3 Investing Bubbles to Beware

Welcome to StockUp, the investing newsletter that has not yet launched its own proprietary cryptocurrency. -------------------------------------------------------------------------------------------------- [View this email in your browser]( Welcome to StockUp, the investing newsletter that has not yet launched its own proprietary cryptocurrency. This week, we’ve found three market sectors that might be perilously overinflated. Plus, four reasons not to sell a semi-de-Bezosed Amazon.com, and a way to invest on the cheap that could be far less likely to imperil your hard-earned cash. — Nathan Alderman, StockUp Editor POP POP! 3 Investing Bubbles That Might Be Ready to Burst --------------------------------------------------------------- We’ve never shied away from portraying the current stock market as That Guy at the Party with the Lampshade on His Head, and alas, it’s given us no reason to stop doing so this week. In the long run, the market generally makes rational decisions. In the short run, well … lampshade. Head. You get the idea. Fool Sean Williams has found three particular sectors where he thinks the market’s enthusiasm may have gotten juuuuuust a wee bit ahead of reality. Investors who wish to avoid a raging hangover when this particular party ends might want to consider backing away slowly from: - Cryptocurrencies and related stocks. We’ve also freely aired our crypto qualms in the past, but to recap: It’s not anchored to any real-world value, it’s hard for regular human beings to actually use, and its supposed scarcity relies on nothing more than its creators’ assurances and a few lines of code. Stocks that pin their entire business models on “mining” new crypto coins -- and on crypto values remaining high no matter what -- may be cruising for a bruising. - Reddit-fueled stocks. If you’re making investing decisions solely based on message-board pile-ons, you might want to think twice while you’re still in possession of your cash. Companies like GameStop (NYSE: GME) have become proxy playthings in titanic tugs-of-war between rambunctious retail investors and high-powered hedge funds. But their gains aren’t based on anything the actual businesses behind those stocks are doing -- and eventually, that truth will catch up with their share prices. - Electric vehicles. We don’t blame anyone for being excited about EVs’ potential to rule the road over the long term. But we do caution investors to actually look at the companies they’re buying into, and compare the prices they’re paying with -- again -- what the actual company has actually accomplished. At least some of these red-hot stocks’ sticker prices have far outraced their ability to make money and, you know, sell cars. For more details and specific companies whose current high spirits may lead them to stumble off the roof or into the swimming pool, [read the rest](. --------------------------------------------------------------- Already subscribed to a premium service? [Click here]( to view your subscriptions. Not a member yet? [Click here]( to sign up! --------------------------------------------------------------- JARGON DECODER Well Fed They don’t call it “Wall Street” for nothing; the big banks there build bigger barriers of baffling terminology to keep regular Fools like you intimidated, underconfident, and ready to fork over your cash to a broker. Each week, Jargon Decoder translates one of those worrisome words or phrases into plain English, helping you get a leg up on the Wall Street Wise. This week’s term: The Federal Reserve. The nerve center of the United States’ financial system, the Fed controls how much money the entire country’s economy has to borrow, spend, save, or invest -- which helps to determine how well (or poorly) the economy runs. The Fed became part of the U.S. government in 1913. It has a board of governors based in Washington, D.C., who supervise the 12 regional Federal Reserve Banks in major cities around the country. According to the Fed itself, it aims to: - Try to keep as many people employed as possible. - Keep the prices we pay for what we buy from rising or falling too quickly. - Ensure that the interest rates Americans earn for saving their money are big enough to make saving worthwhile, but not so big that they keep us from spending that money entirely. The Fed tries to accomplish these goals by controlling the nation’s money supply. Think of the economy as a big tub, and money as the water sloshing around in it. (This metaphor’s not as farfetched as it might seem -- in 1949, British inventor Bill Phillips created a machine that [used water to accurately model the U.K. economy]( The Fed has to control how much water’s in that tub, so that it neither runs dry nor overflows. It can drain water out of the tub if it gets too full, or turn on the taps to pour water in if it gets too low. If the money supply overflows, inflation kicks in. Money’s worth less; the same amount of money buys less; and prices for goods rise. If the money supply runs low, deflation hits. Money’s worth more; prices drop; and companies that make and sell things start making less, since the same amount of effort gets them a smaller reward. Going too far in either direction hurts the overall economy -- and all the everyday people in it. The Fed tries to keep these opposing forces in a healthy balance. The Fed has three main ways to adjust the money supply: - Discount rates control how much banks lend. When you want a loan, you borrow money from the bank. But where does your bank get money when it needs a loan? It borrows from its regional Federal Reserve Bank. The Fed sets the discount rate -- the interest -- that its banks charge to banks like yours. The cheaper that rate (and right now it’s near rock-bottom historical lows), the cheaper and easier it is for banks to borrow money. Lower rates = more banks offering loans to individuals and businesses, and vice versa. - Treasury bonds control interest rates. The Fed sells U.S. Treasury bonds: the government’s promise