Transcript
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler, talking about the world of money and investing. Now I did a video this week and I like to talk about the videos because it’s a great way to, well, number one have visuals from time to time, but I like just putting out things just when there’s market turmoil. That seems to be the best time to put out a video on investing because people are worried about what’s going on?
What’s Going on with the Market?
How do you put this in perspective? And, you know, I’ve done some videos on elections and election cycles and historically, and how markets are, you know, for years and years. Good grief going back to 2008, 2009. I was doing a ton of videos during that period of time, because everybody was so scared about the stock market. Like what’s going on, where’s it going to go? And you have to get perspective on how markets work and you know, when you own stocks, you own companies and you’re going to get the rights to the profits of the companies and how those prices can fluctuate based on new information coming in.
You know, what’s going on with the market? Not that I’m worried, but I was just kind of curious, what’s going on with the market. And, you know, it was interesting with some of the market of earlier in the week, you know, as we were, and of course we get these, this data on Thursday saying the GDP numbers are phenomenal. I mean, you know, what’s going on? You know, why would stocks go down with the GDP numbers that it was because the GDP numbers gross domestic product. That’s the output of the US it was pretty much expected that it was going to be good. So when it came in good, it was like, well, I mean, that’s what we expected to happen.
So, you know, not news. And then, you know, with the market down, when it goes down, you go, what is going on? And what do I do about it? Well, a lot of times, what I try to do is I coach people through this type of stuff, because it’s really easy to get just down and out about, Oh my gosh, as you know, it’s gone down, it’s going to keep going down. And we continue patterns that are in our mind. You know, if my general pattern of the stock market has been down, I continue that mentally thinking was going to keep going down. I mean, that’s just, you know, if the market’s been going up, I continue that in my mind and going, what’s going to keep going this direction. It’s going to keep going up.
And the markets don’t really have any patterns. So that’s just, it’s, we call it false patterning. We look for patterns that don’t really exist, and that’s just basically it. So I was looking around for articles about things, and I decided to, just for the fun of it, I would put a search phrase in, and it was like regret and stock market and downturn and regrets or something like that. And it just figured I’d see what came up. Well, a couple of articles came up as I was doing this search and I loved the headlines and I loved the content.
And one of the articles was on lessons from past market plunges and my single biggest regret, you know? And, what was his single biggest regret? This guy? Well, his regret was reacting to them, you know? So I thought, Hey, that’s a good one right there. Because that’s really what it gets down to is we have the market make big moves down. We want to react. We want to go into self-preservation mode. Oh my goodness. I gotta, you know, stop the bleeding. It’s going down. Well, it’s not like you’re really bleeding when you’re really bleeding. Yes. You better stop the bleeding because if you keep bleeding, you die. Well, you know what? Stock markets don’t continue. The flood doesn’t keep coming out. You know, they jumped back up pretty quickly.
And, you know, as I like to share from time to time, studies show that they jump up more, much more rapidly than you ever imagine. You know, if we go back and look back to the 1960s till now, you know, 96% of returns occurred in 0.9% of trading days. Well, how many days is that? Well, if you look at the number of trading days, there are in the year and the stock market, it works out to just like 2.3 days. So 2.3 days per year on average, give us all the return of the stock market historically. And it just seems mind boggling. How can that be? That’s huge. Well, that’s just the way it is.
Reacting to the Market Doesn’t Help
It is, you know, so this guy was just making the point. He says, you know, “My biggest thing was reacting to them.” He says it may be patronizing to be told that falling markets are a good thing because you can buy at bargain prices. But 10 years from now, you’ll marvel at the deals you got on stocks bought during a plunge. And you know, the, the reality of it is the vast majority of ten-year periods in all of history. I mean, you can only go back to the great depression and find one where there was no return. The vast majority of ten-year periods, you have a higher valuation on stocks 10 years later, and it’s not, you don’t have to wait 10 years. The vast majority, you know, you look at it and say, well, most of the time its markets recover from downturns in 111 days on average historically. You don’t even have to wait one year.
Most of the time when markets go down for markets to be at a higher price, 111 days, that’s it. That’s not much. So, you know, that was good and everything. And I commented on that nice thing. And I was just talking about how, you know, you may not necessarily want to go stick all your money in cash. And you know, when people don’t do that, they go and they stick their money and then cash. And they go, well, you know, I’ll get back in when things look better. And of course things look better. Markets go up so rapidly. You can’t get in on time. And the reason is because psychologically, think about this, stocks go down and they go down and then you go, and then you go, Oh man, I’ve got to get out. I’ve got to get out. This is crazy. I’ve got to get my stock, my money out of the stock market. I gotta get out. And then you get out and then, you know, the market goes up a little bit. Ooh, Oh man. Maybe it’s a good time to get back in because, well, you know, it looks like it’s starting to recover and then it goes down and you go, whew, boy, I’m glad I didn’t react. I’m glad I didn’t do anything. You know, when I saw stocks go up because, you know, man, I almost bought and then I would have bought and then it went down again and then it goes up a little bit and you go, Oh, well, no, no, no, you fool me last time. Not going to fool me again. And then the stocks go back down. Look at that. I stayed out. And then the stocks go way up.
