Gaby Lapera: Hello everyone and welcome to
Industry Focus, financials edition. I’m Gaby Lapera and John Maxfield is joining us
on the phone. Maxfield and I are still attempting to recover from Thanksgiving. My turkey hangover
is real and it’s bad. So today as a result …
John Maxfield: Sometimes hangovers can last multiple days, I’ve heard. I’ve heard
that from somebody. Lapera: Does like the tryptophan just build
up in your system and it just doesn’t go away? Is that what it is? It’s just stuck with
it for life like mercury poisoning. Maxfield: Yeah it’s cumulative. The thing
is, Gaby is that, what actually kills most humans is the accumulation of that in your
body over 80 or 80+ years. Lapera: That makes a lot of sense.
Maxfield: It’s science, Gaby. We can’t, you know, do you want to argue about the science?
Lapera: Did you know that I got my degree in biological anthropology? This is killing
me a little bit inside right now. Maxfield: I don’t even know if that’s
science. That’s how little I know about science.
Lapera: Oh my gosh. Listen, so today we’re going to be doing a grab bag because my, I
don’t know about you, but my attention post-turkey is really short. So like I couldn’t do a
long story today. So I hope you’re excited about many segments instead.
Let’s talk about that, there’s this Wells Fargo article on the front page of the Wall
Street Journal. It’s about cross-selling. Maxfield do you want to explain what cross-selling
is? Maxfield: Yeah, so just a little bit of context.
So Wells Fargo, right? I mean anybody who listens to this show regularly knows that
I’m a pretty big fan of Wells Fargo. I mean this is like an amazing company, right? When
you look at its metrics and particularly over the years and particularly when you consider
that it’s a bank, and the troubles that most banks went through during the financial crisis.
Well it turns out, well one of the things that makes Wells Fargo such an amazing organization
from an investor’s perspective, is the fact that it sells multiple products to every customer.
I think its average is like 6.13 products per retail customer. And most other banks
are, even though they don’t report those figures, they are presumably much lower than that.
And it’s that selling multiple products to the same customer whether it’s checking
account, credit card, mortgage, what have you, wealth management product, it’s the
selling of those multiple products to that same customer; that is what cross-selling
is. Lapera: Right and it’s actually really impressive.
You stated that the average Wells Fargo customer has around 6.17 accounts with them. Back in
1999 that was only 3 accounts on average per customer and I believe that their goal is
to have 8 per customer. Maxfield: Yeah that they call it the … And
I think I’m probably going to totally get this pronunciation wrong, but this is a former
CEO Dick Kovacevich who was really the force behind the merger of equals that brought,
that gave us the Wells Fargo that we know today. And he came out with this initiative
called I think they called it, The Great Eight. But in the Wall Street Journal article they
are referring it to as The Gr8 like Gr and then dash 8. Gr-8.
Lapera: Even bankers have a sense of humor. Maxfield: Yeah, so at least I hope that they
do that as a joke. Because maybe their sense of humor is like my knowledge about science.
They don’t know enough about humor to even know if that’s funny or not.
But anyways, Kovacevich came out with that and that really since then over the last almost
2 decades, that has really been able, that has really pushed their margins and put Wells
Fargo in a position to outperform the vast majority of its competitors both in terms
of stock price and in terms of growth in its dividend share buybacks and things like that.
Lapera: Absolutely. But they’ve run into a little bit of trouble with this practice
and like you must be sitting there thinking as an investor, this is great, this is a really
good way for them to grow their business. But back in May a lawsuit was filed in LA
against the bank claiming that they were engaging in predatory, kind of sales tactics.
Like high-pressure tactics to get people to sign up, to open accounts that maybe, like
one example they gave was they were trying to get customers who maybe didn’t speak the
best English so they didn’t really understand what they were signing. Or trying to get customers
— one story that was told in the Wall Street Journal was they set up outside of the blood
bank where people were going to sell their blood knowing full well that those people
probably would get their accounts frozen. But it was so important to the Bank of America
employees to get sales, that they were engaging in these tactics that maybe aren’t above board.
