IFB192: Navigating An Impending Crash, Investing Your Emergency Fund

Welcome to the Investing for Beginners podcast. In today’s show we discuss:

  • How to navigate an impending stock market crash, and time in the market versus timing the market
  • Building your portfolio with a mix of value and growth stocks
  • A brief overview of commercial paper
  • Different ideas to invest your emergency funds

For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com


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Announcer (00:02):

I love this podcast because it crushes your dreams and getting rich quickly. They got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern with step-by-step premium investing guidance for beginners. Your path to financial freedom starts now

Dave (00:33):

All right, Folks, welcome to the Investing for Beginners podcast. Tonight, we have episode 192; we’re going to go back to our listener questions and read a few great ones that we got recently and do our little give and take and answer them. So I’m going to go ahead and read the first question. It’s a bit long, but there are some important parts here. So bear with me for a moment. So I have; Hi Andrew, I’m a new avid listener and a fan of your podcast because investing just seems smart. And I want to know everything. I’m in my early twenties and want to start that slow growth drip style. However, this sparked a conversation between my boyfriend and I seeing as, as the stock market is about to crash and inflation is soaring. He thinks it would be incredibly dumb to begin now because I wouldn’t put in enough initially to survive the crash with my means; I would be looking at investing between 50 to $150 a month.

Dave (01:26):

So my question for you is what would happen if I had $150 worth of a stock that went to zero and below, would it ever come back when the market slowly returns, or would that money be wasted? You’ve always mentioned that the stock market always returned stronger and that even people who invest in bad times come out ahead, do the froth in the market, but my boyfriend. So that’s only if enough is invested and not to lose the stock entirely. Do you think it is wise or stupid to begin investing now in the current economic state for slightly more detail, he said. A better idea would be investing in myself right now and increasing that active income assets or otherwise just saving the money since the liquid value slash stocks won’t have value in upcoming months as a young one with a 20 and $20 an hour full-time job and an apartment.

Dave (02:17):

So no assets. What do you recommend again? Thank you. Thank you. Big fan and huge respect. Mary Rose. Andrew, what do you think of her great question>.

Andrew (02:27):

Yeah, there’s a lot of parts of this flower to pick. So let’s just kind of step by step. I think it’s fantastic to be that age and be looking into investing first off. It’s a great place to start, and these are good questions to ask because as you start, it’s something we’re all thinking of. The first thing and I came across this when I first started in the market is the stock. The market’s always about to crash. That’s always what everybody says. And then once the stock market gets complacent as it did at the beginning of 2020,

Andrew (03:00):

And people stopped saying, it’s going to crash. Then it does crash. And so I’m telling you ever since I started back in 2012, I heard it in 2014, 2015, 2017, 2019, people will constantly say the stock. The market’s about to crash. Now, you know, we could be recording this, and the day after it comes out, the market could crash. But that the point of the matter is whether there’s always going to be a fear of a stock market crash, and there’s nothing you can do about that. So to start, you have to move past the fear of a crash. And so, to understand that, we need to understand what’s the worst-case scenario. That’s where I like, or the second part of the question comes in because you want to think of what happens during the crash. So maybe we break down the basics of stock real quick.

Andrew (03:58):

All you’re doing when you’re buying a stock is getting shares in that stock, which is part ownership. You’re getting equity into a company. And so that’s going to be different from other things like, you know, options and, and all the kind of exotic stuff you heard when it came with the whole game stop fiasco. We had a couple of months ago, or if you’re talking about trying to bet against the market or using leverage, all of those things are completely different. What I’m talking about here is buying stocks. And so the worst that you can lose when you buy a stock is for it to go worthless. And for that to happen, a lot of things have to go wrong. And though it does happen. It’s not very common. So for a stock to become worthless, that means a company goes bankrupt. So it does happen.

