24-Hour Bear Markets

Jul 23, 2021 | Free Resources, Investing

On this episode, Karl Eggerss discusses the resiliency of the 2021 stock market. Plus, what is a stock? Many have been investing for several years and still may not know exactly what owning stock really means.

Hey, everybody. Welcome to the podcast. Thanks for joining me. My name is Karl Eggerss and this is Creating Richer Lives. Thanks for joining us as always. Hey, our telephone number is 210-526-0057. Our website is creatingricherlives.com. And the show’s brought to you by Covenant Lifestyle, Legacy, Philanthropy. Just a reminder. If you want to get our weekly educational piece called Covenant U, all you have to do is text the word CovenantU, the letter U, to the number, 22828. That’s it. Text CovenantU to the number 22828, and you will start getting Covenant U each and every Monday afternoon. And it’s got a lot of good information in there. We get a lot of positive feedback on that, so make sure you subscribe or send it to a friend. And there’s no spam in there. Just education. That’s all that is.

Well, how’d you enjoy that bear market? Did you miss it? Yeah, it was a 24-hour bear market. That seems to be what we get. Monday was a pretty nasty day in the markets. And we seem to continue this pattern each and every few weeks where there’s some sort of scare, there’s some sort of news event. The market starts to pull back and you think, “Here we go. We’re going to have the proverbial 10% correction, right? And lo and behold, by the time you look back up, it’s ended. And we had the same thing happened this week. We finish at highs. We start off on a Monday. Obviously, for several reasons, the market was probably going down Monday. And we talk about that a lot that yeah, sometimes everybody wants to know why are things happen? And sometimes it’s just more sellers than buyers, right? But a lot of the news floating around on Monday.

There’s a few things that happened and that kind of all came together at once. One was of course the Delta variant. And there were some odd statistics that were coming out that were later clarified the next day. I’m not sure if that turned the markets around. But certainly the impact on the economy and could we see more closings and so forth, so that was a big scare. And then the stimulus bill seemed to be a ways off. There was Fed chatter of a tapering and that was going to be becoming pretty soon. And the economic rebound was slowing. And the fact that interest rates were so low. I mean, we still have interest rates in the low ones, believe it or not, on a 10-year treasury. So the idea that, “Hey, if the economy is so great, why aren’t interest rates going up?” People were starting to get concerned.

And then the market internals had been diminishing for a few weeks. So it wasn’t a huge surprise that we started to see a selloff at all. The bigger surprise came the next few days when it completely erased those losses. And that’s the pattern that we continue to see in 2021. We continue to see these really small pullbacks. And then, there’s plenty of buyers there.

Now, for you technicians out there that like to look at charts, go look at the 50-day moving average this year. All that does is look at the last 50 days. And then, of course, when you have a new day, you add the new day on, you drop the 51st off and you get this line. It continued to be support for the market. Every time it goes down to that, we continue to get a bounce. And it’s literally bounced off of that spot maybe seven times in 2021. And so again, until the trend breaks, you don’t really do anything about it. So did you do anything Monday to make you nervous and you started selling? Or did you buy What did you do during the week?

We didn’t do a whole bunch here because this was just normal volatility. But what’s interesting is these pullbacks are normal. And we typically get about a 5% pullback three times per year. You know that you get a 10% to 15% pullback at some point during the year. Well, we haven’t even had a 5% pullback yet and in 2021 on a closing basis. So the pullbacks have been very, very minor. People waiting for the next crash, waiting for the next bear market are continuing to sit on the sidelines wondering when they should get back in. And this is precisely why you have to have an allocation that fits what you’re trying to do.

And yes, you’re taking the market into consideration as far as what’s going on around you with interest rates and with the economy and with earnings. All of those things, of course. But the people that have made the biggest mistakes over the years are the ones that continually try to navigate it on a day-by-day or week-by-week basis. And you get whipsawed. You say, “Okay, it’s going in this trend.” And then the trend changes and that’s called a whipsaw and it can happen quite a bit. And so that’s what we really saw this week was again the pattern that has been here for 2021 continued. So nothing has changed, but we are at new highs once again. We haven’t even had a 10% correction since March of 2020. So really, I mean, ever since we got through that nasty spring of last year, we haven’t had a 10% correction since then. So the 24 hour-bear markets are alive and well.