And then you hear people say, well, it’s a sucker’s rally. You know, it’s a term. That means that only suckers will buy after the market goes back up and then it keeps going up. And then it goes down a little bit and you know, well, it, when it gets back down to where it was before, then I’ll get back in and then it goes up precipitously and you sit there and go, Oh no, what have I done? I’ve missed. And you know, this may happen over a period of years. I mean, I made it sound like it may be just a couple of days, but it could be a period of years until this kind of stuff happens. And this is why people miss out on the upturns. And that’s why market timing is so, so crazy because you have to be right twice. You have to be right when you get out and you gotta be right when you get back in.
Cash Isn’t Necessarily Safe
And you know, as he was saying, he didn’t didn’t know, well, people put money in cash and they think, well, this is safe. Well, you know, one of the things I pointed out in the videos is there was this article. Yeah. The UK government borrowing soars to record high during COVID pandemic. What’s going on here, UK government borrowing and the record high in the six months of the financial year. Then the financial year as extra spending needed to tackle COVID-19 pandemic pushed the public deficit further into the red. Now what did that have to do with anything? When you start to see this kind of borrowing in this kind of money flowing in, you can actually have, because of the government borrowing a great demand for cash, right?
So you have this great demand for cash, whatever cash is out there. And then you, all of a sudden, you can start to see interest rates, start to jump back up as time goes on, but here’s the bigger deal inflation when inflation kicks up, because all of a sudden the price of things actually starts to accelerate. And then all of a sudden you with your money in fixed income investments and some of your lock it enough for years, you know, in order to get higher interest rates or you’re locking it up and investment vehicles like annuities and insurance contracts that have borrowed or have lent money to people borrowing for multiple years.
You gotta think about it. When an insurance company invests in bonds, they’re typically not investing all their money. They’re not in treasury bills, which are really, really short term interest bearing notes. And they technically are sold at a discount, but they’re very, very low yielding because the money is in there for such a short period of time. No, what an insurance company is doing is buying longer-term bonds to get a little higher interest rate. Well, those interest rates that they got, you know, they basically have locked this money up for years.
You know, when, if all of a sudden we have this inflation and then all of a sudden with the inflation comes higher interest rates. Well, what happens to bond prices, bond prices go down, which is what the insurance company invested in.
Now, if we look at this whole picture here, you know, we could see where the devaluation of currency could significantly happen and you don’t know what’s on our, I’m not predicting anything. I don’t know when that’s going to happen, but I’m going to tell you that when you pull money out of the stock market and you stick it in fixed income investments, you are timing the market. You’re expecting that what you put the money in is going to do better than what you pulled it out of, which is a really scary proposition.
Yeah, you got to really, you really have to think twice when you do these types of things. Now, the other thing I talked about in the video was this article. They sold stocks and lived to regret it. Now this was a little bit of an older article, which makes it kind of interesting because it was written in 2006. Okay. So those of you that have followed market history over the past several years, kind of, you’d kind of know what’s been, you know, what happened in the market in 2000, late 2007 and 2008 and then early 2009, right? Big market down here, right? We’ll check this out. What happens in this particular case? This lady that they start off the article talking about, she bought 10,000 shares.
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One Woman’s Story
Just go, you know, put a couple of thousand dollars down. She put a amount of money down 10,000 shares buying Amazon stock. Yeah. Amazon at $16 a share that’s $160,000. I mean, that’s not, you know, not pocket change by any stretch of the imagination. Well, what happens is, you know, the stock drops. So she’s basically $16. It drops a what? 25% goes down to $12 a share. So you can imagine she’s thinking, What on earth have I done? Oh my gosh, this is crazy.
Probably hyperventilating, you know, putting the bag over her mouth. You can imagine the panic, you know, watching that much money, just dry up on you, you know?
So, you know, like bam, $40,000 out the window, right. So she goes and sells it nervous. And I made the point in the video. I said, well, let’s see, let’s an Amazon, you know, it’s over $3000 a share now. Right. You know, it was when she did this, it was $16. You can imagine $16, $3000, so you look at that and go, Oh my goodness. And before you go out there and buy individual stocks and think you’re going to hit the next Amazon or whatever, realize that what the media always does is they pick the real big winners to just really make their point about regret or greed or, you know, whatever they’re trying to get across.
