After huge swings gripped the stock market on the announcement of the effectiveness of Pfizer’s vaccine, investors saw certain stocks soar while other stocks (like those with the WFH theme) popped like a defused balloon.
In this episode, Dave and Andrew discuss the mindset needed to invest during a time of great market volatility.
A few key concepts include:
- How the market prices on the future rather than the past
- The interesting behavior of today’s frothy market
- Why the margin of safety in relation to price paid is so important
For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com.
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All right, folks, we’ll welcome you to the Investing for Beginners podcast. This is episode 178 tonight. Andrew and I are going to talk about a new, interesting subject. We’re going to talk about how to trade the vaccine of volatility. Last week, early in the week, on Monday, we had some great news. We had a vaccine announced from Pfizer that could help with COVID. And because of that, the markets went nuts. And I think there was a huge, I guess, lack of a better word, euphoria surrounding the markets, and probably me personally, and everything felt great. So there was a lot of volatility that week, though. So Andrew and I wanted to talk a little bit about how you could work some of that to your magic. So I’m going to turn it over to my friend, Andrew, and we’re going to go ahead and have a conversation.
Yeah, sounds good. I think that was a good way to kind of set the table watch by the time this goes live next week, it’s going to be old news, right? It’s not even; it won’t even qualify to be fake news. It’s just going to be old news.
Right? Exactly. So, the way I, you know, I’m getting a stock, that’s coming into my head right now, and it’s, it’s very fresh for me because they released our names tonight. And it’s not the stock you think I’m going to talk about; it’s a different one. This was my pick for November. And ever since I picked them in November, they’ve gone pretty much straight up. It’s been nice they’ve they were up 12% up until today. And then they released earnings. And then I look and the, in the pre-market third down like 10%. So I’ll still be up on the pig, but I think it’s good; it’s a good illustration. And you know, you mentioned Disney too, as a good illustration of just the way that the volatility is kind of working both ways right now. And so it’s like forget about Monday, which was just a crazy event, all on its own, pretty much this whole quarter for the last, at least two months ever since people started buzzing about the election volatility has been off the charts in the sense that you’ll have these huge moves up or down from earnings.
And if you’re a more fundamental Backwards looking historical based investor, it’s going to be confusing to observe. And so I’m hoping by talking through some of those situations, we can provide context and some clarity, so you can figure out what’s going on when you see these big moves in your portfolio.
Yeah. I, that’s a great way to put it in; I admit, I thought you were going to talk about another company. So I was a little surprised about busy. Then I’ll talk about what happened with Disney. Well, Disney. Everybody probably does know, but after the market closed, Disney announced their earnings for the third quarter, I believe it was. And they came in air quote, better than projected and aftermarket, the company was up, I think almost 8%. I think it’s slowed down now too. It’s only up 4%.
And the basic gist was that the company is still lost money for the quarter, which means that I believe they will probably lose money for the year. And so that’s kind of a big deal. This was the biggest loss that Disney has had since 1991, I read today. So that was another little interesting tidbit. Of course, most of this is a direct result of the COVID pandemic and the parks, as well as the movies, all being shut down. And so those are two of Disney’s bigger revenue sources. And, of course, that’s hitting their bottom line quite hard, understandably. And it was, I was kind of talking to Andrew before we came on the air. And one of the things that I was remarking about was the fact that people were excited about the fact that keep in mind Disney lost money. They were lost money for the quarter, but people were excited because it didn’t lose as much as they thought it would.
So I found that kind of entertaining. Some other good news that did come out from the results was that Disney plus had increased to, I think it was 72 million subscribers, which was quite astounding in considering everything that’s been going on. It’s probably, maybe not as surprising, but needless to say, the Disney plus has done quite well. I heard on CNBC today that Reed Hastings, who runs Netflix, said that he was impressed. He thought that their subscriber growth was very impressive. So I thought that’s wow, that’s kind of high praise coming from him. So I thought that was kind of cool, but apparently, they also announced they didn’t catch this, but Andrew, who to be into it, also announced that they were cutting their dividends. So they would not be paying a dividend for this year.
