Motley Fool Hidden Gems Investing - The Latest Correction

Episode Date: February 24, 2022

With the S&P 500 officially in "correction territory" it's worth remembering that these happen more often than we remember. Timing the market is nearly impossible, which is one more reason we play the long game and stay in the market. (0:25) Chief Investment Officer Andy Cross discusses: - How often we experience corrections - The added uncertainty of Russia invading Ukraine - Nasdaq stocks falling even further - Why being a net-buyer of stocks is so much better than trying to time a market bottom - The importance of taking a break (now and then) from financial news If you're looking for more guidance and stock ideas, check out our free Investing Starter Kit:  http://fool.com/StarterKit Stocks discussed: ZM, HD Host: Chris Hill Guests: Andy Cross Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

We got a question in our Facebook group from Avi in Folsom, California, who writes, I'm wondering if the Motley Fool team can do a segment on why it's better to hold long-term than to try and time the market. There's a lot of indicators that the market correction is looming, like Warren Buffett and Charlie Munger sitting on cash, rising interest rates, etc. I'm Chris Hill, joined today by the Chief Investment Officer of The Motley Fool, Andy Cross. Thanks for being here. Thanks, Chris. That clip that everyone just heard is from four years ago, although it is very easy to imagine

getting an email question like that from right now. We're going to break our usual format because we're in correction territory for the S&P 500. It's down 13% today. It's never fun when this happens, Andy, but it is common. You know, you and I were talking right before we started recording, looking over the data from the last decade, the last 40 years or so, this is a very common occurrence. Yeah, Chris, if you just go back and look at the S&P 500

over the last 40, 50 years, like you mentioned, in the markets every year, 12, 13 months or so, they fall 10%. And every two years or so, they fall 15%. And they fall 20% every four years. And certainly, the last time we were in this position was March in 2020, when the markets fell 30%. So even more drastic, but then you have to go back to 2018 before that, when they pulled back 10% during the last time there was some movement in the Fed interest rate. So these pullbacks are natural resets in the market. And what happens if you've never been through this, you see and experience this as the markets pull back. But then, of course, as we know, Chris, the underlying equities, the underlying stocks tend to be even more volatile than that. And we

certainly have seen that over the past six months when the markets and so many growth stocks have really pulled back as concerns over the interest rate environment. And then, of course, what we have right now is an exceptional macro situation with Ukraine and Russia. So they do happen. But the bright side is on the other side of the tunnel, Chris, is that every five-year period, the S&P 500 makes money almost 90% of the time. If you go through rolling five-year periods, the market's up almost 90% of the time going back to 1928. So if you're willing to hold in to your stocks and get through these periods that happen very frequently, the longer term picture is much brighter for investors.

You mentioned what's happening in Russia and Ukraine, and obviously that's different this time. This is a different X factor as opposed to past corrections and all of the uncertainty that comes with that. And you and I and the majority of people listening are fortunate that we're here in America. We're focused on our investments. We're not in the Ukraine where people are focused on their lives and the lives of their families and friends. And we can only hope that this situation ends soon and ends as well as possible. That's what's different this time, as you indicated, there's a lot that's familiar about past corrections, questions of interest rates. What is the Fed going to do? A lot of the corrections we've seen in the past,

like this one, are preceded by great run-ups in the market. I forget the exact number, but in 2021, the S&P 500 hit a new all-time high more than 50 times. Yeah, it was pretty extraordinary. If you go back, just to make parallels, not exact comparison of parallels, reminds me a little bit of the Kuwaiti invasion in the early 1990s that started the first Gulf War. The markets fell 16% from their highs. Lots of concerns around oil impact and the price of oil, which is more meaningful. We're seeing that now with the price of oil really skyrocketing to above $100 a barrel for the first time in a long, long time. Inflationary pressures, concerns a little bit about slowing global growth, although

the GDP information from today was pretty encouraging. And just what is the impact on valuations, especially, Chris, as you mentioned, 2021 was an exceptional period for investors and the latter half of 2020 was exceptional. So if that's all you know as an investor and now all of a sudden you're in a market where things are moving in the opposite direction, and as we said, markets are going up and down all the time. That can be very unnerving. And I think for me, looking at the markets overall, that's a lot of what I am thinking through is so many of our members or just investors, millions and millions of investors who got into the stock market during the COVID quarantine period. And now how do they react for this? And so much of what we