Andrew (04:47):

And you will see them often happen in groups like 2008, 2009. We saw the Lehman brothers WorldCom Washington Mutual, Bear Stearns. A lot of these big firms will all kind of go bankrupt together, but that’s not what happens over the life of the stock market. And if you look at a group of companies, it’s a very small fraction of them that do go bankrupt. And that’s usually the irresponsible ones. We need to be aware that, yes, any stock we buy, there is a chance that we lose all of our money because the business goes bankrupt, but you can’t; you can’t go below that. So there’s nothing that says, man, I got to put in $10,000 to have my stock come back from below zero; a stock will never go below zero. And so the worst that can go two is zero, but that’s very, very rare. And especially if you’re going to be cautious, it’s not something you generally have to worry about. So maybe I’ll pause there, and you let me know. What else should we cover about that before moving on, Dave?

Dave (06:00):

I think that covers that very, very well. I think it can’t go below zero; I think it is something that everybody needs to think about it and understand that you can’t lose more than you put in. When we’re talking about buying or selling stocks, you can’t lose more than you invest. So if you invest a hundred dollars, that is the total amount that you can lose. And I think for me, that helps me, I guess, feel a little bit better than I can only lose what I put in. And that just makes me feel a little bit better about that.

Andrew (06:36):

Yes. And so, you know, for, for the first stocks to come back and for the stock market as a whole to come back, it also doesn’t matter how much money you have. If Mary has $50 and Dave has a thousand dollars, and they’re both invested in the same stock, it doesn’t matter that Mary has 50 and Dave devas, a thousand, they’re going to earn the same percentage on that. So if the stock dropped 50% and then it rises in the next week by 10%, it doesn’t matter if you have more of that; it’s a percentage thing. So how much money you have doesn’t matter. So that’s why we try to encourage getting started as soon as you can because it’s those little pieces that you build like roads, and each little brick will get you closer to your goal. And each one grows over time, and it compounds on itself.

Andrew (07:33):

These little things grow and become bigger and bigger and expand like a balloon, and you just have to start early, and there’s no way of getting around that. So that’s kind of like the downsides to investing are yes, you will get stocks that crash. And what happens when stocks crash because people are scared and because people are afraid of losing their jobs, we’re afraid of economic recessions, but all of that stuff eventually passes. And it’s, we know, that eventually passes because it’s happened over and over again. I mean, 2000, 2007, 2008, 2009 1999, 2000 2001, 1987, you know, the 1960s, 1929. Right. We can go in March 2020. Yeah. To be a little less in the history books, pull me back. Thank you. So it happens all the time, and it’s not that good investors know when it’s going to happen, or good investors know when there’s a lot of inflation, or good investors know when it’s about to crash.

Andrew (08:39):

That’s not what it is. What it is is you are getting; you are staking your claim in businesses. And you’re saying; I want to be a part of businesses. The fact about business, just like the weather, is that it’s constantly changing. You’re going to have the spring and the fall, which are great times and maybe the coldest parts of winter, aren’t that great. It’s the same thing with the economy. It’s the same thing with the stock market. What you try to do when you play in the stock market, and then you kind of graduate into taking it seriously, is that you are trying to buy these stocks and be a part of these businesses over the very term. And so you’re looking through multiple cycles. We’re not looking at next fall. Next winter. We’re looking at ten years from now, 20 years from now.

Andrew (09:26):

And over that time, good businesses continue to grow. And that’s what will drive returns for you for, from the stock market. And that’s not, again, it’s not going to matter if you put in a little or a lot; you’re still going to earn the same percentage on it. What matters is if you start early, even small amounts can swell to huge amounts over long periods. I liked Andy’s example. One example he gave was, I think you could do a dollar a day or something. I think it was like $25 a month. And if you started doing that for 25 years and then just let it sit over like half a century or something that would turn into millions, something crazy, and it’s just small, small pieces grow. And those small pieces grow on themselves. Again, look at it as a tree, right?

Andrew (10:23):

A small little seed turns into a couple of branches, which turns into more, which turns into more, which turns into this big thing that bears a bunch of fruit. And that’s just the way that investing works is because of compound interest and because of things building on themselves. And so you want to start that early. You want to start that small, and you have to look past what’s potentially upcoming because you don’t know what the future holds, and it’s not going to have a bearing on your long-term results anyway.