Now at some point, we’re going to get a big correction. We’re going to get a bear market at some point, right? You have to prepare for that. You have to have a portfolio that you’re comfortable with going through something like that. Yes, you may make some modifications, but the trend has not changed just yet. We will get bear markets at some point. We’ll get corrections at some point. That’s normal. We just haven’t had one yet in 2021. A lot of people believe there’s just too much liquidity going around and it’s finding its way into the stock market. And so be it. But if that starts to get taken away and we start to see the economy slow, which I think it is starting to decelerate right now, if it’s decelerating at the same time the Fed starts taking away the punch bowl, you could have some issues.

Now, I think another big thing this week was the earnings. I mean, companies are just doing very well profit-wise. And remember, when you buy into the stock market, you are buying profits. That’s what you’re doing. And that’s what I want to focus on today. I had somebody ask me this week, “How does the stock market work? When I go buy a stock, what am I doing? Am I buying that from the company?” And some of you may know the answer to this. Some of you may know what all that is. But a lot of you may have been investing for years and don’t really know the mechanics behind this. And so we’re going to talk a little bit about that. This is maybe something if you want to pass it on to somebody who doesn’t understand the stock market, maybe a child or grandchild, this is the podcast. And I’m going to keep it pretty brief because it is pretty simple.

When you have a company that’s privately owned … So let’s just take your company that you own, your widget company, well, if you need to raise more money to go build another building, to go hire more employees, whatever it may be, you need some more capital, how do you do that?

Well, one way you could do it is you could borrow the money from a bank. Or you could issue bonds, which is a loan where you have investors that you’re paying an interest rate to. But there’s also the equity piece of it. You can actually take part of your ownership and you can sell it to the public though. It’s an initial public offering, right? You hear about IPO’s all the time. So what happens is companies will sell part of the stock to the public. And so you may want to invest in that company and you may own it. So now you are a shareholder in that company. You own part of the stock. You may own .000001% of the company, but you own part of the company. Now, the only way for you to make money from owning that stock is by either price appreciation and you eventually sell it or they pay you a dividend. So let’s take the price appreciation first.

The only way that stock really goes up over time is if more people are buying it than selling it. It’s simply supply and demand. Pretty cut and dry. And so you buy that stock at $10 per share, that goes up to $20 per share. The reason it did was because there was more demand for that stock and less supply. That’s it. And so if you want to sell it, you are selling it to somebody else. So when you buy and sell stock outside of the IPO, you are typically buying and selling it from some other stranger through an exchange. The New York stock exchange, the NASDAQ. You’re buying and selling from each other.

You’re not buying and selling to the company. That’s a misnomer. People think, “Well, if I buy the stock, I’m buying it from the company.” No, you’re buying it from some stranger. And because of technology, you’re able to do it pretty much instantaneously when you want to, which is amazing. And so you buying and selling is causing the price potentially to go up and down because of supply and demand, but it’s not really having an impact on the company itself. And so the way you make money is when you buy the stock, you’re hoping that at some point, somebody’s going to buy it from you at a higher price down the road.

Now, the second way to make money besides price appreciation is through some sort of income, like a dividend. So these companies may elect to share part of their profits in the form of a dividend. You take a company like Coca-Cola. It’s had dividend payments for over 100 years. And so they’re going to continue to pay out dividends various times throughout the year. And so you get part of the profits through dividends. Now, they can stop that. They can raise it. They can lower it. They can do whatever they want with it, but that’s another way for you to get some money from this investment. And what’s really interesting is right now, many companies, the dividends they pay, the rate is higher than what you could get in a 10-year treasury bond. So you think about a 10-year treasury bond paying 1.3% per year, roughly. And you have to hold it for 10 years to get that 1.3% per year. There’s many stocks that are paying at a 3% or 4% or even a 5% dividend based on where the stock price is.