So that was kind of big news as well. So COVID has impacted them big time, but here’s the entertaining, not entertaining, but here’s the, I guess, challenging part of being an investor in the stock market. So we had the vaccine news on Monday, everybody was going crazy. You could just feel the euphoria across the country. It just, everybody was excited. You felt like, you know, a black cloud had been lifted over over the country. So we just come off the election. Over the weekend, most of the news sources had announced that Biden would be the winner of the presidential election. Without getting into all the politics of everything, there was some excitement about that. And then Monday we turn around, and we have the vaccine news before the markets opened that day, and everything went nuts.
It just all went up straight up. And I believe Disney finished the day eight or nine, eight to 10% up. Berkshire Hathaway, a company that I own, was almost 12% up for the day. Almost everything except, of course, Wells Fargo was up, but that’s another conference. That’s another conversation. But I remember Andrew and I, and Andy, the other gentleman that comes on the podcast with us, we’re all texting each other back and forth throughout the day going, do you see this? Can you believe that? I mean, we were all super excited. It was just; it was nuts. The next day everything went back down, not as much, but still, Disney was down, I think 3% for the day. And then, a few days later, it was down another couple percent. Today, it was down a little bit for the day, but then you got all this news about the earnings, and now it’s up again. So there are just wide swings in volatility and, if it could make your head spin a little bit, you think, wow, this is awesome. Investing is easy. And then the next day, Oh, wow, this is hard. And it’s, it’s just, it’s all over the place. So it’s really, it’s really hard to figure out. So Andrew, what are your thoughts about the volatility we’ve seen over the last couple of days?
I can; I can very, very much imagine how stressful it would be to try to time all of it. Look at the cruise lines and the airlines, as an example; it’s A up like 30% for that day. I don’t know how high they went up that day, but I know it’s just a constant roller coaster of, Oh, things are looking good with COVID; we’re up 15%. Oh. You know, by the way, things haven’t changed. And what’s funny to me about the cruise lines, in particular, is they’ll get a big piece of news. Like I remember one day, the CDC said, okay, they’re going to out the no sale, another three months and the stock, none of them moved. It was just so funny to me that I felt like that was disastrous news. It must have been expected because it didn’t move the price much, but then you’ll have another day where, Oh, it’s just, you know, another day, just like any other, and the stock will crash down 10, 10, 12%. And so you’ll again see these huge moves for what seems like no logical reason.
And I’ll admit it does seem a bit backward from what I’m used to in the sense that in most markets, from what I’ve observed, it seems to me that you’ll have stocks that will crash a lot, you know, like maybe like a 5% move or 6% move, whatever that, that would be a pretty, pretty big crash in, in normal circumstances. And then it’s kind of followed by slow and steady gains up. So let’s say you have a normal volatility cycle for a stock where there’s an overreaction. When people realize that not much fundamentally changed with the business, the stock returns to where it was. And so if you look at any stock really, and there’s probably no more pronounced than it is today and then in this year. But if you look and you take these periods, you’ll see just wild swings, but in a range where it seems like, okay, some fundamentals are driving this where the stock’s going to trade at this price because of how much it can earn in earnings or cash flows, things like that.
But in the intermediate, you’ll have big swings up or down. And so my point with all of that is backward because we see big updates that are very steep right now. And then the down days seem a little less, they’re a little more muted, and it’s usually flipped from that. Again, being an investor, who’s looking at this situation and trying to figure out what to do. I think the worst thing you can try to do is try to predict or time, you know, what’s going to be the next big move. What’s give me the next great Monday that we had at the end of the day. You just need to step back and understand why the company is worth outside of, of where the volatility is. And so the, bring it back around to the stock I bought in November.
