kondo this thing all at once. There's a lot of room here for variation and personal preference. Do you like picking stocks? Do you feel like there are one or two of your stock positions that you really love, that you have a good feeling about over the long term? Nothing to say that you can't have the bulk of your money in broad market ETFs and keep those one or two stock picks.

I hope that helps.

Good luck with the tidying up. If it doesn't bring you life-changing magic, I hope at least you get better risk-adjusted returns.

Next up, we have Chris from Texas.

I had a question really following up on last week's episode. Your guest mentioned that there's new types of reactors that are coming online called SMRs, small modular reactors. And in doing some research on this area, I found out that Sam Altman, the co-founder of OpenAI, actually took a company public a few months ago called Oklo, and it's an energy company that looks like it may be producing these SMRs. But I was just wondering if you guys could elaborate a little bit more on some of the other companies that are in this space and a little bit more on this technology, and if there's any other investing ideas within that realm that y'all might have. Thanks for the show, love it, and come eat some brisket in Austin, Texas.

Thank you, Chris. I love brisket and Austin sounds like just the place for it. Your question about small modular reactors for nuclear power is probably a good one for a deep dive on a future episode. Let me just cover some of the very basics now. There's a nuclear renaissance brewing and there's a lot of investor interest in the subject. You can take a look at something called VanEck Uranium and Nuclear ETF. That's a fund of these stocks. The ticker's NLR, and that has returned about 45% over the past year. It's 10 points better than the S&P 500, and some of the stocks have done much better than that. For instance, a pair of utilities with some nuclear power in their footprints, Constellation Energy and Vistra, they've more than doubled this year. Why? It has to do with data centers. We had a guest on this podcast from Morgan Stanley several weeks ago break that down. You can take a look for that episode. Basically, if you're a big tech company that wants to build a new data center to put your shiny new AI chips to work, you're in a hurry, but you need a tremendous amount of power to do that. And residents near your proposed data center might frown on a big new customer coming in and gobbling up all the power. It could prove disruptive. Life would be a lot easier if you could find some vast supply of power that was just sitting there unused. There aren't a lot of those, but there are some in the form of dormant nuclear facilities. And both Amazon and Microsoft have announced deals with owners of such facilities to get them up and running and to use their power to fuel what I suppose you could call nuclear data centers. Okay, so those are traditional large-scale nuclear facilities. You don't hear much about building new ones of those in the US. Those projects take a long time, they cost a lot of money, and in the past they've run into cost overruns. But what if you could build smaller reactors and just sprinkle them here and there instead of large centralized ones? And what if you could produce some of the components to those reactors in factories instead of on-site? Companies have been researching these small modular reactors for years. Remember, we had the CEO of Duke Energy on this podcast a while back who talked about potentially locating these reactors in what are now coal facilities. Now, with the new demand for power in a hurry for artificial intelligence, small modular reactor technology seems to be on the fast track. This week, Amazon said it will finance the construction of some small nuclear reactors in the state of Washington. It's also going to invest in a nuclear startup. Alphabet recently announced a deal with a California-based nuclear reactor company called Kairos Power. It's privately held, spelled K-A-I-R-O-S. Now, Chris, you mentioned Oklo. O-K-L-O is a company that has exposure here. A recent Barron story on the subject mentioned that one along with NuScale Power, BWX Technologies, and Centrus Energy. I guess I'll add GE Vernova to the list. The ticker there is GEV. General Electric recently broke up into a few different companies, recall, and this is the one that makes turbines for natural gas-fired power plants, but it's also developing small modular reactors. The thinking there, and I've touched on this before, is that if you really need power in a hurry for these data centers, you could just use a co-located gas-fired power plant. In other words, build a gas-fired power plant just for that data center so you don't have to take power away from nearby residents. Yes, it's not as green as nuclear, but maybe you can do other things to contain or sequester the carbon that you create. With a combination of gas-fired plants and small modular reactors, you could meet your power needs both in the near term and the intermediate term. GE Vernova stock is up 111% this year. Anyhow, that's just a quick overview. I'm sure we'll have more on this subject to say later. Anything I'm missing there, Jackson? You want to touch on for folks where things stand with nuclear fusion development? Give us an update there.

I think it's coming along.

It's come TBD, as they say.

Watch this space.

That's a good time for a quick break.

We'll be back with more listener questions.

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Welcome back. We have two more topics for your listening delight. And they are, Jackson, sell these. Give us a good tease.

We have one on why the heck do we do quarterly earnings?

Okay, what's that?

That could have been dull, but you put some passion and intonation in it. Now it's really jazzed up. Go ahead. Next one.