So that is not the message that I’m trying to put out there, but the message is that this person, you know, sold stocks and she ended up regretting it. And reality is that’s what happens often is we’ll get rid of something and we’re just like, ah, just forget it, this isn’t gonna do anything. And what do we get rid of? We get rid of the thing that just did the worst in our portfolio in recent years or recent months or whatever. And then all of a sudden, you know, that is the thing that is just the thing that, you know, shoots up like crazy and value. It’s like in the late nineties, you know, the thing that everybody wanted to get rid of myself included, but I just said, No, I’m not going to do it, just because, you know, my academic training and some of the professors that I had studied under had convinced me that it was a really bad idea to do it.
I wanted to get rid of international small companies and value international, small value. And you know, that area of the market, you know, quadrupled in value over the next few years where large US stocks, you know, just did nothing. I mean, basically lost money for 12 years. So what happens is she gets nervous and gets out of it. And one of the things that’s interesting about some of these companies, we, we did a little study on just as an aside on some of these companies this week, we are looking at the S&P 500 and you’re going, Hey, you know, the S&P, if we look at the return, it’s one of the stronger areas of the market in the past years. And one of the things I’ve been talking about is how much of it is S&P 500, how much of its value is just based on a couple of companies.
We call them the FANGM stocks, you know, Facebook, Apple, Amazon, Netflix, Google, and Microsoft. And I actually said, “Hey, why don’t we run the numbers and look at the data. If we look at the return of the entire market, the S&P that part of the market, those give us confidence, but let’s just take the return of the stocks out.”
And you know, what happened? There was an 11% difference in return, 11% difference in return, removing them from the picture. It is huge.
And it is because they make up so much of the index. So literally, these companies, if they go the other direction and, you know, it’s just a matter of time, you know, stocks go if they win for a while, and then they don’t win. You could have a lot of American investors because most, most investors aren’t terribly well-diversified. They are diversified very poorly in fact, and they come out really, really sorry, and really hurt when those stocks actually dive in value.
Diversification Matters
So, you know, that’s, that’s one thing. So that was the aside, you know, just that it just happened to be one of the stocks that was talked about in this article. But the other part of the article that I wanted to share with you is this one, it says, while some market watchers are reluctant to declare the bowl has returned, the article says many investors have been eager to jump back in on the investing bandwagon.
They’re basically going, I, you know what, we’re, we’re reluctant to declare. Yeah, it’s a bull market, it’s back. But, you know, I don’t know. I don’t know what a lot of investors are like, yeah, man, let’s get back in the market.
I looked at well, why would they, why would they feel this way? Why don’t you look at some areas of the market? I just pulled up, you know, small value stocks, just as an example from 2002, 2002, 2003, this area of the market is up 66%, 66% for small value, US companies, 2004 of about 24%, 20 2005, 7% in 2006, another 21%. So for a combined average annual return from 2003, through that 2006 about, let’s see about 28%, almost 30% per year, 30% per year.
That’s huge, huge. So you can see why investors go. Well, you know, maybe it’s time to get back in, look at, look what the market’s been doing. Well, do you remember what happened in 2007? Okay, well, why do investors get such bad results because of this stuff? This is literally it right here and further on in the article Bank of America securities research, you know, and it ends up with Merrill Lynch. A couple of years later says the stock market is still a long way from irrational exuberance, still a long way.
Oh, we’ve got a way to go. And I don’t care how big these companies are, how well they’re known, I’m going to tell you something: they don’t have a clue who knew that what was coming was coming. I mean, it’s, obviously they obviously did not know it was coming. So when somebody tells you, and I hear it all the time, you know, in the investment people, these investment people, “Oh, well, you know, our research tells us this is going to happen. And this is where things are going and what we see going on.” And I just want to just scream and just go, you know, stick your fingers in your ear, go LA LA LA. They don’t have a clue. They sound really sophisticated.
They sound really like, they know what they’re doing. And you know, our dark valuations are looking good and, you know, price-to-earnings ratios are looking just fine and everything. You know, if we look at the book values as a company, if we look at the cash flows and we look at earnings estimates. They don’t have a clue. They don’t have a clue on the upside. They don’t have a clue on the downside. Just plug your ears. When these people tell you, no, here’s what you ought to do based on what just happened in the market or where the market is going. It is a waste of time, you know?
So market upturns and downturns, while they’re entertaining, I wouldn’t take action based on them because typically what you end up doing is destroying your investment portfolio and destroying your financial lives. I’m Paul Winkler and you’re listening to The Investor Coaching Show.
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