ASK THE FOOL
Zeroing in on bonds
Q: What are zero-coupon bonds?
A: They’re regular bonds — with a key difference. With a bond, you lend money, typically to a company or government. When you buy a traditional $10,000 bond sporting a 3 percent interest rate, you’re lending $10,000 to the borrower, and you can expect to receive interest payments of 3 percent per year. (In the past, you’d have had to send in coupons to receive these payments.) When the bond matures, you get your $10,000 principal back.
With a zero-coupon bond, you collect no interest payments, but the amount you lend is less than the amount you’ll receive at maturity. Thus, a zero-coupon bond might pay you the equivalent of 3 percent per year by having you lend $7,441 today to receive $10,000 in 10 years.
Q: I want to sell some losing stocks, instead of waiting for them to recover. How dumb is that?
A: It depends. If the company is healthy and growing and has merely encountered a temporary hiccup, you might do best to hang on. But if your research suggests that its problems will be long-lasting, sell. Why try to earn back a certain amount in it when you can more reliably earn that same amount (or more) elsewhere?
For example, if your shares of Home Surgery Kits (ticker: OUCHH) are underwater by $1,000 and you no longer have much faith in the company, sell the shares for a loss. If you move what’s left into a more promising stock, you’re more likely to earn that $1,000 back — and more. Keep your money invested in your best ideas.
MY SMARTEST INVESTMENT
Boom and bust
Dear Fool: One of my smartest investments was in America Online’s stock. I bought 500 shares at $100 each in 1998, and within less than a year, it had soared. I thought things would only get better, and watched in amazement as the stock fell. I then did what you’re not supposed to do — I panicked and sold. Still, I reaped a big profit in just six months. If I’d sold earlier, I’d have netted much more. (Isn’t hindsight wonderful?) The episode taught me that you need to grit your teeth and hold through volatility. It also taught me that you can’t time the market.
The Fool responds: America Online made many people a lot of money during the dot-com boom, but not all great businesses stay great.
America Online was the U.S.’s biggest internet provider in 2000, valued at $125 billion, but that was before the internet bubble burst. It ended up joining with Time Warner in what would later be seen as one of the biggest merger failures ever. In 2015, AOL was acquired by Verizon Communications for about $4.4 billion.
It’s smart to hang on to stocks that you believe in during volatile periods — but you need to know why a stock is falling, and sell if it ever becomes wildly overvalued. Many stocks plunged during the dot-com crash simply because they had been bid up too high in a speculative frenzy.
MOTLEY FOOL TAKE
Video-game developer Activision Blizzard (Nasdaq: ATVI) is known for titles such as “Call of Duty,” “World of Warcraft,” “Hearthstone” and “Candy Crush.” Over the last few months, its stock has fallen more than 40 percent. That slump could turn out to be an overreaction by short-term-focused investors — and an opportunity for long-term ones.
Sure, the video-game developer is facing challenges. Its base of engaged gamers has declined for more than a year, and a few recent launches have underperformed management’s targets. Yet user engagement just hit a record high of more than 50 minutes per day per user. And profitability continues to expand as gamers enthusiastically take up digital downloads both for extra content and for full-game purchases.
Video games are a booming industry expected by some to reach $180 billion by 2021. Activision has a Disney-like library of games and content, which has attracted tens of millions of fans who generate the majority of its annual revenue — more than $4 billion — with in-game spending.
The company has promising new business lines such as esports, consumer products and advertising. With a recent forward-looking price-to-earnings (P/E) ratio in the teens, its stock is appealingly priced. (The Motley Fool owns shares of and has recommended Activision Blizzard.)