In our last few blogs, we talked about the stock prices going down. We also spent a good deal of time discussing how a patient investor can leverage this to their long-term advantage. Today, we’re going to look at the “why”. Namely, we’ll try to answer the two main questions on everyone’s mind:
“Why is this happening?”
We also have some interesting insights from the experts over at the annual WEF meeting in Davos. The conference still hasn’t finished (they’ve still got two whole days to go), but there are plenty of interesting bits of info to discuss. Oh, and if you want to hear our take on the situation and see what we’re doing with our portfolio make sure to watch the video until the end!
We’d like to preface this by saying that, yes, all of this can be pretty scary, especially if you’re new to the stock market. Even some of the more seasoned investors out there are getting worried because this isn’t just your average, run-of-the-mill market correction. But the reality of the situation is that this sort of thing is unavoidable. It was all but guaranteed to happen once the lockdowns got extended. And what we’re seeing right now is “just the beginning”.
However, we’d like to remind you that this is not the time to panic. The stock market is not “dead”. It’s not “over”. Unfortunately, many investors believe they’d be better off if they just pulled out of their positions now. And if you honestly believe this, you’re free to follow their example, “cut your losses”, and close this video. After all, we are not financial advisors – we’re not here to give you financial advice or tell you what to do with your hard-earned cash. We’re just here to share our opinions and give you an alternative look at the situation. But we’re also not here to spread negativity. So, if you are convinced that pulling out of your positions is the correct move for you, please close this video now.
Oh, you’re still here?
Let’s get back to it.
So, yes, it’s going to be shaky, and, yes, it’s going to be volatile. But if you’re disciplined, patient and ready to play your hand smart, you can absolutely leverage this situation to your advantage. We’re not asking you to “believe us” here; we’re simply restating what the experts over at Davos are pointing out. The current situation presents a unique, unprecedented opportunity for all disciplined long-term investors.
Why are the markets acting up?
“The financial system will adapt, it always does. The markets will correct. We’ve had a time of enormous ebullience in the markets – low interest rates & very high growth rates, and now it’s changing. You can’t go on forever as it was. So, now it’s slowing down a bit. I don’t think it is a calamitous situation. Clearly, the growth market right now is not great, and I would say interest rates are going to come up for a while.”
David Rubenstein, co-founder & co-chairman of the Carlyle Group.
So, let’s take a look at why this is happening. Basically, we’ve been through a lot. The economy has been through a lot. The market is basically guaranteed to suffer from it. We’ve had:
- The lockdowns (we have a dedicated blog about this, link in the description)
- The Ukraine war situation
- The Interest rates are going up again
So, even though you have companies reporting great results without missing a beat (Tesla comes to mind here), the numbers on the stock market are still going down. And, naturally, you have a lot of people panic selling. But you know us – we’re long term investors. Meaning that we don’t let the short term prospects scare us.
And, if you look at what’s happening over at Davos, what people are saying, you will notice a similar trend.
For example, David Rubenstein believes that this presents an excellent opportunity for the long term players to grab some “really good bargains”.
But has the market bottomed out yet? If you’re one of those people waiting for the prices to hit rock bottom, is it “your time” yet? Well, here’s what Mr Rubenstein thinks:
“Depends. If you own a lot of these assets and they’ve gone down, you’re not so optimistic.”
So far, so good. We can already tell this just by looking at the state of the market right now. There have been massive sell-offs across virtually all sectors for a while now.
“But if you don’t own those assets and you now have some fresh capital to invest… It’s a lot better now than it was a while ago, cause prices are a lot lower. If you own the assets, the ones you own might not be worth as much, but you don’t have to sell those assets at those prices.”
And this, folks, this right here is the key. The crux of long term investing. Because, yes, this is a unique situation, but it’s not like long term investors haven’t faced price drops before, right? We’ve seen similar situations play out on a smaller scale year after year. The fundamentals of a company are still good, but valuation drops. And what do people do? They panic sell out of their positions. And by doing so, they break the fundamental rule of making money on the stock market.
Remember – when you invest, you’re looking to buy low and sell high. But when selloffs like these happen, people are doing the exact opposite – they’re buying high and selling low.
