Is It Time To Pull Out Of The Stock Market For Good? (Cathie Wood on Bubbles, Innovations & Creative destruction)
Spoiler – no, it isn’t.
Why are people moving their money out of the Stock Market and stockpiling cash? Why is there so much bubble talk all over the place? Is it time to pull out of stocks for good? What does Cathie Wood have to say about all that?
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Hello everyone, and welcome back to investing with Antoaneta! Today, I want to talk about this new trend of investors pulling out of positions and moving towards cash. I’m not talking about isolated cases or weird headlines. There’s actually more cash held today in money market funds than in the great financial crisis back in 2008.
And what does that mean?
That everyone is worried about a bubble, of course.
Recently, we’ve had two major bubble situations. One in the year 2000 and one in 2008:
- 2000 – Tech bubble. Many people lost a lot of money, and many of them just gave up on the market altogether.
- 2008 – Housing bubble. Same thing, just with the real estate market.
Maybe you weren’t actively invested in these fields at the time it happened. Or, perhaps, you weren’t even interested in investing at all back then. For example, I wasn’t financially affected by the tech bubble because I still had not started my investing career. I was still trying to build up my very first business, so all of my time, energy, and money went into it. But that doesn’t mean I should just completely ignore what happened. Because, for all I know, it might happen again. (Oh, and also, these events are pretty interesting, and you know me – I don’t like passing up opportunities to learn new stuff).
So, people are looking for signs of a potential Stock Market bubble for 2021. A lot of investors are worried (even some of the big names out there). People are pulling their money from the market and stockpiling cash. Are they right?
Well, I can’t tell you for sure, of course, because if you’ve been paying attention to my blogs, you already know that nobody can accurately predict the Stock Market. However, I don’t believe that it’s as bad as they think. And neither does Cathie Wood. Actually, she says that this is not a bubble situation at all. She thinks that the market justifies the current price levels.
Basically, Cathie believes that what we see today is just the result of what happened twenty-plus years ago. When the digital tech stuff really took off, things started changing drastically.
Back then, businesses weren’t nearly as digitalized as they are today. The internet was much simpler, and the tech wasn’t really at a place where everyone would walk around with powerful computers that fit in their pockets (the first iPhone, for example, came out in 2007). We’ve come a really, really long way in a very short time-frame.
Cathie thinks that investors called it way too early, which is why the tech bubble collapsed back in 2000.
But today, we do have the technology that was lacking back in 2000. She believes that we will see a lot more businesses like Amazon that just keep growing year after year. If we can reasonably expect something like that, then the prices we’re currently seeing in the Stock Market are 100% justified.
Tech Innovations and Creative Destruction
Cathie also has a warning for institutional investors:
“What they should be worried about is not our [innovation-based] strategies, but about their own strategies. Because the other side of disruptive innovation is creative destruction.”
Okay, and what’s this “creative destruction” that she’s talking about? Well, here are two examples of two big businesses of the past that failed to adapt and went “poof” as a result of creative destruction.
- Blockbuster – movie & game rental giant back in the day. What happened to them? Their business model simply couldn’t stand up to the new tech that came out. Why would the average person go out and rent physical copies of movies and games when they can just stream them on-demand without leaving the comfort of their homes? So, the innovative model of Netflix led to creative destruction for businesses like Blockbuster.
- Toys-R-us – another business that was pretty much everywhere back in the day is now filing for bankruptcy. They had a ton of physical stores all over the US and were pretty much the go-to place to buy toys for your children. But then, Amazon happened. Why go out to the store when you can order whichever toy you like and have it ordered directly to your doorstep?
Cathie believes that, soon, we’ll see this play out once again, but on a much bigger scale.
“When we’re talking about the S&P 500”, she says, “we think that creative destruction is going to impact nearly 50% of the entire index.”
Cathie is all about looking at the bigger picture and planning for the future. Just because your business model is doing great with today’s technology doesn’t guarantee that it will be able to adapt to the new innovations.
The “dangers” of innovation
Innovation is great for the end-users, of course, but it can really hurt businesses. Woods believes that half of the entire S&P 500 will be negatively impacted by the new innovations. And I can see her point – a relatively small but well-implemented innovation could change the entire playing field overnight.
The tech field changes really quickly, and if big, well-established businesses have one major flaw, it’s their inability to adapt. If your entire business model is based around the currently available tech, it would be pretty challenging to adapt to a new infrastructure. Add to that the fact that many big-wig execs and managers don’t like changing things if they work (because they might not work as well after the change), and you’ve got a recipe for disaster on your hands.
And please don’t get me wrong here – I’m not saying that they’re all just “bad at their jobs”. These companies are the big players for a reason, and I’m sure that the management teams understand the risks. But, here’s the thing – the bigger the organization, the more people you need to convince to get things moving. One of the most significant risks to their business is posed by their own “greatness”. If you think of it like that, it’s kind of ironic, isn’t it?
They’ve got so much money, and they’ve got a ton of shareholders and managers who all have a say in the matter. But that same thing could easily spell their downfall because getting a (usually pretty drastic) change becomes progressively harder the more people you need to convince.
The value trap
And why the “human” factor is so important for long-term success on the Stock Market
Have you ever seen a stock that seems like it’s going for a fantastic price, with low price-to-book value, and pays an amazing dividend? If you’re just looking at the numbers, it’s an excellent company all-around. But a lot of these stocks might not do well in the future.
Cathie believes that most of the high dividend yield companies should focus on reinvesting in the business and innovating. But, we are just investors – we can’t really tell the management what to do.
So, instead of worrying about it, we should just take our money elsewhere. Like Cathie says – invest in the companies that are doing the disruption, not in the ones that will be disrupted.
Of course, institutional investors really like their traditional value-type stocks. This strategy has proven its effectiveness year after year, and they use it because it “just works”. However, they don’t take the human factor into consideration. They just look at the numbers. Basically, this strategy can be summed up with “If the numbers are right, then it’s okay to invest”.
But Cathie disapproves.
“The market right now is highly algorithm-driven. If an algorithm is given just two variables, it is going to make a lot of mistakes. If the variables are “price to book” and “dividend yield”, they’re going to be very wrong.”
This is because the companies that can consistently deliver good results by these metrics are generally the type of monolithic business we just talked about. They’ve figured out what works, and they just keep doing more of that because it makes them good money for the time being. They’re most likely not overly invested in innovation because innovation is uncertain. And nobody on the market likes uncertainty.
Cathie specifically warns about:
- Retail – At the moment, online retail makes up about 20% of total retail sales. But it’s just getting started. Younger people are a lot more comfortable with the notion of doing their shopping online, and a lot of them are just now starting to acquire purchasing power.
- Financial Services – digital wallets and crypto are the big dangers here. Every financial institution or service that fails to adapt will get hit really hard by the new innovations.
- Energy Sector – EVs and green & renewable energy sources are the future. There’s really no debate here. And, yes, there is a ton of money in the energy sector. Money invested in companies that are not innovating. These companies are going to get disrupted really, really hard once the new tech really takes off. And that’s just a matter of time, really.
So, in closing, there might be a bubble after all. Just not the type of bubble everyone is looking out for.
- Look out for value traps.
- The numbers are important, but they are not everything.
- Never disregard the disruptive potential of innovation.
- It’s always better to put your money with the companies doing the disruption (Tesla, for example).
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Thank you for watching, and I’ll see you all next time!
Recommended books for further reading:
- Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
- The Barefoot Investor: The Only Money Guide You’ll Ever Need
- Investing Demystified: How to create the best investment portfolio whatever your risk level
- The Five Rules Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market
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