Dave (10:51):

No, you’re exactly right. And I think one of the things that I want to encourage Mary Rose is that time in the market matters more than timing. And for any of us to try to air quote, time the market, it’s almost impossible. And you think about exactly what happened in March of 2020; who of us knew that that was going to happen, probably very, very few. And the few that did, we’re kind of lucky, and there’s just no way that you can predict something like that happening. I mean, you know, you see the memes recently, you know, who had a global pandemic for 2020 almost nobody. And so, to see what happened in March of 2020 is a very rare event. The way you get through those kinds of things is by investing in really good strong companies, and market volatility is not the same as losing everything.

Dave (11:54):

And there are going to be times where your companies are going to lose value. And a perfect example is Amazon; back in the two thousand.com bubble bursting the company, I believe I lost 94% in a market that dropped down to around $6 a share at some point in 2020, which is incomprehensible. When you think about the size and the magnitude of a company like Amazon now, but at that point, it dropped a lot, but it also was a bounce-back quite nicely. So I guess the point is that it matters more about the time in the market and the companies you’re buying and buying good companies. And basically, you’re not doing much. I think there’s this misperception that when you invest, you have to be doing things constantly. And when you look at some of the best investors in the history of investing, many of them didn’t do much.

Dave (12:52):

They would spend a lot of time thinking a lot of time learning and reading and studying, but actual buying and selling of companies. There. Wasn’t a lot of that. And you think about some of the heroes that Andrew and I have talked about time and time. Again, most of their gains come from a lot of inactivities, frankly. And when you buy a company like Coca-Cola, or, you know, it’s just about any company you can think of, anyone that does well for a long period generally stays in the market and doesn’t do a whole lot. And so by that, I mean that time in the market, consistently putting money in, if you have 50 to $150 a month, that is more than enough to start investing and finding a few really good companies and consistently adding to those positions, you will find is going to great, create great returns over a long period.

Dave (13:51):

And you’ll be shocked at how well those can do. And even when the company is not doing well, I’m going to give you a perfect example. So in March of 2020, I had bought a Berkshire Hathaway. And at the time, I had bought it at around $220 a share, and it proceeded after March to drop, it dropped to around 200, and then it fell to about 180. And I think at one point, it got down to $167 a share, but I kept buying it on the way down because it was a great company. And I think that it was a great investment. Keep in mind that why the price of the, of the company, is falling. Nothing about the performance of the company is changing. So this is one of the things we have to think about in the market; just because the price of Microsoft falls or Facebook falls doesn’t mean that its operations and performance have changed much.

Dave (14:51):

It’s just the perception or what Mr or Mrs market is doing in a market. They’re offering us up sales for or deals on companies that are still doing great. It’s just that the market has turned for whatever reason. And so now people are, as Andrew was saying, people were scared. And so they’re selling out of these companies, which drives the price down. Going back to Berkshire Hathaway, I kept buying it on the way down, which in turn lowered my costs for my investment. And then, lo and behold, things started to turn around, and a company started doing better and better. And now it’s trading around 250 $260 a share. So my investment improved immensely because now I was able to buy it out or, or price. And so my cost basis, which means the average that I pay for it, is lower than the price that it’s selling for in the market, which means my return is better.

Dave (15:49):

And that’s part of the magic of working with dollar cost. Averaging is it is you continue to buy something like that. It helps smooth out any sort of volatility that you may see in the price of the company. And so it’s more important to consistently invest and consistently put money in the market and try to find really good companies. And it doesn’t mean that they aren’t going to lose value in price. They will it is going to happen. I guarantee you that there is no time where it won’t happen, but it’s okay. That’s part of the game. And as long as you stay with it and be consistent and don’t lose faith, then it will, it will bounce back, and you’ll see even greater returns as the stocks bounce back because that’s how we win. And so I think the bottom line is all the things that Andrew was telling you are fantastic ideas. And I think just kind of stick to your guns, do what you think is right. And you think about the time in the market as opposed to timing the market. And I think you’ll do well.