Maxfield: Yeah, and let’s be honest, right Gaby? If you think back, so I still think
Wells Fargo is amazing these things aside. But let’s just think about the bank industry
over the last two decades. I mean they really haven’t done some great things, right? I mean
if you think about — my favorite example of what the — and this is with the entire
bank industry did, okay? You would go in, right? I can’t remember what the statistic
is, but something like 40% of bank customers at the biggest bank live from paycheck to
paycheck. Which means that their account balance is constantly going down to zero if not going
to the negative. Well for many years, I don’t know how long
but for many years what the banks did is they would take your daily transactions from your
debit card and they would reorder them chronologically. So they would put the biggest one first so
then that would increase the probability that you would overdraft. So if you had like 10
transactions in a day and let’s say 9 of them were for a dollar and then 1 of them
was for $300, and the $300 transaction was last, they would put that at the beginning.
And if that kicked you into overdraft, then you’d have those, not only would you have
the overdraft on the big charge, but you’d have those 9 subsequent overdrafts as well.
As opposed to if they didn’t rearrange those chronologically you would just have the one
final overdraft at the end. So that’s just an example and then you know
they sold credit card products that allegedly helped protect you or would take care of your
payments or things like that if you got sick or injured at work. And it turns out that
you really didn’t get absolutely anything from these services at all, so all the banks
got in trouble for that. And it’s just this whole pattern of behaviors that all of the
banks got into. Lapera: Absolutely.
Maxfield: That consists of really to be perfectly blunt about it, exploiting their customers.
Now this is kind of where Wells Fargo has been caught up. But it’s important still,
particularly at this early stage in this whole process, that we keep in mind that these are
stories that could be coming … And I don’t doubt that Wells Fargo has a very aggressive
sales culture, right? They’re known for cross-selling. You’ve got to push your employees
to sell if you want to cross-sell. That’s just how it works, right? But whether or not
it actually crossed the line and whether this is going to change the investment theory on
Wells Fargo is something I really, really doubt. It’s not going to cause, I would
be surprised if this thing cost tens of billions of dollars for Wells Fargo.
Lapera: Right, and that is one place that Wells Fargo is ahead of a lot of the other
big banks is that they didn’t have really any large settlements that they had to pay
post-2008 financial crisis. Maxfield: Yeah and I mean it made a huge difference.
I think that Bank of America’s tally, and this is from Bank of America itself was $195
billion from the crisis. $195 billion is what the crisis cost them. So the fact that Wells
Fargo has largely avoided all that, yeah it could have a few hundred million dollars here
and there and it shouldn’t be doing things that if they really are pressuring, I mean
I think we can all agree with that, that they shouldn’t be doing those things. But as
an investment this is still an incredibly solid bank.
Lapera: Yeah. I figure we should probably close with a quote from Wells Fargo which
is from Mary Eshet which is their spokeswoman. “Wells Fargo’s culture is focused on the
best interest of its customers in creating a supportive, caring, and ethical environment
for our team members.” Which that is what she is paid to say.
Maxfield: Yeah, you don’t think that she wanted to come out and say, “We tell our
customers there are employees to make sure the customers buy things whether they like
it or not.” Lapera: No. Actually so speaking of products,
particularly mortgage products, pending home sales were up 2.9% from last year in October
and they rose about .2% from September this year which is less growth than was expected.
But growth either way is a good sign, right? Maxfield: Yeah I mean in terms of the volume
it’s absolutely a good thing, yeah. Lapera: Yeah I mean typically people don’t
buy homes if they’re feeling economically insecure. So this is a sign that people are,
have faith in the economy as it is now and that they’re getting ready to settle down
and plunk down roots. Did you also see, I don’t know if you saw this, an article a
little bit ago about the Case-Shiller index which is — it’s basically an index that tracks
home prices. And it said that home prices had reached pre-recession levels again and
they’re just far too expensive. But that doesn’t really take into account inflation
and there’s a new analysis released by CoreLogic and it says that homes have not reached pre-recession
level when you take into account inflation. In fact they’re about 20% below what they
were pre-recession when you account for inflation. And they’re thinking that it will take 17
years to reach the same price point. So it’s good news if you’re thinking about buying
a home. Maxfield: Not if you’re thinking about selling.
Lapera: Not everything will be selling now. Maxfield: The thing here is Gaby, that when
I read these statistics so let’s talk about housing. So you have housing is, these studies
they throw oh you know, it’s going to be this many years before we get back. But it’s
important to keep in mind that the housing is actually a local market more so than a
national market. Let me just give you some statistics to kind of solidify this in your
head. So nationwide, so I think you said that what
CoreLogic said that they’re 20% down, if you add in inflation?
