Ask the Fool Reading Yield Curves What’s a yield curve? — QS.F., Maryville, Tennessee Imagine a simple graph that Fool’s School some value to you via the buyback. My Dumbest Investment The Motley Fool Take Aplots the current interest rates It can help to think of earnings of United States Treasury bonds per share (EPS). Imagine that Rub- Homebuying A Tech Stock and with maturities of three months, Stock Buyback ber Chicken earned $1,000 in its five years, 10 years, 20 years and last quarter. If it has 1,000 shares, ­Blunders Bank, in One Basics its EPS is $1 — $1,000 divided by 30 years. Connect all those points, My dumbest investment was LendingClub (NYSE: LC) bills and you’ll have a yield curve. If you’ve read news that a com- 1,000. After the buyback, though, pany is buying back or repurchasing ­buying my first house. I did every- itself as “America’s largest online In typical years, shorter-term $1,000 in earnings will become thing wrong. — C.C., online marketplace connecting borrowers some of its shares, you may have $1.25, because $1,000 divided by bonds will have lower interest The Fool Responds: There are and investors” — and it’s about to rates, and vice versa. So a “nor- wondered whether that’s a good or 800 shares is $1.25. So EPS has encompass more. The company bad thing. It can actually be either. risen — not because the company plenty of mistakes you can make mal” yield curve will be a line that when buying a house, and each has been approved to acquire the starts near the lower left of the It can be a good thing because performed better and earned more Boston-based digital bank Radius when a company buys back shares, of them can cost you — potentially graph and slopes upward, slowly money, but because its share count a lot. Bank — and along with it comes its leveling off. It reflects investors’ it reduces the number of shares that shrank. (It’s always smart to check For starters, don’t shop for bank charter, making Lending Club a bank. The acquisition will reduce assumptions that the economy will exist. That makes each remaining how much of a company’s EPS and buy more house than you share a larger part of the company’s growth is due to factors other than can safely afford — if your LendingClub’s costs a lot, as it can keep growing. fund loans with cash from Radius Other yield curves, such as flat- value. (Imagine a pizza being cut improved performance.) household experiences a job loss into six big slices instead of eight or a health setback, it could lead to customer deposits instead of borrow- tening or inverted curves, suggest So how can stock buybacks be a ing money at high interest rates. smaller ones.) bad thing? Well, if a company is foreclosure. expectations of a slowing econ- Many people fail to shop around Inflation fears recently led to a omy or falling interest rates. Here’s a simplified example: buying back shares when they’re broad sell-off of fast-growing tech Imagine the Rubber Chicken overpriced, it’s wasting shareholder for the best interest rate and don’t *** choose the kind of loan that will stocks. However, bank stocks often ­Company (ticker: CHEWY), which money and destroying value. If it do better with inflation and rising Can you explain “forced sell- has, say, 1,000 shares outstanding.­ serve them best; when interest rates spends, say, $5,000 buying back are low, for example, you might lock interest rates. If inflation ends up Qing”? — C.C., Sioux City, Iowa ­Imagine you own 100 of those shares, it will only retire 100 shares in a 30-year fixed-rate loan. Longer- causing the Federal Reserve Bank The term applies in multiple shares. That means you own 10% ­ priced at $50 apiece, but it can retire term loans will cost you a lot more to raise interest rates, LendingClub of the company. 125 shares if they’re trading at $40. in interest, too, so consider making would likely be able to charge a Asituations. For example, if higher rate on new loans. Manage- you’ve invested in stocks “on If Rubber Chicken then buys Management should always be extra payments to pay a 30-year back 200 of its shares, that leaves loan off sooner, or perhaps go with a ment has even estimated that if the margin” (with money borrowed putting money to work where it Fed were to suddenly increase its from your brokerage), you might only 800 shares outstanding. You can be most productive. That could 15-year mortgage. Making a down payment of less federal funds rate by 2%, net inter- get a “margin call” if your hold- still own 100, so your stake in the mean using it to pay down debt, to est income would grow by 13.3% company is now 100 out of 800, or fuel growth by building more facto- than 20% of the purchase price can ings fall in value. You’d be require you to pay for private mort- over the next year, as of March 31. required to add money to your 12.5%. You haven’t done anything, ries, to pay shareholders a dividend In other words, inflation and higher but the company has transferred gage insurance (PMI) — and pay account — which many people or to buy back shares. more overall in interest. rates are not as bad for the company do by selling some shares. If you A high credit score will get you the as they are for pure tech stocks. don’t take action, your brokerage best interest rates; if you don’t have LendingClub is currently projected to post a sizable loss this year, but may just sell some of your shares Name That Company one and you can delay buying your home for a year or more, you can most of that is due to one-time, for you. ­nonrecurring costs as it transitions Another kind of forced I trace my roots back to boost your score by paying bills on time and paying down other debts. to a new business model. Mean- selling can happen with a 1911, when two guys patented a while, it’s growing, with first-quarter wringer washing machine driven A silver lining for your dumbest mutual fund. If shareholders are investment is that you now know all ­revenue growing 40% from the worried about the fund’s per- by an electric motor and founded the mistakes to avoid next time you ­previous quarter, and loan origina- formance, they may sell enough me. I developed a gasoline-pow- buy a home. tions growing 63%. Take a closer shares that the fund has to sell off ered washer for rural customers look at LendingClub. many of its investments in order in 1915. During World War II, I made to generate cash to cover with- millions of items for the war effort LAST WEEK’S TRIVIA ANSWER drawals. If lots of funds are sell- I trace my roots back to the 1922 founding of the American Appli- ing shares, that can depress over- before returning to major home appli- ance Company — and parts of me go back further than that. Electron all stock prices and lead to more ances. In the 1950s, I acquired refrigera- tubes for radios were an early product, and I later made military ­withdrawals — causing more tor, air conditioning and kitchen-range radar systems, among other things. I bought Amana Refrigeration forced selling. Ironically, fund businesses. I acquired Maytag in 2006. in 1965 and made microwave ovens. I’m now the product of a 2020 merger with United Technologies. Based in Waltham, Massachu- managers can end up doing what Today, based in Benton Harbor, Michigan, setts, and recently valued around $135 billion, I have four main divi- they’d least like to do during a I boast roughly $20 billion in annual sales sions: Collins Aerospace Systems, Pratt & Whitney, an “Intelligence market downturn: selling stocks and employ around 78,000 workers. My & Space” business and a “Missiles & Defense” business. Who am I? instead of buying more shares of brands include KitchenAid, Maytag, Hotpoint, (Answer: Raytheon Technologies) lower-priced stocks. JennAir, Amana and Yummly. Who am I? Want to Invest? Email us at [email protected], and we’ll Want more information about stocks? send you some tips to start investing. Sorry, we can’t provide Think you know the answer? We’ll announce it in next week’s edition. Send us an email to [email protected]. ­individual financial advice. © 2021 The Motley Fool/Dist. by Andrews McMeel Syndication 6/17