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Ask the Fool

Caps and Crashes

Q: What’s a company’s “market cap”?

— T.W., Muskegon, Michigan

A: The term is short for market capitalization, which reflects the company’s total value in the stock market. It’s calculated by multiplying the total number of shares outstanding by the current share price.

Consider Apple, for example, which was recently trading around $150 per share. To find its total shares outstanding, you might check out its latest financial statement. Or check out websites such as Yahoo! Finance, which include shares outstanding among the company statistics they offer. Multiply Apple’s recent share count of 16.5 billion by $150 and you’ll arrive at its recent market cap — about $2.5 trillion. That figure can give you a sense of whether the company is overvalued or undervalued, if you compare it to past levels or to peers.

Q: If I’d invested $1 in the stock market after the 1929 crash, what would I have today?

— F.E., Abilene, Texas

A: The crash of 1929 took place over many months and continued beyond 1929. The Dow Jones Industrial Average (“the Dow”) peaked in early September 1929 at 381. It initially plunged in October, falling by 12.8% on Oct. 28 and then another 11.7% on Oct. 29, when it closed at 230. It rallied a bit but continued a long descent, falling to 41 in July 1932. At that point, it was down some 89% from its high. It took 25 years, from 1929 to 1954, for the Dow to hit its previous high of 381 again.

With the Dow recently around 35,800, it’s up some 86,800% since that low of 41 — enough to turn your $1 into $869, at an annual average growth rate of roughly 7.9%. And that doesn’t even include dividends!

Fool’s School

CEO Pay and Performance

It’s not news that chief executive officers are generally highly paid. How highly paid? Well, according to the Economic Policy Institute (EPI), “In 2020, a CEO at one of the top 350 firms in the U.S. was paid $24.2 million on average” — that’s up a whopping 18.9% over the previous year’s level, due in large part to stock awards and stock options.

For perspective, it’s helpful to compare CEOs’ pay to that of their workers. Per the EPI, the ratio of CEO-to-typical-worker compensation was 61-to-1 in 1989, surged to 307-to-1 in 2019, and then rose another 14% to 351-to-1 in 2020. Between 1978 and 2020, CEO compensation (including stock awards and options) surged 1,322%, while typical workers saw their pay grow by only 18%.

Those earning outsized pay, and those granting it, will argue that you have to pay for great performance. But there are studies showing that many companies are paying for underperformance. The research outfit MSCI, for example, studied CEO pay and company performance at 429 companies in the MSCI USA Index over the 10 years between 2006 and 2015; it found that “the bottom fifth of companies by equity incentive award outperformed the top fifth by nearly 39% on average on a 10-year cumulative basis.”

Why are so many CEOs collecting so much in cash and stock while not delivering particularly strong company performance? Well, it’s the board of directors that sets CEO pay, and CEOs are often in the room — and even on the compensation committee! — when they do so. CEOs can also influence who is nominated to be a board member, and as Warren Buffett has quipped, “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”

Shareholders do have a say: They can express any dissatisfaction by voting against proposed CEO compensation packages. (Such votes are currently nonbinding in the U.S., though that may change.)

My Dumbest Investment

Different Schools of Thought My dumbest investment? I sold Shopify at $80 based on valuation concerns.– M.A., onlineThe Fool responds: There are different schools of thought in the investing world, and your actions make perfect sense to one of them — value investors — who seek to buy into companies at prices below their fair value. Value investors can grow uneasy owning stocks when they appear to be very richly valued, as that suggests that they may soon fall in value.The contrasting school of thought is that of growth investors, who focus less on a stock’s valuation and more on its growth prospects. Growth investors are often willing to pay premium prices for high-performing companies, expecting them to grow into — and exceed — those values over time.So while a value […]

source Motley Food