You know, I, I was excited when it went up, and it went up a little too fast for my tastes because I couldn’t; I have a policy where I don’t buy a stock until 24 hours after I recommend in the e-letter because I don’t want any sort of conflict of interest. And so I was; I was getting upset because the stock price was running up too much before I could lock in my position. Anyone else who got in, you know, I’m happy for you on that, but it went up, and then it went down, and now it’s around where I recommended it. And so when you look at the stocks in that way, if you, if you solely look at the stock because you want to see it, keep up with this volatility for the next week or month or a year, then you’re going to be disappointed when it goes down, or you’re going to get excited as it goes up, and then have your hopes dashed when it drops back down.
But when you come from the perspective of, Hey, by the way, I want it to hold this because I saw a trend or I saw an outlook for this company that was more than just next week. It was more than just because, you know, the discussion was, when will we get the vaccine? Now, the discussion is going to be, when are we going to be able to take it, or whenever we were able to distribute it to everybody so they can take it. After that, the discussion is going to be, when there, whenever we can get to a point where enough people take it, where it’s effective. And so that, that, that narrative will never end. But if you’re going to buy a stock and try to time, you’re going to run into all of the emotional swings that come with that volatility.
But if you buy a stock because you’re looking out three years, four years, five years, and you like, what’s going to happen to that business regardless of how the stock price moves next week, then that’s a much nicer place to be in. It’s great; that’s a much better headspace to be in. And it helps you almost laugh at the volatility. Like we are rather than feel this turning in your gut, these big dollar signs go up or down as you see.
Yeah. That’s great advice. And I agree with that a hundred percent because that comes back to the fundamentals that we’ve been talking about since we started the podcast, you think about Warren buffet, and he talks a lot about buying a stock that you couldn’t do anything with for three, five years. Imagine if you bought the company today, and then the stock market closed, and it would not reopen for another five years. Would you be okay owning that company five years from now? And if you aren’t happy owning it for five seconds, why would you own it for five years kind of thing. And I truly believe that. And I think that’s the way that you can help combat all the volatility that we’ve been seeing.
And I know enough about stock market history to know that when you start seeing swings like this, that usually indicates that there’s something else going on, and I’m not saying that the market’s going to crash or the market’s going to go straight up. It just means when there’s a lot of volatility, there just means there’s a lot of uncertainty. And if you think about everything that’s going on in the world right now, especially in the United States, we have the coming off an election and very contentious election, of course. And then we have the COVID hanging over everybody’s head and what will happen with that. And as Andrew was mentioning, there’s excitement because we have a vaccine, and it looks like it might be great potential, but there’s the issue of distributing it to getting everybody in. As Andrew said, getting everybody to take it so that it’s effective can help start to beat the virus.
And it’s not just for here in us; it’s around the world as well. And I know that some other companies are, I think, more Derna and another company announced their results today. And then I think there are a couple of other ones that are going to be announcing. So there’s going to be a lot more of this coming down the road here in the next, probably a couple of weeks to a couple of months, but then we all still have to go through everything that needs to be distributed and all the efforts with all of that. So there’s, there’s going to be a lot of ongoing volatility. And I know there was some, I guess, heartache or heartburn about some of the stocks that were being traded on Monday that were more COVID related. And in particular to that, that I remember one was zoom.
The zoom was down; I believe 20% for that day. And there were a lot of people, very upset about that. And as somebody, very astutely pointed out, the company was still like 240% up for the year. So it wasn’t a sign of panic. But I think people realized that maybe some of these companies when you’re thinking about investing, as Andrew was talking about thinking three, five years down the road, when you think about some of the companies that have benefited from, from what’s happened with COVID a perfect example, is somebody like a Kroger or a Walmart, they have benefited from this because of the strength of the grocery sector of their sales. They’ve been impacted because, for a while, they were one of the only places a lot of us could go. And so that benefited them greatly. And that’s why even the company said, Walmart was saying, Hey, look, these are great numbers, but don’t expect this, you know, this is not going to continue.