So that’s another reason why the stock market may be continuing to go up as there’s a lot of people who need that income. Therefore, they’re electing to invest in the stock market, not the bond market because of the fact that it just pays a better income. So you can get the income from the dividend. Or you can get the stock appreciation. Now, not all companies paid dividends as we know, right? Some companies pay them. Some do not.

Apple was a company that did not for years and years. And then they started to. Various reasons why they might do that, several years ago, the only way really to make money with Apple was to hold onto it and the price would appreciate over time because people were buying more of the stock. Now, where it gets tricky is what are you paying for the stock? What is it really worth? And that’s where you have to do some analysis. That’s where you’re looking at the fundamentals and the profits and their balance sheet and how much debt they have and all of those things.

But the way you make money is hopefully you’re buying it at a good deal and you’re selling it to somebody else. But literally, the way you’re making money, as somebody has to pay more for that stock when you go to sell it. Otherwise, you’re not going to make money with it. And companies can continue to issue more and more stock if they choose. And your piece of the pie will get smaller and smaller, may get diluted.

But that is what the stock market is. It’s really a way to fund initially the extra capital that a company may need and you are a shareholder. And so there’s private companies, maybe like the one you run. And then there’s public companies like a Coca-Cola or Apple or Facebook and they have gone public. So now you can invest in that company and you are a shareholder.

And it’s amazing. I talked to a lot of people that don’t know what makes the stocks go up and down, right? What makes the Dow Jones go up or down? And it again is supply and demand. More buyers that really want that stock, they’re going to bid it up. They’re going to pay more for it. Just like in the housing market, right? Why do home prices go up? More people want to move in the neighborhood and there’s not enough supply of homes. That’s what moves home prices. That’s what moves stock prices. That’s what moves commodities, right? Supply and demand has a lot to do with all of these different things.

Now, of course, there’s multiple ways to invest in stocks. You can literally go buy at the IPO when it becomes public. Or what most people do, as they’re buying in the secondary markets, you’re going to buy it from somebody else. You don’t know who it is, but it’s on the exchange. You see it’s worth $10 per share and you go click a button and you go buy it. It used to be very difficult back in the day because you probably had to have a stockbroker do this for. You had tremendous fees to do this. You had a stock certificate that you had to store somewhere. Very cumbersome. A lot of friction to be able to buy and sell stocks. Nowadays, it’s all done electronically. Nowadays, it’s pretty much free to do so. And so you see the volume pickup, you see people buying and selling maybe multiple times throughout the day, but there’s a whole other side of this, which is if I want to own stocks because I like a particular company, am I better buying a basket or a package of stocks or am I better off buying individual stocks?

That is a individual answer for your question. It depends on your situation. Most people can do just fine owning mutual funds and exchange-traded funds, which are simply baskets of stocks. And they all have different goals. There may be a technology mutual fund. It only invests in technology stocks. There may be a gold mining fund. It only invests in gold mining stocks. But you certainly can do it on your own in terms of owning individual stocks. But as with anything, if you owned fewer stocks in one of them goes bankrupt or there’s fraud or something happens, much higher risk of that happening versus owning a basket of them. So this is simply not putting all your eggs in one basket when you choose to do a fund or an individual stock.

And that’s it. That’s as simple as it is, guys, is that stocks have been the best asset class over the last 100 years. When you look at bonds, you look at real estate, you look at cash, you look at commodities or gold. It’s done extremely well. Because what happens is over time, stocks tend to trade. People are willing to buy and sell at certain levels according to the profits and the fundamentals of the company. Not all the time and not in the short term. But over the long term, that’s what you’re buying. If you believe that company is going to continue to earn a good profit and it’s going to increase over time and time and time, then what’s going to happen is eventually there’s a high likelihood that the stock price will reflect that. Not by some magic fairy tapping on it, but because people see it like you do and they’re buying it. They’re buying the stock and that demand is causing the price to go up. And so the real opportunity in the stock market, of course, is when there is a dislocation between the two.