Lapera: Yeah. Maxfield: So if you look at, and that’s
just the same statistics that I have, but if you look at individual cities; you have
LA which is — now this is not taking inflation into consideration, this is just on a nominal
basis — LA home prices are still down 14%. Houston, since the peak in 2006, home prices
are up 30%. Lapera: I don’t even want to know. What
are they for DC? Do I want to know? Maxfield: I don’t know, I didn’t look.
I used to live there too. It’s too depressing. Boston is flat. Phoenix is down 31%, Vegas
is down 38%, Portland, where I live, we’re way up. Denver’s up. So you have some places
that are way up, some places that are way down. So it’s just important to keep in
mind that when you’re talking about housing, sometimes you’ve got to look beyond that
national number to also kind of take into consideration that some places have much higher
escalations on all prices and drops after the crisis.
Lapera: That’s true. So I guess keep that in mind when you’re home buying.
Maxfield: Let me make one more point, Gaby. That what’s going on in the housing market
right now, with the increases in home prices in certain cities, the question is well it’s
not like we’re getting a lot of great news about the economy, right? I mean you have
the Federal Reserve isn’t increasing interest rates. It still has not increased interest
rates because the economy isn’t going, inflation is high enough, unemployment is basically
where they want it. Lapera: But who knows, maybe soon. If we look
into our crystal ball on the Fed interest rates.
Maxfield. Exactly. I’m sure we’ll talk about that a million more times over the next
few months. Lapera: Who knows? Maybe it will go up in
December and we’ll be really excited. We’ve been saying it’s going to go up for I think
like 6 months. Maxfield: I know, exactly […] 16 months
maybe? But the question is what is going on with housing? And really what is going with
housing is this. The inventory of available homes for sale is still really low across
the country. I think it’s, so at the current sales pace it will take 4.8 months to get
through the current inventory of existing homes for sale.
Well the rule with housing is that if the inventory is equal to less than six months
worth of sales — which it is because it’s at 4.8 right now — then housing prices will
increase. Whereas if it’s above six months worth of sales, then it will go in the other
direction. So that what’s going on in those local markets where you have home prices accelerating
really quickly and then those home prices like Vegas and LA, those places like that,
where home prices are still way low. That’s just a residual of the financial crisis.
Lapera: So I don’t know if you noticed, but it’s almost December, which means it’s
time to start thinking about end of year stuff that you ought to do if you have an investment
portfolio. Let’s start with tax-loss harvesting. Do you
want to explain a little bit about what tax-loss harvesting is?
Maxfield: Yeah, so let’s say that Gaby invests in, I don’t know Gaby like what, Apple?
Give me a company. Lapera: Let’s go with Apple.
Maxfield: Let’s go with Apple. Let’s say Gaby buys shares of Apple and then shares
of Microsoft. And then during the year her shares of Apple go up 30% and her shares of
Microsoft let’s say go down 30%. Well let’s say that Gaby needs to sell her Apple stock
but she doesn’t want to pay taxes on that gain. Well what she can do is she can sell
her Apple stock and take that gain, and then also sell her Microsoft stock, take that loss
and then you can offset it. And that’s what tax-loss harvesting is. It’s selling losers
to offset your winners for tax purposes. Lapera: Absolutely. So a few things that you
want to keep in mind with tax-loss harvesting is one, you can apply up to $3000 a year in
capital losses towards lowering your total adjusted gross income which is great. But
you can also do the same, the thing that Maxfield was talking about where you take your losses
and offset your gains. But if you’re going to do that, you have to keep in mind that
they have to match. So if you’re offsetting short-term gains, you have to do that with
short-term losses. Does that make sense? Maxfield: Right.
Lapera: And if you want to do that you can do too with long-term gains and long-term
losses. It works for that too. Of course if you have a short-term loss for example of
$8000 and only $2000 in short-term gain, then you can apply the remaining say $6000 to your
long-term gains if you have that. Maxfield: Yeah, yeah. And it’s, it really
is when you’re talking about investing, any time you can reduce your costs and taxes
or one of those costs, you’re effectively increasing your returns. So anything that
you can do in that regard and tax-loss harvesting is absolutely one of them. It is a good thing
for investors to keep in mind just as a tool in their toolkit.