try to do is give that context with historical context, historical data, and guide around the best way to think about investing during these rough times. And Chris, mostly that is about staying in the markets, staying committed to your capital as best you can, and sticking with your plan rather than trying to dance around the short-term price movements, and focusing on businesses that hopefully over the next three to five years will be able to drive those cash flows and revenues, cash flows, and earnings that have an impact on the long-term value of a stock price, of the business and the stock price. So, that clip we played at the start of the show was from an episode of Market Foolery from four years ago. I was talking with Ron Gross in that episode,

and one of the things he said is so true, which is, it's so tempting for us as investors to try and time the bottom. It's so tempting to look at either stocks in aggregate, particularly if you look at the NASDAQ and a lot of stocks that have been recommended by different Motley Fool services that have been hit worse than the overall market. It's so tempting to try and time the bottom, but it's so much more important and so much more lucrative in the long run if you just don't even give into that temptation and just continue to be a net buyer of stocks? It's very hard on two levels, Chris. Very hard to do it successfully time and time again to be able to dance around the stock prices. It's very stressful, I find, if you try

to do it. I haven't tried it in my career. I'm pretty slothful as an investor, but it can be stressful. It's very hard to do. And the historical data tells us that traditionally, investors are not very good on it. Terence O'Dean, a famous professor from UC Irvine, and now I think at Berkeley, did a great study in the mid-90s talking about how individual investors looking at their portfolios versus the market tend to underperform the market by meaningful amounts, and he attributed mostly because they're trading too much. This is the mid-90s when the markets were very attractive. The real last time probably since the last couple of years, you have to back to that period when the markets were really, really hot. And investors underperformed because

of that excess of trading mostly. So, it's hard to do. Hindsight is always 20-20. You can always say, gosh, if I just got in or just got out. But what's dangerous is that if you maybe think you could do it one time, to make it a successful strategy is very difficult. And the worst part about, especially during those bear markets, is the studies show that if you are out of some of the best performing days in the market, the returns that you would get, if you miss those days, really, really harm your return. By the way, Chris, a lot of those best days in the market come during bear markets, so bear market rebounds a little bit. If you miss those best days in the market, the data is not in your side. Rather, just let your compound

and the company's work for you. Try to stay invested as best you can within your allocation strategy and try to ride out the ups and downs in the market, assuming that you don't need that capital for the next three years or so. We hope that's money in the markets that you don't need for the next three years and let your businesses continue to do the work for you long-term and have that focus rather than trying to dance around the ups and downs of the stock movement. Because in any given day, there's a coin flip, essentially a coin flip, Chris, and whether stocks are going to be up and down. It's actually a little better historically that they're up, but still it's right around a coin flip. I don't know about you, but in my own personal portfolio, the majority of

purchases I've made over the past, certainly over the past six months, have been adding to positions that I already have. I'm not really going out and looking for brand new stock ideas, although I have added a few here and there. But for the most part, what I've been doing is looking at the businesses in my portfolio. In some cases, I'm in positive territory for them. they've just been knocked down in value. But in other cases, it's, okay, I'm buying at a lower, I'm lowering that cost basis, because this is an established business. I know they're going through a rough patch, but I feel like much brighter days are ahead for a much longer period of time. Well, that's a great, healthy way to look at it. And if you have the ability to be able to

save and invest, save and invest, and you've built up at least a 25 stock portfolio, and you want to add to some of those ones that are the businesses themselves are doing well, they're growing, the prospects are bright, they have great solutions, and the stock price is just lower because the market has decided for whatever reason that it's a little bit lower, then that's great. I've actually been building out positions, new positions in my portfolio over the last six to nine months, really over the last year, just to own more businesses. I was fairly concentrated, so I just started taking some capital, adding to more and more businesses and haven't yet taken advantage of some of those price declines. I imagine 2022, that will be different because

the market prices will give me some opportunities to buy at some discounts. You don't want to buy a stock just because it's down, that's the only reason. But if it's down for whatever reason, which looks more short-term or the market digested some earnings, the earnings this period, Chris, have been very volatile. As we know, we're seeing some stocks get hit very hard after they announce earnings, but the long-term franchise value isn't necessarily impaired. If you can make that definition, we try to do that in The Motley Fool, buying more of a business that you already own can be a great strategy for your portfolio, as long as you're not overly weight that portfolio already. Two more things and then I'll let

you go first. In terms of the Nasdaq stocks, where do you think we are with the Nasdaq overall? It's down more than the S&P 500. You can find individual stocks that have had 75% of their value knocked off the top. As you said, you don't want to buy a stock just because it's down. You you don't want to buy it, it's like, well, it's 80% lower than its all-time high. That's not a great reason to buy a stock. But it does seem like some of these businesses are getting sold off to a ridiculous degree. Yes, Chris, I agree with that. There are some that are getting sold off, I think, that are realistically that just got exceptionally high valuations in the market, it. And they don't really have good businesses, a lot of SPACs and some of the biotechs, that