Now I would argue in 2021, there’s a lot of dislocations that are going to potentially hurt people where the stock price is artificially high for various reasons. Whether it’s just mania or marketing or who knows what, but the fundamentals don’t justify that price. On the flip side, there are still plenty of companies where the fundamentals just continue to go up. Their profits are going up steady-eddie. Everything’s great. But for some reason, the stock price isn’t reflecting that yet. And that’s where the opportunity is. That’s where you buy a stock and you hold onto it and you just be patient.

And so there is a difference between trading stock, which we’ve seen a lot of in 2021 and these manias and these meme stocks, M-E-M-E, where essentially they’re gambling. “I want to buy it and hopefully I’ll sell it a week from now and I’ll make a profit.” That’s gambling, that speculation. That’s certainly something people are free to do. That’s what makes a market. And then there’s investing where you’re looking at something and saying, “I want a good deal on that. And I buy it and then I will wait until it’s justified to sell it.” And those are two different strategies. I prefer the investing route. Trading can be fun, but speculating because you see something on TV or everybody’s talking about it on social media, not the best investment strategy in my humble opinion. But over the long-term, again, companies that deliver products and services that make everybody’s lives better usually will reflect that in the stock price.

Now, the tricky part about stocks, of course, is what is reflected in the stock price, right? What’s reflected? What’s not? That’s the challenge and it’s not easy. But if you know about something with that company, probably everybody else knows it already too, right? And so it has to get even better than that. Otherwise, it’s already priced into the stock.

Now, there’s lots of other asset categories. For the sake of time, I wanted to spend some time today talking about stocks in particular because I don’t think a lot of people really understand what they’re investing in. They think it’s speculation, but what’s funny is many people that think of speculation have their own company and they have most of their net worth in their own company. And so they understand the mechanics of their own company. They just don’t understand how would that translate into a publicly-traded stock.

It’s really no different. The only thing is publicly-traded stocks get a bigger premium. They trade for a bigger multiple. And the reason why is because it’s liquid. I can click a button and get out of it. Very, very simple. And sometimes, it’s because they’re bigger and growing faster. And frankly, they may be better. Now, there is such a thing as private equity, which again is a stock. It is just private. It’s not public, but you may be able to invest in companies that are not public yet. And that’s a whole nother category because it’s less liquid, but you may be getting a better deal based on the valuations. And you’re investing in a business just like you would your own.

So again, you have to take in consideration how much of my net worth do I want in this particular business or company? And then down the road, hopefully, it gets sold or it goes public, but you’re trying to reap the benefits. Most of those types of companies would not pay a dividend. So you’re trying to get price appreciation down the road, either getting bought out by another company or as I said, going public where it’s literally going on a public exchange. But that can be part in a compliment of your stock portfolio.

And of course, not only are there public stocks and private stocks. They’re are preferred stocks, which have a higher dividend. Kind of a hybrid between a stock and a bond. So lots of different ways. But the bottom line to all of this is that companies are needing capital to grow. They sometimes will offer their stock to the public. And that’s usually where you and I come in and we say, “We want to partner with you,” and we click a button, so it doesn’t feel like we’re partnering with them. But we click a button, and now we tend to want to watch the stock go up as things continue to get better.

But there are those examples of the Enrons of the world, of course, where there’s fraud or there’s something like that. And that’s why it still goes back to diversification. So if you’re owning individual stocks, make sure you have enough of them that you have a diversified portfolio. But as I’ve said for years and years, I’ve worked with people of all different types of net worth and sizes of net worths. And some people like stocks. Some don’t. I can tell you a lot of people have accomplished all of their goals without ever investing in an individual stock or equity. So you don’t have to do that. That’s not necessarily what “the rich people do.” You don’t have to do that.

But for some people, it’s fun. They like participating in that. They may like the volatility. They may like some of the risks or they may take a portion of their portfolio and do that. So again, this isn’t a one-size-fits-all for you. The point of this podcast is more about what is a stock. What is it? What moves the price? How does it work? And hopefully, we’ve covered a little bit of that. Just briefly, high-level overview. There’s a lot of little nuances in there, but got that question this week and thought let’s go ahead and do it on the podcast. So if you got a question about that, certainly shoot it my way and we will address it.

All right, you guys have a great week. Don’t forget creatingricherlives.com. Take care, everybody

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