Andrew (16:53):

A good way to get some perspective is to just look at the chart and try to zoom out on these charts. So whether you’re on Google Finance or Yahoo finance, you can look, and you can scroll through and look at how a stock has done in the past. And you’ll see, it’s not a straight line. I mean, if you like to look from month to month, instead of just looking at this, here’s what it did over for the years. It looks like it just went straight up. But if you zoom in and you look, there were a lot of bumps along the road, almost like the road of life, you know, there’s, there’s a lot of bumps to success, and it’s not a straight line, and that’s the same with the stock market, and it’s the same with the businesses underneath.

Andrew (17:33):

And so, yeah, you just have to be the long-term focus, and you got to understand that there’s going to be volatility. And like, as you said, Dave, as long as you’re invested in good businesses that are going to be around for a long time, then over time, their values well returned to where they should be, even if there’s a short term crash and things get out of whack for a little bit. So I also liked the part investing in yourself, increasing income and assets. And I don’t think it’s an either-or. I think it’s; I think it’s a, both a question of both. And I don’t think; I don’t think there needs to be an idea that I’m only going to invest in myself and my skills and career, or I’m only going to invest in the stock market. Having both of those at all times of your life is probably the most healthy thing you can do because success in either thing won’t happen overnight.

Andrew (18:28):

And so you just, you want to be doing things that, that are going to help you grow over the longterm. And so, you know, when it comes to money, it’s, it’s, it’s investing as you can and letting that grow as you can put more, but, but in the meantime, you just, you start to build those habits. You start to let the compounding star in within your portfolio; let those returns start to come in. That those businesses start to work for you, and you become a better investor too. And maybe you’ll still make some mistakes along the way, but if you start early, then you can make those mistakes and have a lot of time to recover from them too. And you can be a better investor down the road. So I guess some other thoughts think about when it comes to what to do with limited funds. Amen. That’s great advice.

Announcer (19:19):

What’s the best way to get started in the market—download Andrews ebook for free @stockmarketpdf.com.

Dave (19:27):

All right, let’s move on to the next question. Hi, Andrew. I’m a 20-year-old from Canada and started investing in the stock market last June, largely thanks to your podcast’s guidance. I have since then grown my portfolio to around $5,000 Canadian, and I’ve done quite well, despite not having a definite plan for allocating my money between growth and value. Right now, I have some positions started in solid dividend payers like TD bank Coca-Cola and Procter and gamble, and some growth stocks like square, Apple, and visa, and fairly tolerant to risk. And as a young investor, I am not sure whether I should be allocating more into growth companies to gain capital appreciation while it can take the risk, or if I should be starting positions and dividend payers to take full advantage of compound interest over a long time, the horizon is buying growth companies in the short term to then increase shares of dividend payers in the long-term a good strategy, or should I focus more on compounding growth companies while I can.

Dave (20:25):

I appreciate the time you take to answer this question. I have recommended your show to many of my friends who have also invested in investing, and now we continue to enjoy your content. Thanks from up North PISA. Andrew, what are your thoughts on Teeson’s Great question?

Andrew (20:41):

Yeah. Good question. And you know, some good-looking companies in there, square Apple visa Procter. You know, you can put labels to say, Hey, this company’s growth, this company’s value. You know, while maybe some of these might be kind of growth, the type names are not super expensive. So I wouldn’t consider, you know, I wouldn’t look at it at such an extreme, but this is something good to consider. So, you know, you have value companies, you have growth companies real quick. The concept of that is basically if you’re buying value companies, you’re buying companies that are a little bit cheaper growth companies tend to be more expensive, tend to be growing faster.

Andrew (21:20):

That’s why we call them growth companies. And so, you know, when we talk about cheap and expensive, we’re not talking about on the dollar basis, but concerning the money that they earn. Such a company like Apple might be a lot bigger and earn a lot more. Depending on how much that price is in the stock market, that’s what depends on how expensive or how cheap it is. It’s not; it’s not a total dollar amount, so you can go the way of balancing between value and growth. I’ve heard that that’s become a more popular approach these days. And you know, it’s called the barbell approach, and I’ve heard many people recommend it. And if you feel like that fits your temperament and your strategy, then definitely go ahead. Where I get concerned when it comes to growth stocks, many high-flying growth stocks, you know, the ones that you see jump up crazy amounts in shorts amounts of time.