And the other one was about qualifying to be a clown.

Circus clown.

Yeah. No, accredited investor is the word.

That makes more sense. Let's start with earnings. Who do we have?

We have Andre.

Jack, I had a question regarding quarterly report earnings, and it was kind of a philosophical question of what's the worth of quarterly earnings? Like, I have worked in corporate America for over 15 years, and I have seen my fair share of not-so-great decisions because of the quarters and, and trying to pull or push things into quarters. And then should we be asking companies to report on a monthly basis, on a weekly basis, on a yearly basis? Is there anything that prevents them from doing good stuff for the short term instead of good stuff for the long term? Anyway, I just wanted your opinion on it. Thank you so much.

Thank you, Andre. Financial reporting season in the US happens, as you say, 4 times a year. It gives Wall Street reporters a lot to talk about. It presumably makes good money for corporate accountants, but is it doing anyone else any good? We can compare it with Europe where companies typically report semi-annually. Let me come back to that. You mentioned specifically one measure, company earnings, and it definitely can be problematic when companies obsessively try to hit earnings targets in the short term. One of my favorite stock market studies, one of many people's favorite stock market studies, is on a subject called quadrophobia, which means fear of the number 4. See, when companies do the math and figure out how much they earn per share, when they earn, say, $1.34, the math usually doesn't come out to an even penny. Often there's a number in the third decimal place that needs to be rounded. So $1.34 might have been $1.33 and 7 tenths of a penny, which gets rounded up to $1.34. Now, we all remember the rules of rounding from grade school. If the number is a 5 or higher, you round up, and if it's a 4 or lower, you round down. So if that third decimal place comes out to be a 4, you can just imagine companies saying, darn it, with just a smidgen more earnings, we could have rounded up instead of down. That penny could mean the difference between hitting or not hitting Wall Street's earnings estimates. So there's a study from researchers at Baruch College in New York and Stanford Law and Boston College This is more than a decade ago. Let me read from the abstract. It says managers' incentives to round up reported EPS, earnings per share, cause underrepresentation of the number 4 in the first post-decimal digit of EPS, or quadruphobia. Further on, it says quadruphobia is pervasive, persistent, and successfully predicts future restatements. SEC enforcement actions, and class action litigation. It is more pronounced when executive compensation is more closely tied to the stock price and when the firm anticipates violating debt covenants. Quadruphobia is especially strong when rounding up EPS allows firms to meet analyst expectations, and investors seem not to see through this behavior. Maybe fractions of a penny aren't the biggest deal, but I think that study was kind of a gotcha moment for how subject earnings are to tweaking and how often and under which circumstances companies like to tweak them to their benefit. But let's put aside for the moment the issue of the quality of reporting and just talk about the frequency of reporting. Would it be better for investors if companies reported earnings less frequently? You can definitely make a case that managers should be less short-term in their thinking and how they put money to work. They should want to invest capital at high rates of return for the long term, and that should be a much higher priority than meeting any given quarter's earnings targets. But even if you had semiannual reporting in the U.S., investment cycles for companies are still going to be much longer than 6 months. And companies internally are still going to have to think short term about whether they're making progress on their goals. In fact, companies internally generally think monthly, not even quarterly. I think we could get along fine with semiannual reporting in the US, and I have seen some policy proposals along those lines. But let me leave you with a little bit of pushback on that idea. This comes from a 2019 paper by the Kelley School of Business at Indiana University. The title of the study is The Dark Side. I love, first of all, when financial academia draws on Star Wars language for dramatic effect. The dark side of low financial reporting frequency, colon, investors' reliance on alternative sources of earnings news and excessive information spillovers, hyphen, The Empire Strikes Back, but the Rebel Alliance comes through in the end.

Is that really in there?

I made up the hyphen part. This study looks at some of the differences between quarterly reporters and semiannual reporters. A summary reads, we find that the returns of semiannual earnings announcers are almost twice as sensitive to the earnings announcement returns of US industry bellwether peers for non-reporting periods compared to reporting periods. Strikingly, these heightened spillovers are followed by return reversals when investors finally observe own firm earnings at the subsequent semiannual earnings announcement. Does that make sense? Don't worry, I speak semi-fluent accounting professorese. They're saying that when companies go a long time without reporting financial results and there's some kind of news that pops up along the way that could affect financial results, that there are larger than usual movements for the stocks. That shows that investors are trying to price in the news on their own, and often those investors end up being wrong. And maybe the researchers figure those investors would have been helped by more frequent reporting. They write, our results suggest that investors are unable to successfully offset the information loss arising from low reporting frequency, thus impairing their ability to value firms and adversely affecting the quality of financial markets. I guess that means, Jackson, that according to the researchers, US companies should stick with quarterly reporting, and it's our fault. That they need to do that because if we didn't have those reports, we'd go making up things willy-nilly about what we think the news means. And we find the quarterly reports soothing. We're less likely to go wild in our trading.