that if you lend it X dollars, it’ll pay you back in Y years’ time -- with a little extra on top, an amount known as the yield, for your trouble. The yield equals the gap between what you pay for the bond right now and what the government pays you back later. But when more people want to buy the same overall amount of bonds, the price for each bond rises. (Just like stocks!) The more bonds cost to buy, the lower their yield, and vice versa. When yields on Treasury bonds rise or fall, they bring the interest rates we pay on mortgages, savings accounts, credit cards, and more along with them. - Capital requirements also control how much banks lend. Most banks lend out a lot more money than they actually hold in cold, hard cash. (As long as every customer doesn’t show up at the bank at the same time, demanding all their money, banks can do this without much of a problem.) The Fed determines how much cash your bank needs to actually keep on hand. The more cash it’s required to keep, the less it can safely lend out, and vice versa. Still curious? Read more about [how the Fed affects your money](. --------------------------------------------------------------- BYE BYE BEZOS Our 4 Reasons Not to Sell Amazon as Its Founder Steps Down Founder and CEO Jeff Bezos is stepping back from Amazon.com (NASDAQ: AMZN), the online retail giant whose rise has made him almost unimaginably wealthy. But before you panic and remove all those Amazon shares from your shopping cart, Fool Billy Duberstein urges you to take a deep breath. He’s found four reassuring reasons why this mighty stream of revenues and profits could just keep rolling along. We’ve got the first two to get you started: - The new CEO has abundant experience. How long has new CEO Andy Jassy been with Amazon? He headed up the company’s big branch-out from selling books to -- gasp! -- selling music CDs. Jassy also spent 18 months in the early 2000s shadowing his boss’s every move (to be clear, Bezos invited him to do this; Jassy wasn’t, like, lurking behind potted plants or anything) to learn how to be Bezos. Plus, Jassy launched Amazon Web Services in 2006, which has only become one of the company’s most successful and massively profitable divisions. So yeah, he’s probably pretty well qualified! - The former CEO’s not going far. As “executive chairman,” Bezos will stay involved with countless Amazon projects, as well as his diverse array of side interests from launching rockets to owning one of the country’s largest newspapers. Bezos, Amazon’s biggest individual shareholder, will also retain veto power over huge and consequential decisions the company might face. In short: Jassy apparently gets the really hard and stressful stuff, while Bezos keeps the fun stuff. For two more reasons why Amazon likely remains in good shape, pause that episode of The Boys you’re binging and [read the rest](. --------------------------------------------------------------- ALEXA, IS THIS THING THAT'S SPECIFICALLY DESCRIBED IN THE CONSTITUTION CONSTITUTIONAL? [Smart Speaker] Not sure what to ask your smart speaker? Keep up with what's happening in the market by asking your Amazon Alexa or Google Home to "Play Motley Fool podcasts." --------------------------------------------------------------- SLOW & STEADY Why Fractional Shares Might Make Better Investments Than Penny Stocks When you don’t have a lot of free cash to invest, penny stocks probably sound pretty great. They’re cheap! You can buy a whole bunch of them with $20 and still have enough for a fast-food value meal. Unfortunately, like the contents of that fast-food value meal, you get what you pay for -- a considerable chance of heartburn and indigestion. But Fool Katie Brockman’s found a more wholesome way to at least try to turn today’s pocket change into tomorrow’s tall dollars. Penny stocks trade dirt cheap because they’re risky. The companies issuing them tend to be small, inexperienced, tough to research, hard to sell, and prone to wild swings. (Hey, what’s not to love?) But many online brokers now offer fractional shares instead -- teeny tiny pieces of the shares of larger, more reputable companies. Even if Company X’s shares cost $200 a pop, you can buy a piece of them -- and any future returns they might generate -- for as little as a buck. Fractional shares let you invest steadily over time, socking away a little each month, and they also let you protect your money by easily spreading it out over a bunch of different bona fide businesses. To learn more about the benefits of fractional shares, put down that pressed processed rib-shaped pork sandwich (and maybe use a napkin or two) and [read the rest](. --------------------------------------------------------------- CLARISSA WASN'T AVAILABLE FEATURED PODCAST [Motley Fool Answers]( Morgan Housel Explains It All The longtime friend of the Fool and author of The Psychology of Money joins us to share his takeaways amidst the GameStop fracas, Bezos stepping down as Amazon CEO, and this seemingly never-ending party in the stock market. [Subscribe on iTunes]( --------------------------------------------------------------- A REAL EYE-OPENER Quick Reads - [New COVID-19 vaccine contender:]( … from a biotech that specializes in [checks notes] treating eye diseases? - [Tap here to buy sugar, tea, & rum:]( TikTok takes on Facebook (NASDAQ: FB) in selling stuff through social media. - [More money, more problems?]( Pros and cons of a congressional proposal for $2,000-a-month stimulus checks. --------------------------------------------------------------- BORING BUT TRUE Social Media Post of the Week [Most investment problems can be solved with a combination of patience and humility.]( [See all our Tweets!]( Join the 1,300,000+ people who follow us! [Facebook]( [Twitter]( [Instagram]( [YouTube]( [LinkedIn]( We work fervently, fastidiously, and Foolishly to make sure all the facts and figures we publish in our emails are 100% accurate and up to date. Returns as of February 10, 2021. 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