Andrew (22:25):

Like Zoom or Peloton, or Airbnb, these kinds of companies are so detached from business fundamentals. So detached from these businesses’ actual profits are making the prices are just so extraordinarily high that they fall very, very fast. And so you can lose a lot of money quickly, and that can be very problematic. Now, the problem with picking good growth companies is yes; you will have many companies like Amazon, like your example, day from earlier, Amazon classic growth company lost like 80% or 95%, whatever it was in its share price in 2000 eventually recovered. And now is one of the most expensive, you know, one of the biggest market cap stocks in the market. The problem with that is that for every Amazon, there, there are like three or five other growth companies that completely disappear than just made people’s money evaporate.

Andrew (23:28):

So, you know, for every Microsoft, there was a Yahoo for every Google. There was an IBM for every Facebook; there was an AOL. It’s very tough to figure out which companies will be the great successful growth companies and which ones are not. And the price that you pay, the price for being wrong, is very high when you’re playing in the growth space. And the price for being wrong is not as high when you’re playing with value stocks, which is why it’s called a margin of safety. So, you know, if I, if I could try to paint a picture of, or maybe how it kind of looks like you don’t have to be a golfer to, to understand this, I hope, but, you know, let’s say hypothetically, I, I sliced my driver, and I ended up in the woods, hypothetically, of course, and you know, I have 150 yards to go to, to get to the green. Still, I have all these trees in front of me.

Andrew (24:26):

And maybe there’s like a little window where I could swing my golf club, hit the ball through, through like this little window pocket and the branches and score it to get on the green and have a nice, easy shot after that. Or I could take the very sensible, kind of low risk, just chip it out, put it, put it, put it somewhere really easy just to get it out of trouble, get it out of the way, and then take a normal shot from there. So I, I’m not a very good golfer, Dave, you know, this even on like a good day, if I’m trying to hit from like 150 under 60 yards half the time, I’m not going to make a good shot anyway. Like it’s not going to get that close to the green. So my upside isn’t that much higher from trying to take this impossible shot.

Andrew (25:16):

The downside to doing that is as much greater because there are branches all around you. You’re probably going to hit one if you’re just slightly off and you made a slight mistake, and that’s going just completely to derail you and derail your score the more you tried to do it. And so when I, when I try to look at balancing the risks between growth and value, I kind of look at it that way too. When I’m looking at buying companies for value, I’m not trying to pick the next Amazon or Google, or Facebook causes realistically; how many of us can say that? We know that it’s easy for us to say that after the fact is it’s, it’s much harder, to be honest, and humble and be like, you know, maybe I’m not that that appreciate, you know, I don’t have that kind of magic eight, whatever magic eight balls that tells me all the right answers all the time.

Andrew (26:07):

So what you, if you take that kind of a mentality instead, and you say, I don’t need the stocks I buy to be the next Amazon, I just need them to grow at a reasonable rate. You know, something that’s kind of maybe close to the economy or slightly better than the economy. And if they do that based on the price that I paid, I’m going to make nice returns, right? Whether it’s 10%, a year, 8% a year, whatever that is, those returns over time are going to grow. And they’re going to grow into my compound interest, which will roll like snow rolls down the Hill and accumulates on itself. And so, if you take that approach versus man, I got to get this stock selection perfect. And the stock is priced so expensively that it needs to execute like one of the best businesses in the world.

Andrew (26:58):

Otherwise, I’m going to lose my shirt, and that’s going to go down to 80, 90%. And if you’re trying to do that with every stock you buy, it’s going to be, you know, it’s, it’s not an easy road, and you either need to be one of the brightest people there is, or you just need to be right or lucky all the time. And that’s not something that I think most people certainly, I can’t depend on doing that time and time again. And so that’s why I go for the compounding growth, you know, just trying to buy those over the long-term, letting them do the work, not trying to micromanage them or anything like that—and just buying good companies when they’re priced at a good price where yeah. They could grow, you know, a decent amount; continue to do that. And they’ll do fine.