Lapera: Absolutely. So other things that you want to think about before you sell is check
your cost basis before selling. Maybe that will influence you either way. You obviously
want to sell depreciated investments if you’re going to do tax-loss harvesting, but you want
to try and get rid of the ones that don’t really fit in with your strategy, whatever
your strategy may be. And you obviously want to hold on to stocks that fit your long-term
goals. Maxfield: Yeah and to that point, I’d just
like … Lapera: Don’t sell things willy-nilly is
what I’m saying. Maxfield: Exactly and I suspect that Gaby,
you were going to bring this up, but it can even be a part of rebalancing your portfolio.
You know, looking at your portfolio at the end of the year, seeing where your stocks,
how they’ve changed, seeing what percentage certain socks are taking up of your portfolio.
And if some are taking up more than others, you want to take those gains or take those
losses to offset those gains, it can all kind of factor into that rebalancing of your portfolio.
Lapera: Absolutely. And just to throw this out there, the Motley Fool philosophy is of
course to always look for diversity and to look for long-term investments that you really
believe in. So just keep that in mind when you’re rebalancing your portfolio.
Another thing that you should think about doing is making a contribution to your taxed
advantage retirement account. So it’s 401(k)s, IRAs. The 401(k) limit for 2015 is $18,000
and you can deposit an additional $6000 if you’re over 50 and for IRAs the yearly limit
is $5500 and $1000 for if you’re over 50 years old.
Maxfield: Yeah, and just use these, right? If you can use the tax-advantaged retirement
account, use them, right? Because let’s just give an example. Let’s say you can
put $10,000 into it, your marginal tax rate is 25% or let’s say your average tax rate
is 25%. Just by putting that $10,000 in income and transferring it over into a different
account that you still control, that you can still see on your computer screen, you’re
going to save yourself $2500 in taxes. So it’s basically an immediate 25% return on
your money. So again just like tax-loss harvesting, reduce
your taxes. That’s really what you should be thinking about as an investor right now.
Lapera: Of course, that’s only for the traditional accounts. With Roth IRAs you’re going to
be taxed up front. Maxfield: Exactly, exactly.
Lapera: Just keep that in mind. Maxfield: Yeah and that’s a really important
point to keep in mind. Yeah thank you Gaby that was a really important point. Roth you’re
not taxed when you withdraw but you are taxed on your income in the current year. But again
just if you can use your retirement savings accounts, use them. If you can’t, then you
can’t. Lapera: Right. I mean the other thing is with
401(k)s if you have one, most employers have matches. So you just want to take advantage
of that matching. I mean even if that doesn’t help you necessarily now, because there’s
withdrawal penalties. Down the road it’ll help you quite a bit.
Maxfield: Yeah and the thing is, is that what’s so great about America, one of the things
that’s great about America is we have this incredibly powerful economy. And that economy
is powered by our consumers, right? So spending as much money as they can possibly spend.
So for the country it’s a really good thing if everybody’s going out and spending all
the money. But for an individual you need to save. And I know saving is hard and things
like that, but these are vehicles that can make savings easier because they can accelerate
your savings by reducing your tax liability. Lapera: Absolutely and one thing that you
can do to make saving easier is you can set up a direct deposit into the account, so you
don’t even see the money. It doesn’t even go into your savings account, so that way
you don’t even have to think about it, or your checking account.
Maxfield: Yeah that’s smart. Lapera: So basically the theme of this is
get a sense of where you’re at with tax liability, make sure you sock some stuff away
for retirement, and get excited for the New Year.
Maxfield: Love it and watch, don’t eat too much turkey.
Lapera: Don’t eat too much turkey. Do you have anything else?
Maxfield: That’s all I’ve got for today. Happy holidays to everybody.
Lapera: Alright then. As usual people on the program may have interest in the stocks they
talk about and the Motley Fool may have recommendations for or against. So don’t buy or sell based
solely on what you hear. Thank you very much for joining us. I hope
you guys enjoyed this week’s episode. Write to us at [email protected] if you have
any ideas about what next week’s podcast should be about. Thank you, everyone and have
a great day.