Welcome back, everyone, thanks for joining.
The Joseph Carlson show on this episode.
We're going to be talking about and reacting to an article from
The Wall Street Journal. They call it by the dip.
Believers are tested by the markets downward slide and this
article goes into the hole by the dip idea and what investors
are doing right now because the professional investors, the
institutions are apparently running for the hills they're
scared, they're in aggregate pulling money out of the market.
Market. But us the small guy here, the
dumb money, right? We're just the ignorant naive
retail investor, we're putting our money in the market.
We're buying these dips, as institutions are selling out of
them. And I think that this is an
interesting dichotomy that's happening.
Retail investors are pouring money into the market as its
falling and we have the institutions selling out as its
falling. So do they know something that
we don't, or are we going to have the advantage if the market
recovers? We're going to be discussing all
of that in today's Episode. Now, first, let me just say,
this is a market that will test your resolve, we've had an
interesting past couple of years.
The past seven months, the market has been on a steady
downward decline with little Rays of Hope little, you know,
little bump UPS in price along the way.
But overall, we've lost a lot of money over the past six months,
if you've been investing during this time, I'm down thirty eight
thousand dollars in just the past 30 days.
All right, so, every day I've lost over a thousand dollars in
the stock market over the past, Past 30 days, not a good feeling
to have this happen. Generally speaking in investing,
I want my money to be going up but that's not how it works.
That's not how it works in investing.
You have to go through bear markets and you have to go
through bull markets, you make money when the markets going up
and during a widespread bear market, like the one that we're
in, there's not too many places to hide.
Now, having said that this portfolio just a few months ago,
used to have 80,000 dollars in gains, that was kind of at the
peak of it. And we've Back all the way to
just sixteen thousand dollars in gains.
So I really just a couple days of heading back into the red and
right now, the huge majority of my gains are earn dividends.
So even though this portfolio trades up and down from eighty
thousand dollars in gains to 16 thousand dollars in gains and it
might go down a - ten thousand dollars or minus thirty thousand
dollars. It can trade around in any
direction based on the appetite of investors and as investors we
have no control over what Oceans are doing over, what big funds
are doing or what other people across the globe are doing.
We have no control over their budgets or whether they're
buying stocks are selling them. So, in essence, we have no
control over these price fluctuations.
What we do have control over is the companies that were buying
and the way that we value them. When I look at what I'm doing
with my portfolio I'm not buying companies based on what I think
other investors will want to buy next month.
I'm not trying to swing trade or get ahead of the curve on
certain Timely. With my portfolio.
I'm buying companies that I consider to be economic machines
that will produce cash flows for years and decades into the
future, they'll produce growing cash flows with sound balance
sheets and they're at valuation with very low down side and
these type of companies, I think will continue to produce these
cash flows. They'll continue to grow their
dividends and their share BuyBacks for a very long time
into the future. That's why I buy so much apple
and Microsoft and Costco not because I think these are Timely
trades, that will do well over the next six months.
But because these companies produce real profits, and what I
look at my portfolio, if you really ignore the price
fluctuations and the month-by-month trading, whether
I'm down, fifty thousand dollars or up fifty thousand dollars,
give or take one or two months. You look at what's going on
underneath the hood, the engine that I'm building this passive
income portfolio is the project of building an economic engine
that will provide real passive income.
This is Out of monthly dividends at this portfolio has provided
since its beginning in 2018. Now, on average, this portfolio
produces around $600 a month in dividends and my goal is to get
that to 700 and 800 and then above a thousand dollars.
My long-term goal is to get this to four to six thousand dollars
a month and make it so I can live entirely off of my dividend
income. So this entire project is not
based around timely Market trades, it's around building
this economic machine for the future.
And when I look at the Best time to buy these companies at
discounted prices based off their future expectations.
It's always better to do that during a dip over the past six
months. The QQQ is down, 25% from, it's
just recent Heights down that much.
Then you look at the S&P 500 and it's down, 17 percent, the major
indices with all the companies in them are selling off like
crazy. And we don't know when that's
going to end, but while this is happening, I'm certainly
reinvesting my dividends and I'm certainly deploying new.
Cash into buying these companies on a dip.
Now, having said that, there's this new Wall Street Journal
article where they kind of question the strategy of buy the
dip and they know how popular this strategy has become amongst
retail investors. And the interesting thing is
that retail investors and institutional investors are
doing two different strategies while retail investors.
Here are buying the dip with all these great companies.
Falling institutions are pulling their money.
So let's go ahead and dive into this article.
They say this year stock market volatility has turbocharged a
favorites Strategy, among individual investors buying the
dip. Their dramatic Plunge in major,
indexes will test the resolve on Thursday when the stock market
had one of its worst days of the year individuals, rushed in
setting. A one-day record for buying in
March, they invested the largest-ever monthly some
according to Van Der research data beginning in 2014 and
continue to pour money into the markets in April.