Andrew (27:48):

And, you know, bouncing in and out of like, well, I’m going to try to allocate more into growth, or I’m going to try to allocate more in a value. I think that’s tough. And I think if you are going to do that, you should just kind of just set it and forget it, just buy and hold and then try not to touch it. Cause once you start getting into like the micromanaging thing, you start talking about what that first question was about. Like, Oh, how are they going to think about inflation? What about the economic crisis? That’s going around? Well, what about what’s happening in China? All these things that we just have no control over. We, nobody has any idea how it’s going to turn out. And so for me, I kind of like stacking the odds in my favor, and that’s why I like the growth type of plays that are just going to be kind of slow and steady for me rather than super fast and exciting growth.

Dave (28:38):

What a really good answer. That was fantastic advice. And I think you should listen to what Andrew was saying. I think the ideas you stated in your, your question, and the, Or that Andrew gave, I think is the perfect idea of how to look at your portfolio and what will work best for you.

Andrew (28:59):

Well, cool. Let’s move on to the next one, then. So this one is from Tammy says, hi, Andrew, either question that I thought might be good for the podcast, but there’s something I was personally curious about. I know that there are some guidelines that people suggest to have in savings. Typically six months of expenses, I was curious if there is a good way to invest money like that is safe and easy to access in emergencies. I’m newer to investing, but having so much money, just sitting in a savings account, doing nothing seems like it might be a wasted opportunity. Any input you have would be more than welcome love the podcasts; keep them coming. So what about you, Dave? Do you invest money in an emergency account? I do. I don’t invest in it at the moment.

Dave (29:43):

I am boring and have mine sitting in a savings account, but I have learned something in the last few weeks from you and Andy that I will start investigating. So one of the things that Andrew’s going to talk more about, but I thought maybe I could give a little like one Oh one on, this is called commercial paper. So this is something that most investors are probably not super familiar with. What commercial paper is, is think of it as its debt; it’s like a bond. And if you’re not familiar with what bonds are, bonds are, in essence, debt. And what it is is we are buying debt from a company we’re loading them money to, let’s say Apple, we’re loaning Apple money, and they’re going to pay us interest on that money that we loaned us.

Dave (30:40):

And then, at the end of however long, we’ve agreed to wound them the money. They’re going to give it back to us in addition to the interest or the dividends. However, you want to rephrase that or think of it, that extra money for the right, for them to use our money. So in most cases, bonds are generally used for, I think, bigger purchases. So the think of buying another company or doing large expansions of the business, let’s say you want to build a factory or something along those lines, instead of going to a bank and borrowing money, you may go this route and issue bonds for investors to buy, to give them, you know, to give us their money. And then they can use that to build their factory and that kind of thing. What commercial paper is, is it’s along with the same idea of a bond, and it is technically a bond, but it’s much, much shorter.

Dave (31:37):

Generally, I think they’re probably less than six months. And so it’ll range a little bit. Still, commercial paper is, in essence, its short-term money that a company will use to cover different expenditures that the company may have a perfect example is, let’s say, the target has their payroll coming due. They don’t maybe have quite enough cash to cover the payroll because of whatever reasons, because cashflow going in and out of business, it’s kind of like our checking accounts. Sometimes we have all the money to pay the rent, and sometimes maybe we don’t. So commercial paper can help fill those gaps. And I’m not saying that target has issues with that. I’m just using them as an example that we can understand so that that money may cover the payroll. It may cover buying inventory. It may cover paying off some debts that we have; maybe we have to pay our vendors for things.

Dave (32:37):

So think of it as I guess an extension of credit is maybe an easy way to think of it. As somebody who worked in the restaurant business, I think it is an easy way to explain this to people. When you are running a business, you buy products from vendors you turn around and sell to your customers. And in some cases, it’s something that’s already produced. And in other cases, it’s something that maybe you’re buying the raw materials, and you produce it and sell it to your customer. So in the case of a restaurant, two things that immediately spring to mind are food and alcohol. So, for example, food vendors, depending on the restaurant’s size, we’ll give you maybe 15 days to pay them. So, in other words, I buy my food today on a Thursday, and then I pay them back two weeks from Thursday.

