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THE MOTLEY FOOL
Ask the Fool
Published: March 28, 2023
Q. What's the "index effect" in the stock market? -- R.J., Greensburg, Pennsylvania
A. First, understand that companies are routinely added to or removed from various indexes -- sometimes because they merge with or are acquired by another company, or because they grow too big or small for the index they're in.
The index effect refers to a change in the price of a stock after it's added to, or removed from, a major stock index. If a company is added to the S&P 500 index of 500 of America's biggest companies, its stock price seems likely to rise. After all, there are trillions of dollars invested in index funds. So when that stock is added to the index, all those funds tracking the index will be buying shares; you might expect that kind of demand to push up the stock price, at least for a while. (The reverse would be true for stocks removed.)
Interestingly, though, while the index effect has topped 7% in the past, it has nearly disappeared over the last decade; it's now well below 1%.
Q. How can I invest in Taco Bell? -- P.C., Ashland, Kentucky
A. Technically, you can't, because Taco Bell belongs to parent company Yum! Brands -- which also owns KFC, Pizza Hut and the Habit Burger Grill.
You could invest in Yum! Brands, though. Lots of companies are actually subsidiaries of other companies. For example, PepsiCo owns Quaker Oats, Lay's and Gatorade, while Restaurant Brands International owns Burger King, Popeyes and Tim Hortons. Nestle owns Purina and Gerber; Amazon.com owns Zappos and Whole Foods; and a company called Stellantis is home to the Chrysler, Jeep and Maserati brands.
Fool's School
Business and Investing Books
To improve your investing skills, it's good not only to read books about investing, but also to learn about business in general and about what makes a company great. Here are some books you might check out:
-- "Good to Great: Why Some Companies Make the Leap ... and Others Don't" by Jim Collins (Harper Business, $35). In this classic, Collins answers the question "Are there companies that defy gravity and convert long-term mediocrity or worse into long-term superiority?" by analyzing the histories of 28 companies.
-- "Business Adventures: Twelve Classic Tales From the World of Wall Street" by John Brooks (Open Road Media, $35). Both Warren Buffett and Bill Gates have recommended this book. It offers illuminating business stories from the 1950s and 1960s about companies such as Ford Motor Co., General Electric and Xerox.
-- "Against the Gods: The Remarkable Story of Risk" by Peter L. Bernstein (Wiley, $23). This book will take you from ancient Greece to modern days, covering topics such as probability, risk, gambling and the growth of the insurance industry.
-- "Devil Take the Hindmost: A History of Financial Speculation" by Edward Chancellor (Plume, $20). It's helpful to understand how markets sometimes get carried away, creating booms that are followed by busts. This book offers eye-opening stories about speculation in tulips in the 1600s, the 1929 stock market crash and day traders in the modern era.
-- "The New Map: Energy, Climate, and the Clash of Nations" by Daniel Yergin (Penguin, $22). This riveting book can help you understand how the energy industry works -- as well as how the world works, as it reviews geopolitics involving Russia, China, the Middle East and the United States.
-- "The Innovator's Dilemma: When New Technologies Cause Great Firms To Fail" by Clayton Christensen (Harvard Business Review Press, $28). This book can teach you a lot about disruptive companies such as Apple and Amazon.com. It discusses Steve Jobs, Jeff Bezos and many others, so it can teach you about effective leadership, too.
My Dumbest Investment
Too Big To Fail
My worst investing move was buying shares of General Motors in the late 2000s. I figured it was too big to fail, as they say, and snapped up some shares after they'd fallen quite a bit. -- T.C., online
The Fool responds: General Motors' history has had a lot of ups and downs since its founding in 1908. The company weathered many boom and bust economic periods and even profited during the Great Depression, gaining market share. For many years, it was the world's largest automaker, by far -- though it lost the No. 1 title to Toyota Motor Corp. in 2009. Some see its stock today as appealingly priced, with a price-to-earnings (P/E) ratio recently in the mid-single digits, big sales of trucks and promising electric vehicle initiatives.
However, the "down" periods have caused big trouble for many investors. In 2009, after trying hard to stay afloat, and despite accepting billions in government loans, GM filed for bankruptcy protection. It emerged (as is common in bankruptcies) a newly reorganized company with new shares of stock -- and holders of its old shares lost their entire stakes.
GM was indeed seen as too big to fail by many, and that's why the government stepped in to help it survive. But ensuring a company's survival doesn't mean doing well by all its shareholders. It's generally best to steer clear of companies facing any meaningful risk of bankruptcy.
Foolish Trivia
Name That Company
I trace my roots back to 1911, when my founder (and namesake) created the Maine Hunting Shoe with a rubber sole. This was followed by a Maine Duck Hunting Coat, which is still sold today (under a different name). By the 1920s, I was mailing out a well-regarded catalog. My durable wares helped me thrive during the Great Depression. Beginning in 1951, I kept my flagship store open 24/7 -- only installing locks on the door due to the COVID-19 pandemic. (They were removed in 2021.) I recently operated more than 80 stores in the United States and beyond. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1851, when my founder invested in the Bay State Glass company of Massachusetts; he then moved to Brooklyn, New York. In 1868, he moved his entire glass company via barge on the Erie Canal system to its new home. I made the first glass bulbs for Thomas Edison's electric lights, the first low-loss optical fiber and Gorilla Glass, the first damage-resistant cover glass for mobile devices. Today, with a market value near $30 billion, I'm a leader in glass science, ceramic science and optical physics. Another of my best-known products is Pyrex. Who am I? (Answer: Corning)
The Motley Fool Take
Taxes and Accounting
Intuit (Nasdaq: INTU) is best known for its market-leading tax preparation software TurboTax and accounting software QuickBooks. Meanwhile, Intuit is working to deepen its customer relationships by expanding its offerings.
For instance, it provides payroll and payment processing software to small businesses with its QuickBooks platform, and it connects consumers with loans, insurance and credit cards through Credit Karma. Intuit also offers "live" versions of its tax preparation software (TurboTax Live) and accounting software (QuickBooks Live), which allow users to instantly connect with financial professionals.
That strategy continued to pay off in the quarter that ended Jan. 31, with revenue rising 14% year over year to $3 billion, while net income per share climbed 71%. Those results are particularly impressive because Credit Karma revenue dropped 16%, due in part to rising interest rates. Management offered bullish projections, expecting revenue to grow 8% to 9% in the third quarter, and announced a 15% dividend increase. Its dividend recently yielded 0.8%.
Intuit should be able to maintain its momentum, especially in a more favorable economic environment. (The Motley Fool owns shares of and has recommended Intuit.)
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