So, as retail investors, we are buying the dip we aren't running
for the Hills. And I think that that's an
interesting thing. It's a change in human behavior
individual's willingness to backstop markets throughout this
year. Sell-off demonstrates that the
group for now has been more resilient than analysts and
traditional professionals anticipated.
But this year the S&P 500 has fallen, 16 percent, its worst
start to a year in nearly a century and the NASDAQ Composite
has dropped 26 percent. Inflation is at a 40-year high
and the Federal Reserve has embarked on an aggressive.
Terry tightening cycle, right there.
They highlight all these super bad things that are happening.
Now, that is change the situation and this is where the
strategy comes into question. And they highlight where some of
the recent strategies have not worked out for retail investors.
They say the wildly popular trades of the past, two years
have already crumbled. Many investors have soured on
richly valued technology stocks newly minted public companies
which soared last year have come back down to earth and the
highly speculative Ark Innovation fund has plummeted.
It is of course a lot of things have changed over the past year,
they say, despite the Turning Tides, many investors said that
they have relished the chance to buy stocks at a discount they
say for many of the calculation is simple.
History has shown that stocks eventually go up and that is
exactly correct throughout all of history.
We can look at any bear Market in any correction and the
investors that were fearful that sold out during the market lows
are very regretful in those situations.
The best thing historically speaking has always Always been
to take advantage of dips and buy them when the market trades
down to lower and lower levels. But the journal goes on here to
know how many investors are pouring money into this current
dip, they say small investors plowed 114 billion dollars into
US. Stocks through March and the S&P
500, tumbled into a correction falling, at least ten percent
from its high. According to Goldman Sachs that
marks a sharp shift in the group strategy for much of the past,
two decades, typically individual investors have sold
about Out ten billion dollars in 12 weeks after market Peak when
the S&P 500 has tumbled that much.
So this paragraph here, outlines a dynamic shift in the behavior
of investors. Historically, retail investors
have not bought the dip after major sell-offs.
In fact, human behavior. Historically has been to sell
during the market going down. That's why they've earned such a
poor return as opposed to just a general index.
So historically speaking investors have done the Exact
opposite of what they're doing now is seems like a lot of I
think the financial education across social media across
YouTube has taught investors now to buy the dip, do not be
fearful of on the market trades down and I think the abundance
of financial knowledge has changes for the better.
So no longer are investors selling out after massive
losses. Now they're doubling down and
buying these dips. They say in the month of March
alone individual investors bought around Twenty Eight
billion dollars of us listed stocks and ETFs on a net basis.
That's the largest monthly some on record that is pretty
substantial. Even after these big
discouraging declines retail investors are piling money into
stocks. Now, this is where the Wall
Street Journal, gets a little bit skeptical on whether or not
this buy the dip attitude of retail.
Investors will work out for them.
They say unlike the crash in early 2020 which lasted just 23
trading days investors are weathering.
A more prolonged sell-off. That could worsen as recession
risks grow the feds move to raise, Rates and shrink the nine
trillion dollar asset portfolio has already triggered a sell-off
in the Government Bond Market. So with the treasury going past
three percent interest. Now Stocks have more
competition, you can actually get a semi okay, return 3%, with
a risk-free asset. They say that this is the
highest level since 2018 higher yields typically chip away at
stock markets Allure by giving investors another attractive,
place to park cash. So as the tenure goes, higher
and higher, Fire. Investors will look to buy that
instead of risk on assets like stocks and this is where we get
to the most interesting part of this article.
While us retail investors are putting money into the market.
Us individual investors are buying these dips left and
right. The institutional investors are
doing something entirely different.
They say individual investors appetites for stocks diverges
from the behavior of professional investors who have
collectively sold stocks. During the turbulence JPMorgan,
Chase estimates that Institutional investors have
pulled almost 200 billion dollars out of the stock market
this year. So just in 2022, the net flows
of institutional, big money, smart money.
Investors has pulled almost 200 billion dollars out of the stock
market. That's the data that they're
Gathering through these public order flows.
So the professionals keep ramping up a bearish bet against
the US Equity Market. While the individual investors
are betting long, that's the dynamic going on right now.
Now, so when you see your aportfolio going down week,
after week, and month, after month this year, especially in
2020 to realize that that's not other individual investors, like
you, that is because of big money, big institutions, pulling
out hundreds of billions of dollars.
That's what's causing a lot of the liquidity to come out of the
market along with the price is collapsing.
That is a pretty substantial and interesting change that's
happening. Now individual investors buying
the dip and institutions selling out and here we have the Wall
Street Journal in the same article.
Giving us a warning about buying the dip.
Now, they're all of a sudden against buying the dip when
they've been telling investors to do this for the past 20
years. Some strategist say buying the
dip is a risky way to invest because it's so difficult to
gauge. Whether the market is going to
keep following Vanda estimates that the average individual
investor portfolio Peak late last year and has since tumbled
giving the average individual, a paper loss of about twenty eight
percent. So here we are.