kind of thing. And those are the ones that I'm not so interested in building out positions. But there are a lot of the high-tech companies. I think my friend John Rotonti was saying this week that almost half, more than 40% of the NASDAQ companies or 50% or more off their highs of the past year, and the Nasdaq itself is just about 20%. It's hovering near that bear market territory compared to the S&P 500 that is down in the correction territory, so down 10%. The Nasdaq itself has pulled back pretty dramatically. If you can find those opportunities in businesses that continue to be able to grow, but they maybe for whatever reason, the market euphoria got ahead of itself, started to price these businesses as if they weren't going

to grow, they were going to grow to the sky. And now investors are saying, oh, wait a second, I'm sorry, a company like Zoom won't grow to the sky, then I don't want it. Well, of course, it's not going to grow to the sky, but the growth doesn't mean that it's priced for nothing. So if you can find those businesses that you look out in the next three to five years and say, wow, That business, I think, will be much more relevant than it is today. And it's down substantially, but it's still generating revenue growth, profit growth, cash flows. The team can reinvest. I think those are the kinds of businesses that you get excited to be able to build out more and more positions. And if you can use different macro, whether it's military excursions into some countries and or interest rate environments or whatever it might be, to take advantage of the market myopia, by all means, I think that's a good strategy to do. Yeah. You don't have to look too hard to find some established profitable businesses that at the moment are being priced in such a way that Wall Street analysts are basically saying,

yeah, we're pricing in zero growth for the rest of this year. It's like, wow, really? Zero growth? That seems pretty low. It's fascinating how it just wavers, Chris. I'm just amazed at a company like Home Depot that can fall almost 10% in the day it announces earnings, which is a large position in my portfolio. And so my portfolio certainly felt it on that day. And it was like, oh, you know, Home Depot isn't going to continue to grow as robustly as it has the past year. And oh, gosh, they have some cost concerns. And I'm just thinking, does that mean that the franchise value of Home Depot is, I think it's down more than 20%, maybe even 25% just this year, Chris. Does that mean Home Depot as a business, the entire value of the business is worth 25% less

today than it was on December 31st? And so I start to see those kinds of movements in the market. And when it just happens very aggressively, even absent of Russia's invasion of Ukraine, just the market, we were seeing this before that. I started to see that and I say, okay, well, we're getting to a point where it's a little bit more rational in the markets last year, maybe got a little bit irrational at some points, like I mentioned with some of the pricings of those stocks. But now they're going the other side and it's a seesaw. And you're constantly measuring those as an investor and an analyst, measuring at which point we are in the seesaw. And now we're starting to move in the opposite direction. And there's going to be,

especially when the, I think when the Federal Reserve really starts amping up its action, we're going to start seeing some much more realistic bargains on the court to be able to take advantage of. Last thing, and this I know is difficult for some investors, but this seems like a great opportunity, particularly as we're heading towards the weekend, for people to get away from their portfolios. And I realize that's probably not a great thing for me to say from a professional standpoint that since my job is hosting a daily podcast about business and the stock market to recommend that people might want to take a step back from business and stock market news. But I don't know. I don't know about you, Andy. I'm getting outside this weekend. I think it's a

I think it's a good weekend to just get outside and unplug a little bit. Yeah, Chris, as you and I were talking before, and I think context is so important when it comes in life in general, in investing. It's been a stressful time for many of us. And certainly for me, I'm feeling it on behalf of our members and trying to provide the best advice that we can. And so I think we are feeling it, but that context is very helpful as you're thinking about investing your portfolio, historical context, lots of what we just talked about. but also just personal context, taking care of yourself, whether it's outside, enjoying weather, being with your family, walking your dog, meditating, playing some sports, enjoying that

time and appreciating that. I think that does come, Chris, though, with having that investing plan and some soundness. I know I have many, many years ahead of investing for me, so I'm okay with having my portfolio structured in a certain way. I'm feeling it right now, for sure, but I have that plan in place and and so along with getting outside and enjoying that make sure also you have that that um you're real um comfortable in your investing plan because that will help you i think as you think about the the volatility not just what we saw this week but also what we're going to experience i think for the next few months well and uh for people who are members of the motley foal we'll continue to have um live streams uh discussion boards uh sort of that investor

community. For folks who are not yet members, obviously, we've got a lot of free content on fool.com, this podcast, our Facebook group, etc. Andy Cross, always great talking to you, but especially on days like today. Thanks for being here. It's my pleasure, Chris. Thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow.

Thank you.