And my point with all that is that when we’re investing and buying these companies, we have to sometimes look beyond just the end of our nose, so to speak, and think about a little bit farther down the road. And how do we anticipate that that company’s going to be, and I feel for the people that are that invested in airlines and believe in the airlines because trying to invest in that, in that business is gotta be nerve-wracking because of the ups and downs that that industry has gone through even before COVID. And it’s, it’s just very volatile, and you got to have a strong stomach to play in that, in that field, for sure. And I don’t, so I don’t banks are boring, and I don’t mind investing in them, but they’re boring. So there’s, there’s generally not as much volatility in those.
So it helps me sleep a little bit better at night, but they’re also not going to make, you know, bazillions of dollars in a week either. So, I guess my point with all of this is that thinking about investing during times like this is always coming back to, what is your plan? What do you want to do? What are your goals, and what kinds of companies are you looking to buy that are not going to give you heartburn every time you look at it because it’s so upper. So down the euphoria that you feel on a day where everything is just going through the roof is amazing. It is. But then the depression that you can feel that we all remember back from March wasn’t that long ago, that things are crashing, and you feel like the world is ending.
Trying to keep it open-minded while keeping an even keel when you’re thinking about these things will help you in the long run. But I think it comes back to having a plan, working your plan, and kind of knowing why it is you’re buying the company that you’re buying. Because again, remember, we’re not just buying a little ticker or a little stock symbol on it, on an app, on the phone, we’re buying a company. And the results that that company produces is really what leads to the value of the company. Not what some talking head on TV says or what we see some school lines, tell us on, on, upon a piece of paper or on a computer screen. So I guess that’s my thought on that part of it,
Yeah. I’ll give a, An example, a tangible example of this. Going back to the stock I recommended in November, it was based on something that I saw developing over the longterm. And it’s not some big secret. I’ve talked about that before on the show, I’ve talked about that on the eLetter, there are multiple times, there is a big boom in residential real estate right now. And I believe it’s for bigger reasons than just because people are freaking out because I covet now whether that’s the truth or not is maybe where the debate starts, where the
Discrepancies and opinions happen. And then, you know, either that’s going to be a potential for gain because if not everybody believes in something, then they’ll PR they’re probably underpricing it. So either that’s the one thing or the other possibility, a very real possibility. I’m just completely wrong on it. And it was just a COVID thing. And that’s fine too. So, we have this, so if we want to look at it as a secular theme, not to say that every investment needs to have one, but it’s, it makes for a good illustration in it. It can be very relevant for certain companies. So we have this theme; we have low-interest record rates. We have personal balance sheets that are very, very well and a pretty healthy job market. If you look at the job report numbers, unemployment, temporary versus permanent, and the things that the economic data, you have, this, this, this thing that’s going on.
And so there’s going to be all of these sorts of effects that, that happened along the way, as, because as one industry booms, all the other industries that support that industry will also boom. Any of the suppliers vendors that are helping this industry think about builders, materials, and everything that feeds into that. And then on the other side of it, if you have residential, you have things that people need to buy after they become homeowners. So that’s about as close of a hit as I’ll give. And it’s not a company that hardly anybody on wall street even is looking at it. So I’m not too worried about giving another way, but that’s kind of the idea. And then when I look at the financials of this company in the very short term, they’ve had decent growth. They’ve had acquisitions that they’ve made to see the numbers and see those numbers play into their recent financials.
I know what the debt situation is. So I know that they’re not going to go out of, they’re not going to go into bankruptcy in the next three, four, or five years. So I know that that’s taken care of. I know that they’ve historically been able to earn a certain amount of profits. And I know that from the acquisitions that they made in 2017 and rolled into 2018, 2019, and they had an oxygen 2016, that helped them grow those profits. I know how much those grew. And I also know that the brands that they brought into their umbrella from those acquisitions and how those will help power growth, moving forward, knowing all those factors and knowing what those numbers are and knowing how to interpret it is how I come with my, my value, how I’m thinking about this company, how much I think it’s worth.