In the Wall Street Journal and they're highlighting strategist
saying that buying the dip is now risky.
So let me share a few thoughts on this article.
First of all buying the dip in and of itself isn't really an
investing strategy because all buying the dip means is that
something fell in price and you're buying more of it as it
falls in price. But the thing that you're buying
is really important in this equation.
For example if you have an extremely overvalued company
like cloudflare was in 2021 and that company Falls 50% and
price. A massive fall, it's chopped,
its valuation in half that still doesn't mean that that
companies, good value. And in the case of cloudflare,
even after this company, fell 50% in price, it would still
dramatically overvalued. So investors that were buying,
the dip were really buying a company that was going to
continue to fall unknown other 50% and even after this last 50
percent drop the company still not cheap by any measure.
It trades at a price to sales of 28.
That is incredibly expensive. Ensive with incredibly high
expectations. And in my opinion, this company
has no business trading at these levels.
If anything, it should be trading around a 15 price to
sales or lower. So buying the dip doesn't mean
by any company at any valuation after its fallen in price,
that's not what that strategy should mean.
What you're buying is incredibly important in this calculation,
when I look at companies that I'm buying the dip of, I'm
buying companies with reasonable valuations and in many cases I
think heavily Valued, I've been buying more restaurants, stocks,
high, quality ones, like Starbucks, Texas, Roadhouse, and
Domino's. And the reason I've been buying
these companies is because right now, they're in a substantial
dip. And I also consider them to be
high quality companies. But I want to contrast and
compare buying the dip in a Starbucks or Texas Roadhouse
compared to the example of cloudflare.
And that is where valuation comes into play.
While Cloud fleurs creating at a 28 price to sales, Starbucks
trades at a Seven, this is around half of what McDonald's
trades at and Starbucks has a better balance sheet than
McDonald's and better growth than McDonald's.
So it trades at a low price to sales.
The PE Ratio is now below 25, which is historically extremely
low for this company. It usually trades anywhere from
like 29 to 35. Simply put investors aren't
pricing in a lot at this price. The company's already traded
down significantly in the chance of this company under performing
its earnings to the extent that it trades down.
Other 50% I think it's highly unlikely.
So when I assess the different companies to buy the dip, I'd
rather be a buyer of Starbucks right now than cloudflare.
So buying the dip is a strategy that I Implement.
I firmly believe that you should try to buy high-quality
companies as investors and institutions sell out of them
based off of temporary fairs. Most people in the stock market
have a short term time Horizon and if you have a long-term time
Horizon, you can take advantage of dips and in terms of the Wall
Street Journal and these new experts trying to discourage,
Judge retail investors and individual investors from buying
the dip because the stock market might go lower.
That is the exact attitude, that Warren Buffett and every great
investor warns you against trying to time the market.
That's basically what they're saying.
Oh, don't buy these companies right now because they might go
lower in the future. If you look back on history
there is no way that anyone including any expert from JP
Morgan or from Goldman Sachs would be all the time.
The market. None of Have been able to
consistently do it and at best they're guessing we can look
back at all. The bear markets in the S&P 500
since 1950. There's been 15 and in each case
people cannot time. The bottom of the market it is
frivolous. It's not worth trying.
And the thing that you should be trying to do is take advantage
of good quality companies falling in price that you know
have a very bright future and eventually when the market turns
back bullish investors will want to buy.
Over the past 70 years, we've had 15 bear markets in the S&P
500. They've averaged a decline of
30.2%, they've gone on on average three hundred and thirty
eight days, so just under a year.
So we're around 7 months in ours.
That means that it could go throughout the remainder of 2022
or even longer some bear markets.
Like the worst ones last almost three years.
That would be a tough bear Market.
But even in those cases, the investors that stuck with it and
continually dollar Stafford in, we're heavily rewarded over the
next 10 to 20 years. So, having the perseverance and
the determination, and the resolved estate in the stock
market. During these times, is critical
becoming discouraged and bearish and having pessimism take over
and discourage you from sticking with your plan, is probably the
worst thing that you can do historically.
Speaking every single bear Market throughout history,
eventually returned to all-time highs on average.
That happened on day 6, 2003, Yeah, so 603 days go by the
market returns to all-time highs.
That's just under two years. So this bear Market could last a
while. We could be in it for years and
that's something you have to be, okay, with if you're investing
in stocks, that's why I put such a huge emphasis on Investing For
passive income and the fundamentals of my company even
if the bear Market lasts one year or two years or three, I
know that I'm going to generate more and more passive income,
more dividends every single month and every single year.
So that's my thoughts overall. You to buy the dip.
But focus on quality and focus on valuation.
That's all for this time. I'll catch you in the next one.