They do give more opportunities for financial journalists to write stories every quarter.

And that's what's important here, right? Jackson, do we have time for one more quick listener question if I promise to breeze right through it, not drone on and on and turn this thing into a whole big slog.

Yeah, we do. We have time.

Thank goodness. Who do we have?

We have Liz. She doesn't say where she's from, but it does say sent from an iPad.

Liz from Bozeman, Montana. That's just a guess, but I feel pretty good about it.

You have a good shot. Yeah. Liz wrote her question, so I'll summarize it here.

With gusto, please.

She says she qualifies to be an accredited investor at the investment level. You have to have a certain amount of money in investments, but she doesn't have the annual income requirement. So she's asking if she's still able to qualify as an accredited investor. And I'm going to add my own question to this, which is, what is an accredited investor and why does it matter? And should Liz be trying to become one?

Thank you, Liz and Jackson. An accredited investor is what you need to be to buy unregistered securities. Stocks, bonds, exchange-traded funds, those are all registered securities. A private equity stake in a company that has not yet gone public, that's an example of something that only an accredited investor can buy. So Liz, you might be thinking, I've heard about an opportunity in private equity or private credit. I want to buy in. Will I make the cut? The rules are you have to have yearly income of over $200,000 or $300,000 if you're counting your spouse or partner. You have to have had that for the past couple of years and expect to continue having it. Or you have to have a net worth of $1 million. Net worth meaning add up your assets, subtract your debts. You may not count the value of your primary residence. There are some other ways you can qualify. You can be what's called a knowledgeable employee of a a private fund. In other words, you work for a company selling unregistered investments and you know what you're doing. You can also be a registered investment advisor. But for most people, it's those first two things. You have to be rich or make a lot of money. And when I say rich, by the way, the cutoffs aren't indexed to inflation. So as time goes on, $1 million becomes less and less of a big deal. It's like in that Austin Powers movie. Remember Jackson, when the guy, he's frozen, Dr. Evil, and he comes back and he says, I forget what they're going to do, some naughty thing, and they're doing it for $1 million.

Holding the world hostage is.

Right. And then everybody just looks at him and then he has to up his figures because, you know, inflation. Anyhow, that helps explain why there were an estimated 19 million plus accredited investor households last year. It's around 15% of American households. By the way, the burden of showing that you're an accredited investor is on the fund or investment that you're buying into. So expect them to give you a questionnaire and maybe ask you for some statements or a credit report. You can't just show up with a monocle and top hat and say, I'm rich, I'd like to invest. What if you don't meet the definition of an accredited investor? You can't get in on all that stuff that the clever people seem to be talking about all the time. Private equity, the stuff that's— you can't get past the velvet rope. Is there any point in even saving anymore? Should you just liquidate everything and spend it all on a big party? That wouldn't be my approach. In fact, we began this listener question episode by talking about my financial nudism philosophy. Why I think you don't need a lot of the stuff that Wall Street talks about, and private equity is one of those things. I think the evidence on whether private equity produces better long-term returns than the regular old stock market for a regular old investor buying in, that evidence is dubious. I think you can do just fine with a cheap index fund of stocks. In fact, if you want to know the steps to become an accredited investor, I'll give them to you right now. Number 1, spend less than you make. Number 2, save money in stocks. Number 3, there is no number 3. You do numbers 1 and 2, you'll eventually be plenty rich to invest in unregistered securities. But when you become that rich, just reconsider whether numbers 1 and 2 were enough. And that's it. Jackson, did I come in under the time limit? Is that a high school basketball timer? That you just played?

Uh, oh yeah.

Circa, I'm going to say 1987.

Yeah.

It sounds very short shorts. It sounds like it's right out of the short shorts era.

You're exactly right.

Both me and Larry Bird were rocking the style back then with somewhat different results on the basketball court. Thank you all for listening. Jackson Cantrell is our producer. If you have a question you'd like to hear on the podcast, just tape it on your phone, use the voice memo app, send it to jack.hough. That's H-O-U-G-H. @barons.com. You can subscribe to the podcast, Apple, Spotify, wherever you listen, rate it, review it, tell your friends, the whole thing. Thanks and see you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.