And so if the stock market goes down and the stock goes down in three months, I’m looking at it again. If I’m happy with what happens at their earnings, and if the stock has gone down, well, why not buy more? And so that’s the mindset that you have, but you can only arrive there. If you’ve done this number one, you need to make sure that the company is safe. It has a margin of safety emphasis on safety. So the business itself is safe. And then number two, we have grown with the business. So the business has shown that it can grow. And then we have looked into the future. You can see that there is growth that’s likely to happen on the horizon. In this particular case with this company, it’s the residential boom will help feed their growth.
And then the last piece of all of that is the margin of safety as it relates to how much you’re going to pay for it. So as long as you’re paying a fair price, based on how you measure, whether it’s worth based on those profit numbers, those growth numbers and their ability to maintain that growth, that’s how you come up with where you feel accompany should be. And that’s that, that again, puts you in the right headspace towards holding a company when the stock goes down and, or buying more of it when it goes down, as long as you’ve checked to make sure that your, your reasoning for buying is still there.
That’s a perfect illustration. And I agree with all those things. I think that’s the ideal way to think about investing in a company and having, I guess, a plan, and a thing that I have adopted over the last year or so is starting to create a diary. It’s not really like a physical diary. Basically, you just have a word document that I write a very short thesis on why I buy a company and then I save it on my computer. And then whenever I have questions about the company, or I start to have doubts, I just look back at that thesis and try to think about is the reason I bought this company at that time. Has that really fundamentally changed? Is there anything drastically different going on with the company now that would cause me to want to not own it anymore. And I guess I liken it to buying a guitar because all my guitars are kind of sacred to me. And if I’m going to sell them, there has to be a really darn good reason why I’m going to sell the guitar. And I guess I kind of feel the same about investing in
A company. And I’ll give you an example. I bought a, bought a company and I bought it, Oh gosh, it was around October of last year. And it’s a company that I had wondered for a long time. And I bought some and it immediately went down like literally the day after I bought it, it dropped in price and it continued to fall a little bit every day. And at one point It was down, I believe almost 15 to 20%, but every, and keep in mind during that time, there was no earnings reports. There was no news. It just was a matter of, it was an industry that people didn’t look highly upon. And the person running the company, they kind of felt like was over the Hill. And there was just a lot of negativity around the company for really no real reason.
And then the next earnings report came out and it was good. It wasn’t awesome, but it was good. And the stock went up a little bit and then COVID hit and it fell even more. And so I thought, well, you know, nothing has really changed. So I bought more of the company and brought my cost basis down for what I bought it from originally. And to me, everything is still was in good shape and flash forward to today almost a year later, ever after dropping almost 15 to 20%, at one point it’s now up almost eight or 9% since that point.
And my point with that being is that I could have panicked when I started seeing that the company was doing poorly in the stock market. But in my head, I was thinking that nothing has really changed. And I, I still believe in the company. I still believe in the people running the company and their business and what they’re trying to do. And I just felt like that this was something I needed to stick with. And I would remind myself of why I bought the company whenever I would look at it, all my stock ticker and think, Oh, geez, it’s down again. Oh, what am I doing here? But then I would, you know, think beyond the emotional part of seeing that negative number and seeing something in my head that was, it was more valuable than what was being a valued at, in the stock market today at that point.
So eventually it it’s, you know, it’s rebounded since then, and I feel good about the company going forward, and I think it will be ended up being a good investment for a long time. But my point with all that is, is that you’re going to get fed a lot of negativity and you’re going to get fed a lot of uncertainty and volatility and a lot of emotion. If you watch the news, if you go on social media, you’re going to get bombarded with that stuff. And I think you have to look no farther than the election to see the stirring of emotions that those things can bring on. And
My point with all that is that all the ideas that Andrew was talking about, some of the ideas that I’m talking about, those are things that can help you through the volatility as we are going to see going forward, we’re going to see more volatility. It’s just, it’s going to come. And it’s part of investing in a stock market. And really you have to think about, you have to keep in mind why it is you bought the company. Volatility is part of the game. And as long as you’re buying a company, that’s not going to go bankrupt. You’re going to do well in the long run. If you just stick with it and believe in what you’re doing and why you bought that company. And if you, if you’ve done the work and you understand the company, you will do well. And I think that’s really what it comes down to.