And, of course, we’re not happy that we’re down on our positions. We have a well-diversified portfolio, and we own a lot of stocks. And everything is down big time. And looking at a huge table painted almost exclusively in red is not exactly what we’d call “encouraging”. We’re not happy with this. But things are what they are. We can’t do anything to change this, and we’re not about to sell at a loss.
Here, we try to adhere to Warren Buffett’s principle: “our favourite holding period is forever.”
So, unless the fundamentals have changed drastically or the company faces some impossible problem, we’re committed to holding for the long term.
Instead, what we see here is a buying opportunity. Or, like Rubenstein puts it:
“Right now, people are going to make a lot of money buying at these prices, I believe, because prices are pretty low now relative to where they’ve been.”
Essentially, it’s not the markets; it’s the investors.
So, is now the time to pull all stops and go “ALL IN”?
David Rubenstein assumes that the prices might drop further, and, well, that’s about as close to an accurate prediction you can get with the stock market. The prices could always drop further. They could also stop here or go up. So, no, we do not believe that it’s time to pull all stops and go ALL IN.
Instead, we will do what we’ve always done and stick to our long term strategy.
Here, we believe that one of the best ways to capitalise on the volatility is to buy in increments. When the stock drops, we add a bit more to our positions, and then we wait for the next shift. If it falls more, we add more. And because we’re not looking to sell in the short term, we’re not hurt by further drops. But, of course, this strategy only works well if the fundamentals are solid. There’s actually a really in-depth video about this here on our channel, and if you haven’t seen it, we highly advise you to pause right now and go check it out. It’s really packed with great info, and it explains our approach to buying in detail.
Is it recession time yet?
Brian Moynihan, CEO of Bank of America, doesn’t believe that we’re going to enter a recession at least for the next couple of years. And, despite the horrible numbers on the market, most economists actually agree the economy is much more likely to continue growing in 2022 and 2023.
“The balances continue to be stable and continue to grow year-over-year for the broad base of consumers. More importantly, the spending levels in May through the first few weeks are up 10% of the last May. And that is not as high as it would otherwise be, because, last May, people paid taxes, so it actually is a bigger base to grow from. So, year-to-date they’re up 17%.”
There has been a lot of back-and-forth discussion about the stimulus checks that were given out during the lockdowns. So, let’s see what Brian Moynihan, CEO of Bank of America, has to say about this.
“In the balances of our customers, they [the customers] have more money. In April, their balances grew over March. In March, they grew over all the way back to mid last year. So, the notion that people are spending the stimulus down isn’t happening yet. It may happen, but it hasn’t happened yet.”
So, basically, what he’s saying is that the vast majority of people still haven’t spent those checks.
And, yes, the balances do go down during May, but that’s because people pay taxes in April, which makes the balances go down.
“That’s a normal pattern year-to-year. People will over read that and not understand that every year this quarter, because during the month of April everybody sends a bunch of money to the government. And the government does a bunch of good things with it. But that’s what’s happening.”
According to Mr Moynihan, Bank of America is seeing an actual increase in the amount of savings year-over-year.
“This April to last April, it’s up 8%. This May to last May, it’s still up 8%.”
Mortgages, Real Estate & the Economy
Mortgages have slowed down. That’s a fact. However, there’s something that most people are missing.
What people have to realise about mortgages is all the fixed-rate mortgages, which are the dominant, dominant part of them, don’t change rates because rates go up.
Now, about the other big difference between now and 2007, most lenders have gotten rid of the adjustable-rate mortgages.
Most people now that are in a home have a fixed-rate mortgage
So, essentially, we shouldn’t expect a repeat of what happened back then. What Moynihan is saying essentially is that no matter what happens with interest rates in the future, people are going to remain locked into their current rate.
Additionally, we’ve got another difference here. Wages are also going up. And they’re generally going up faster than mortgage rates are going up. So essentially, most people should still be able to keep with their payments.
“The house purchases are still going through”
You also need to remember that real estate prices have been going up at a ridiculous pace over the last few years, which is simply unsustainable. So this has to slow down eventually, and we’re probably pretty close to the tipping point where things start normalising.
And that’s the real main takeaway here – as long as people have a solid income, as long as they can still afford to cover their expenses, things shouldn’t deteriorate by that much. This is also why we keep going on and on about financial freedom and financial independence. The sooner you break away from the paycheck-to-paycheck lifestyle, the better. Once you really become the captain of the ship, your situation changes completely.