Dave (33:29):

And so they give me credit to pay them. So it helps my cashflow so that I can kind of flow with it. Now it doesn’t mean you have to wait two weeks to pay them. If I have the money to pay them on delivery, I can certainly do that, but it gives you the flexibility to work with the cash flow that you have for your business. Now, alcohol is longer it’s 30 days. So I have a long time paying back my Wicker vendor, my beer vendor, or my wine vendor. So that’s how that works. Now, depending on the size of the business, you may have better choices for that credit. For example, a small restaurant, like the one that I was working at, didn’t have as much buying power as somebody like a Darden. So the Olive Gardens, for example, the Red Lobster, is the world.

Dave (34:16):

Those have large budgets, and they also have a lot more buying power because it’s a much bigger company, so they could get extensions on their terms from buying for people. And the same thing applies to a company like Walmart or Costco. They are, in essence, using the credit from these companies to finance their purchases. For example, Walmart can go to a vendor and say, I’m going to buy all my tires from you, but you got to give me 90 days to pay you. And if the company goes well, I don’t have the cash flow to pay for that. They say they may say no, but if they say yes, then Walmart buys the tires from the tire company and pays him 90 days later. If the tire company may not have the cash flow that they need to cover their expenses, they may use something like commercial paper that will allow them to borrow some money to pay for those expenses. And then, when Walmart pays them back, they pay off the commercial paper. A long story, short commercial paper is an easy way for a corporation or a company to kind of float expenses, to help them get through a cash flow period. Now you can use these things as investments on our side to put your money in because they’re very, very safe. They don’t default

Dave (35:38):

They’re very easy, not easy to buy, but they’re very safe and secure and I do pay interest and think they pay better interest than savings accounts. And I’m going to turn it over to Andrew now so that he can tell us more about this exciting idea.

Andrew (35:53):

Yeah. So they have ETFs where you can buy; basically, these ETFs will hold a huge collection of commercial paper. That takes away a lot of the risk of if any of these companies go and solve it. Well, guess what, there’s, you know, I don’t have the whole holdings list, but you know, 50 plus companies who makeup, you know, that are giving that are issuing this commercial paper the CTF is holding. So there are two options. There’s one that’s the ticker, NEAR so near that’s from BlackRock.

Andrew (36:34):

There’s another one called ticker. ICSH also BlackRock. And so they have different maturities, but like, let’s, let’s take this ICSH one 18% of their fund is mature. The one, the seven days, most of it’s within like one year time; this whole fund is within a year. There are different periods as the, you know, within a week there are 30 to 60 days, 69 days, whatever they are. So it’s very, very short term. And why that’s important is because bond prices fluctuate and, and I’ll tell you why this can be frustrating because we’re talking about an emergency fund. And so you want something liquid. So if you do have that emergency, you can get out. And not only that, if, if, if you do get out that you’re not locking in losses. A good example of this was I put some money and I was like, well, you know, I’m not making any interest in my emergency fund.

Andrew (37:35):

I want to try to do that. So I looked at whether some, like some bond ETFs, I could get into. So I got into a short-term, us treasury. So it’s just like Dave was saying with the bonds, but we’re talking about the government. So very, very safe because it’s a very low chance of government defaults. And so I’m thinking, okay, there’s no way you can lose money on this. But even if it’s a short-term bond even within like one year, two years, three years as interest rates move, the price of the government bonds. So I’m not going to get into why just know that, that you could do what I did, where you put emergency fund money into. What’s supposed to be a very safe bond fund ETF. And yes, you’ll make those little dividend payments, the dividends that you’re receiving in your account every month.

Andrew (38:28):

But you look at the brokerage account, showing you as negative because interest rates are rising. And so your you’re the value of that ETF is falling, and now I’m still losing money on something that was supposed to be very, very safe, where the commercial paper comes in is because of this. It is not nearly affected as much as, like an ETF as I had with the U S government in such a short term. You know, we’re just looking at the US government. So there’s one price for the US government bond. These commercial paper things are there. They mature so frequently. And the way they’ve structured, these are like I said, there are so many different mixes of maturities. So I’ll give you an example of some of the companies for one of these. So this was one of them from BlackRock, right?