I think so too, I like to think about a stock I had, so I have a, a lumber stock and it was one of the better performers for me near the end of 2019. And from that time, until the COVID crash, it wiped out pretty much all the gains I had in that stock. And we’re talking about like two years of really good gains and then, you know, just wiping it out. And so looking back at it with hindsight, now you can look at that and say, well, you know, yeah, that was just the Kobe crash and we’ve recovered. And so, whatever, right. But there, there, there are some emotions that if you let those emotions creep into your mind, that they’re going to mess with, with the way that you look at your portfolio and as much as it’s good to hear and, and talk about it, it can feel that way where you’ll look at a stock and if you see it even flat, and if you’ve held it for years and you see zero gain, regardless of what it’s done over the past two, three, four years at a point of maximum volatility of maximum loss or wherever that is, you get a feeling in your gut where you think, man, I just wasted all my time with this investment, but that’s not the truth at all.
Because those same stocks that crashed down so hard, you often see them rebound up. And so some of them don’t rebound up. And so if you see a stock and it’s barreling down because the businesses deteriorated, those are the ones that you want to stay away from, from the onset. And so again, what a stock price is showing you, and whether it’s showing you in your portfolio does not telling you what the reality is in any given day, because however, the volatility is taking, you can put you in at a snapshot, but eventually like that great quote from Benjamin Graham, right? And in the short term, the stock market is a voting machine in the long term. It’s a weighing machine. So when you see a stock get beaten down way, way irrationally, because when, you know, it’s, it’s just not trading where it’s really worth. And so you see that negative volatility event, that’s just a voting machine.
Eventually it will go back to where it was on the way in the machines, why you’ll see those tend to tend to bounce up again. So I think if, if you’re, if you have that conviction and if you listen to what Dave is telling you about giving yourself reminders about why you buy a stock and constantly reminding yourself, I think, I think a journal or diaries is a fantastic way to do that. It helps you get past these negative thoughts and doubts that can come with when you see a stock that you own go down. And that’s really the key. I love the illustration of thinking of it like a precious guitar. Warren buffet has a similar thing. He says a punch card where you only have 20 punches. The reason for the, those ideas is that’s how you can really compound wealth in the best way.
And that’s the way that these stocks work. Cause you’ve seen it. I mean, who’s, who’s going to pick the next zoom. Who’s going to pick the next 10 bagger or the next 250% stock. I don’t know the, the reality of it is, is if you want to make money at this over the long term consistently reliably, you have to let those stocks do the work for you. And all along the way, it’s going to be a rough ride. There’s going to be a lot of volatility and that’s just the facts. And so if you’re always selling out at the lowest volatility, because you’re, you’re letting the voting and the emotions tell you what your, how you make up your mind about the stock, then it’s going to, you’re not going to get the kind of rewards that you should get from stocks, because it should feel like you’re selling your precious guitar to get rid of it. And the, it should feel like as long as the business, isn’t, isn’t really, it should, it should, it should feel like you’re selling your precious guitar and it should be something that you hold over the very long-term and it should be something you hold over volatility. And so doing that, I think is the best chance that the average investor has at having great returns in the stock market.
That was very, very well said.
All right, folks. Well, that is going to wrap up our conversation for this evening. I hope you enjoyed our conversation about trading volatility with the vaccine. So there’s a lot of stuff in there to unpack, and there’s a lot of things in there in our conversation that can definitely help you through these turbulent times. So please be mindful of all those and good luck with everything. So without any further ado, I’m going to go ahead and sign this off. You guys, go out there and invest with a margin of safety emphasis on the safety. Have a great week, and we’ll talk to you all next week.
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