The Economy & The media
Now, the elephant in the room. The economy.
Everyone has an opinion about the economy, and everyone obviously thinks they’re correct because, well, that’s what it looks like from where they stand. However, the best (and most informed) people are usually the ones in charge. The CEOs and execs of the major banks. And when we’re talking about the States, the Bank of America is one of the top four. So, here’s what Moynihan has to say about the financial health of the average (American) consumer.
“Our economists said, Friday, there’s a 1/3rd chance of recession.”
25-30% chance of recession?!? Now THAT sounds scary, right? But this was just what you see quoted over the news and most major publications. So now, let’s see the entire thing because he’s got a bit more to say on the subject:
“Those numbers get overquoted. If you were to ask them in the middle of ’15-’18 they would’ve said there’s a 15-20% chance of recession. But nobody had it on their mind.”
Basically, the economists were expecting a recession even back then. But it wasn’t the “trendy” thing to talk about. It wasn’t something that even crossed the average consumer’s mind. So, naturally, you didn’t hear anything about that.
Because here’s the thing about economists (and all data analysts, really) – their job is to draw conclusions based on the raw data. On “the numbers”. When the numbers aren’t looking great, their conclusions will also be pretty grim. Coincidentally, this is also why we don’t generally like analysts.
But what we know about investing is that there’s a lot more to it than just the raw numbers. Because if all we really cared about were the numbers, nobody would be investing in most tech stocks, for example. There’s a lot more going on than “just numbers”.
“The reality is that it’s moved up marginally. It’s moved up because the government has to slow down and take on inflation. Inflation wasn’t transitory last fall, and that’s what everybody was figuring out. Now, they’ve gotta move fast.”
And they’re moving at an unprecedentedly fast rate. And the question is:
“Can they slow it down without tipping it over? And that’s what the debate is about.”
The debate is between the people who expect it to tip over and those who say it’ll be fine. So, the final verdict from the analysts over at Bank of America is this:
“Our team believes we’ll grow this year and next year. And, by the way, if you look at all the blue-chip economists, only one out of forty economists has a negative number this year and nobody has one next year.”
Basically, the vast majority of these economists believe that the economy will grow in 2022 and 2023. He also goes on to point out what we mentioned at the start of the video:
“And, if you look at all the big firms, none of them have the negative quarter. So the probability is rising, the fear is going up, but the reality is there’s nobody really saying, “There will be a recession in 2022 & 2023.”
Yeah, the news outlets like to focus on the sensationalism. And, basically, this is the sensational stuff. This is the news: “Economists say 20%-30% chance of a recession”. But that’s not the whole picture.
“Be fearful when others are greedy, and greedy when others are fearful.”
And, if anything, this is the real takeaway here, folks – “ALWAYS look at the bigger picture.”
You always want to look at the bigger picture. If you’re investing, starting a business, planning out your career, or setting up your budget. The bigger picture with all the details is what matters.
And our conclusion here is this:
We’re not pulling out of our positions. We’re using this situation as an opportunity to incrementally add more stocks for cheap.
The portfolios might be going down, and things might be all in the red, but we don’t believe stuff is nearly as bad as you think. As long term investors, we plan to capitalise on this. But, again, this is our approach. It’s how our strategy works. So we’ll be sticking to that.
Now, if you enjoyed this blog and you’d like to learn more about our approach to the stock market and the investing strategies that we use here, you will want to check out our Private Investing Group. There we host a lot of exclusive content, courses, discussions, and all-in-all, a ton of value for investors of all levels (links in the description below!).
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You can also signup to our newsletter for updates. Check out also this related post on “4 strategy to value investment; Monsnish Pabrai“. And that’s all we’ve got for today, folks.
Thank you all for watching, and until next time!
Recommended books for further reading:
- Intelligent Investor: The Definitive Book on Value Investing – A Book of Practical Counsel
- Shares Made Simple: A beginner’s guide to the stock market
- Smarter Investing: Simpler Decisions for Better Results
- How to Make Money in Stocks: A Winning System In Good Times And Bad
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
If you are looking to open an investment account, follow these links below:
- Passive income
- Silver & Gold coins
- Interactive Brokers
(‘68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)