Andrew (39:20):

They’ve got a bank of America, AbbVie general mothers, Morgan, Stanley Volkswagen, Goldman Sachs Citi group. These are all companies that they hold the commercial paper for, and the companies are just going to pay this in interest as long as they’re alive. So what’s cool about having all these different companies in there. They’re all at different maturities. So some of them might have a commercial paper that’s due in seven days. Some might be in 30 days, 45 days. And so, as that kind of all trickles in, the interest rate isn’t moving as much. And so if the interest rates are moving, like we have seen lately, well, you know, if it’s like Bank of America, they just paid off there, there let’s say ten-day commercial paper, they’re going to need more commercial paper, right. Just to run their business. So they’ll go in, and they’ll do they’ll issue another thing of commercial paper, but it’s going to be, it’s going to be reflected at the higher interest rate.

Andrew (40:13):

So you see like the money was never really tied up that much. If interest rates rise, the companies have to pay that difference in the interest rate instead of the investors. Going back to like a government bond ETF, that that money is not, it’s not safe, it’s not swishing around, and it’s not getting recycled. It’s just sitting there as a, like a government bond. So that price moves. But in commercial paper, ETFs, all of it’s all flushing around. It’s all being recycled over and over and over again. So if interest rates go higher, you’re going to make higher dividends because as these companies need more commercial paper and as they recycle through it, they’re going to pay higher interest rates. And so what you see, if you look at the long-term prices of these ETFs, is they’ll stay around their net asset value, which for these two ETFs is around $50, and it’s not their prices won’t move.

Andrew (41:13):

So you won’t lose money. And that’s just the amount of money that you’ll receive from dividends will change as interest rates change, but the actual fund itself and the price of it. You know, other than like there was like a short dip when, when the market kind of gets out of whack. But as long as you believe that companies will need commercial paper. And as long as these commercial paper ETFs aren’t, you know, super, super-concentrated in all the riskiest commercial paper companies or companies issuing commercial paper, then, then it’s, it should go back to $50. So this is a foreign emergency fund for something that is zero volatility. And you’re getting at least a little bit more interest than the savings account. This is probably going to be your best bet. And that’s what I’m going to do with my emergency fund moving forward because I did the short-term government bond thing.

Andrew (42:13):

And I didn’t like that. And I’m not too fond of it; I don’t particularly appreciate seeing emergency fund money going negative, even if it’s not going negative as much as like a Stockwood, that’s still frustrating to see that. And so I don’t think it’s a good idea to do anything more than like they’re very ultra short term, which is what commercial paper is. Yeah. That’s, that’s a great insight. So the question for you then about these kinds of ETFs, how are, how, how quickly can you turn around and liquidate it, let’s say that you have an expense come up, like, you know, God forbid the brakes in your car go out, and you need to tap into your emergency fund for that. How quickly can you get the money out? I mean, as soon as the market’s open and then, I mean you have to transfer it from your brokerage to your checking account. So however long, that takes maybe a couple of days. Okay. You know, maybe, you have an emergency fund and then a bigger emergency fund. So this would be for the bigger emergency fund.

Dave (43:16):

Okay. All right. Yeah. That sounds great. Yeah, that’s that sounds fantastic. I’m going to be; I know what I’m going to be doing tonight after getting done with the podcast.

Andrew (43:27):

Have fun. Good luck.

Dave (43:28):

Yeah. Thanks. I am so doing a little research, little deep dive into the commercial paper.

Dave (43:33):

All right, folks. Well, with that, we are going to wrap up our conversation for this evening. I wanted to thank everybody for taking the time to write us those great questions. Keep them coming. These are fantastic. You guys are sending us some thoughtful, great stuff. So I appreciate it. And with that, I will go ahead and sign us off. You guys, go out there and invest with a margin of safety emphasis on the safety. Have a great week. We’ll talk to you all next week.

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